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Part 4 General Council statement

Congress adopted the following statement:

General Council statement on the economy

The world economy is in a downturn. The roots of the crisis do not lie in the UK, but we are not immune. Ordinary working people are already paying higher energy and food prices, suffering from growing job insecurity and finding their wages are not keeping up with the cost of living.

The Government's top priority must be to mitigate the impact of the worldwide slowdown. This means giving priority to growth and maintaining confidence in the future of the economy so that we do not talk ourselves into a downturn deeper than necessary.

There are two main causes for this slowdown.

First the lack of proper regulation of the finance sector has had the inevitable consequence of an unsustainable boom and subsequent bust. This has led to the world-wide credit crunch in which banks no longer trust even each other. The Government itself has acknowledged this problem through its current review of financial sector regulation and the TUC looks forward to rigorous and comprehensive proposals arising from this.

Second the growth of demand for oil and other natural resources, possibly aided by speculation, has led to substantial price rises particularly for everyday essentials.

It is important to understand this inflationary threat. Getting this wrong will lead to policy errors that will make the slowdown longer and deeper.

Trade unions are not soft on inflation. We do not want to see hard-won pay settlements wiped out by price rises. Living standards are already being eroded by inflation, and inflation rates are higher for those on low and middle incomes as essentials such as food and energy make up a greater proportion of their household bills. High petrol and diesel prices, in particular, are significantly raising the cost of getting to and from work. Those who use their vehicles for work are finding this price rise particularly difficult to accommodate.

But current inflationary pressures are external. Most experts expect them to ease over the next two years. Depressing the UK economy needlessly to eliminate non-existent domestic inflationary pressures would be economic masochism.

In particular, there is no evidence that UK pay increases are driving UK inflation. There are no signs of a damaging wage/price spiral. Indeed neither public nor private sector pay rises are keeping up with the cost of living, and the consequent depressed demand will do nothing to counter the downturn.

The Government's two per cent target for public sector pay increases does not help deal with inflation. Public sector pay is not driving inflation, nor will holding it back reduce it. Forcing a nurse in Bradford or a driving test examiner in Swansea to suffer a cut in their standard of living will not reduce the price of a barrel of oil, but will slow the economy at a time that we need growth. In addition, public sector pay restraint is leading to a widening gap between private and public sector earnings while damaging recruitment, retention and staff morale. The policy threatens relations between the Government, staff and trade unions, impairs the independence of pay review bodies and prevents constructive negotiations on pay awards and pay structures. It is important to respect the integrity of pay determination machinery, including the need to pay proper attention to equalities and the need for realistic pay structures. These should provide for appropriate recognition and reward as set out in the public sector pay principles agreed between the Government and unions through the Public Services Forum.

Low inflation is undoubtedly desirable, but so is growth and employment. Attempting the impossible - dampening external inflation by driving the UK economy into recession - would be an approach driven by economic dogma, not today's economic imperatives.

While we cannot insulate ourselves from the world economy, the major challenge for the Government must be to show that it is on the side of ordinary working people by ensuring the costs of the slowdown are borne by those who can most afford it. This is a fundamental test of the Government's commitment to fairness. It must protect those least able to bear the costs of the slowdown. And it must make those who have done best from the boom years make a fair contribution to the cost of recovery from a downturn at least partly caused by the bonus-driven risk taking that lies behind the credit crunch.

We therefore need a new economic programme from Government and economic policy makers. It needs to be made up of short, medium and long term elements that provide immediate help to those most affected by the downturn, action to ensure the slowdown is no deeper or longer than necessary and helps to build the future strength of the UK economy.

In the short term we need a package to help those facing most difficulty from the downturn - particularly the growing numbers facing fuel poverty, including pensioners, and those suffering from the difficulties in the housing market and construction sectors.

The TUC calls for the following.

? Mandatory social tariffs for energy providers - it cannot be right that the poorest, who pay for their energy via pre-pay meters are faced with higher bills than those who can afford to pay by direct debit.

? An increase in the Winter Fuel Allowance to bring it up to one third of the average fuel bill, as was the case when it was first introduced. This and other measures to help those facing fuel poverty can be funded through an immediate windfall tax on the huge profits being generated in the gas, electricity and oil industries. Making such profits at a time when household energy bills are being raised so rapidly and forcing thousands into fuel poverty is unjustifiable. The Government must step in and ensure that these profits are used for long-term investment in skills and energy infrastructure and to help those most at need rather than being directed into the pockets of shareholders through higher dividends.

? Ministers to scrap the arbitrary public sector pay target which is imposing real terms pay cuts on millions of low and middle income workers delivering vital public services. The TUC calls for genuine dialogue to secure fair pay and good employment conditions for all public sector staff.

? The Government and Financial Services Authority to ensure that repossessions are kept to an absolute minimum.

? A significant cut in VAT on property renovation to boost the home improvement market and provide greater job opportunities for those facing job loss in the construction sector.

In the medium term the Government needs a determinedly pro-growth strategy which should be reinforced by the Bank of England in line with its mandate to 'support the Government's economic objectives including those for growth and employment'.

1. A smart fiscal package

With ordinary working people facing cuts in their living standards there is a need to put more money into peoples' pockets to stimulate economic activity and growth. This will be best achieved by rebalancing the tax system to help low and middle income tax-payers while making the super-rich and big companies pay a fairer share. This requires cutting down on the tax avoidance that the TUC has already exposed. The tax system has become less and less progressive in recent years and it is time once again to make the case for fair taxation.

There are various ways to help ordinary people through targeted tax cuts. The key way would be to cut income tax by reducing rates at the bottom or by raising allowances so that the low paid and middle earners receive a greater part of their pay tax free. There is also a case for targeted reductions in VAT on goods and services that are essential to ordinary life such as energy - possibly time limited or replaced with a gradual phasing in of a more environmentally sensitive energy tax regime. Indirect taxes are the least progressive element in the tax system. Cuts in VAT have the added benefit of reducing prices and thus reducing inflation. However, the potential for cuts in VAT are seriously constrained by European Union rules which require a standard rate of 15 per cent with relatively few exceptions. As such, this may be the time for the Government to open an EU-wide debate about whether these rules should be temporarily loosened.

We note that the Government has already made some moves towards fiscal stimulus in the wake of the abolition of the 10p tax rate. This will amount to an extra £120 for those earning between £6,035 and £40,835 over the next six months. However, compared to the fiscal stimulus package announced in the United States which provided between £160 and £1,000 (or more for those with more than two children) in the form of a one-off rebate cheque to taxpayers, this is unlikely to act as a sufficient stimulus. It is notable that growth figures for the last quarter in the USA were much healthier than had been expected.

TUC research shows that very considerable funds are available to the Treasury to pay for such a package, and the short-term measures outlined above, through a comprehensive crackdown on tax avoidance, tax evasion and excessive tax planning by the wealthiest individuals and corporations. That is why we call for a minimum tax rate for earnings over £100,000 to pay for such a package. The current effective rate for earnings above that level is now only 30.8 per cent, as opposed to the actual 40 per cent rate which usually applies, once the wide use of allowances and reliefs is taken into account. A minimum tax rate of 32 per cent for earnings over £100,000, 37 per cent over £150,000 and 40 per cent over £200,000 would raise approximately £5 billion of extra revenue for the Treasury.

If some of the package of measures presented in this section and throughout the paper also needs to be funded through a short-term increase in government borrowing, then so be it. It is precisely at times of economic slowdown that governments should borrow to stimulate the economy, and if applied effectively will result in greater economic growth and tax income that can be used to reduce that borrowing as can further long-term measures to end tax avoidance and evasion. In this context, we welcome the Government's decision to review its fiscal rules which have limited borrowing to no more than 40 per cent of GDP.

2. Lower interest rates

The Bank's remit is to limit inflation, but it is supposed to achieve this commensurate with healthy growth and employment and support the Government's wider economic policy objectives. But the danger is always that the Bank will err on the side of caution and set interest rates that are unnecessarily high, particularly at a time when inflationary pressures are external and not domestic. It is clear that the MPC is holding rates at their current comparatively high level to dampen inflationary expectations, not with any belief that they will reduce current inflation levels. The Bank says these will remain high until the higher oil and commodity prices begin to weaken in response to the global economic slowdown.

This is why the Bank should recognise that there are no significant signs of inflation taking off in the UK and that the real danger is the growing recessionary expectations that threaten to push the UK economy into a deeper and more prolonged slowdown than needed. Of course the Bank must keep a weather eye on domestic inflation, but a steady series of cuts in interest rates would help boost confidence. Lower interest rates would also ease the financial burden on those struggling to meet increased mortgage payments imposed on them through no fault of their own as a result of the credit crunch.

The Bank must remain aware that a severe drop in growth and employment would not only cause serious damage to the livelihoods of hundreds of thousands of British people and the future of the UK economy but could also lead to a new problem of deflation rather than inflation.

3. Regulation of the energy industry

As was stated above, a windfall tax on the profits of the energy industry is justified as a measure to address those facing fuel poverty in the short term. However, the TUC does not believe that a windfall tax alone will address the long-term problems caused for consumers by the energy market in the UK. Government action is required to ensure that the long-term public interest predominates over short term business priorities in this sector which is so crucial to domestic households and the success of the UK economy. It is vital that the Government and the regulator work together to bring order to this market by developing more effective regulation to provide affordable, sustainable and secure energy for domestic and individual consumers. In addition, a detailed Government review of the way the energy market and Ofgem operates and their capacity to deliver consumer satisfaction, meet the public interest and help limit climate change is overdue. This should be done in close consultation with the TUC, industry and other stakeholders.

The Government should also undertake an urgent inquiry into speculation within the oil industry to understand the extent to which this has driven up energy prices and caused damage to the UK economy and to bring forward proposals to limit such activity.

For those who claim that the energy industry is being unfairly targeted and that investment in the sector will be damaged by a windfall tax, it should be kept in mind that the energy industry is due to enjoy a further £9 billion effective windfall hand-out between 2008 and 2012 as a result of the European Union Emissions Trading Scheme. Energy companies will make vast profits by passing the cost of having to pay for the right to emit carbon on to the consumer. However, they will not take into account the fact that a fair proportion of their carbon allocation will be given to them for free.

4. International co-operation on the global economy

The TUC believes that the response to the economic crisis needs to be co-ordinated at an international level. The slowdown is affecting every major European economy as well as the United States. There can be little optimism for the UK economy if its main trading partners fail to grow. The British Government must work closely with European Union and G8 members to identify policies that can be used to restart growth across the world and ensure that current EU agreements on growth and stability do not impede economic recovery. This is particularly important to ensure that the close economic ties developed over recent years are not undermined by a retreat into isolation and protectionism as governments seek to respond to their economic problems.

Furthermore, given that this crisis has its origins in irresponsible practices on the global capital markets and the banking sector, the time is ripe for the advanced economies to develop a co-ordinated response for the regulation of these markets to ensure that the world does not find itself in the same situation again some years hence.

There is also a very strong case for much greater international action to combat tax haven abuse and 'tax competition' where business places pressure on governments to reduce business taxes under threat that they will relocate to lower tax territories if their demands are not met. These activities continue to weaken tax revenues across the world including in the UK and the developing world and make it harder for governments to respond to economic downturns or to grow their economies. However, no government can act alone on this: challenging tax competition and ending haven abuse will require concerted multilateral action.

The TUC believes the British Government has a crucial role to play in such action as one of the largest economies, as one of the leading centres of financial trading and expertise, and as a country with close constitutional links to some of the most active tax havens.

5. Early response rescue for 'at risk' workers

A rise in unemployment will damage the economy and act as an untimely drain on public finances. The Government should ensure that employment and training services are fit to respond rapidly and fully to support employees who have lost their job or are at risk of losing their job. This will mean ensuring that adequate resources are in place to allow these services to take urgent action to support individual workers and groups of workers as necessary.

6. Help for construction and housing

The UK housing market undoubtedly overheated in the years of easy credit. While there was significantly less sub-prime lending than in the US, there was undoubtedly some irresponsible lending. Not enough houses have been built - particularly ones that low and medium income households can afford to rent or buy. This asset inflation has also encouraged speculation in property - often with undesirable effects on local communities that end up with high proportions of buy-to-let housing. The result has been house prices beyond the reach of first-time buyers, and now an inevitable burst of the bubble with a particular impact on those who have bought recently.

The credit crunch has further led to a severe shortage of available mortgage finance making it extremely difficult for first time buyers to take advantage of more realistic property prices.

Given these conditions, the TUC warmly welcomes the package recently announced by the Government to help those at risk of repossession. In addition, the Financial Services Authority should ensure that all lenders are abiding by the Mortgage Conduct of Business rules to prevent lenders moving to court action without giving the borrower a fair chance to pay their arrears.

The decision to bring forward the plans for social housing construction is also important given the long-term problems of supply in the housing market which has affected those on low and middle incomes particularly hard. The Government needs to take all necessary steps to ensure that all those involved in the construction sector, including developers and builders, are actively supporting the target of three million new homes by 2020. Given the current problems, achievement of this target may require a very considerable expansion of social and council housing.

The extra help announced for first time buyers is also welcome but the TUC believes the Government should, as a matter of urgency, work with local authorities to make it easier for them to provide mortgage finance at a competitive rate and to build new council homes.

The General Council notes that the Chancellor is considering options for reviving the mortgage lending market. The TUC does not believe that measures which risk creating a new asset price bubble in the housing market are beneficial. There is a need for house prices to return to levels that first time buyers can afford. The Government should take measures designed to make mortgages more easily available on a responsible basis, such as encouraging local authorities to lend and through measures that may be included in Sir James Crosby's review to underwrite lenders. But such help should avoid any attempt to prop up unrealistic house prices and should be accompanied by a tighter regulatory environment for mortgage marketing and provision.

In the long term the Government must do more to build the strength of the UK economy. This will require it to intensify some of its existing activities such as investment in skills, but also rethink some other aspects of its economic approach.

The UK has privileged City financial institutions at the expense of the rest of the economy through a lenient tax regime and light regulation. Yet we cannot rely on the next City or asset bubble to drive growth. As a recent Financial Times editorial noted: 'investment banking has occupied an outsized role in western economies in the past decade ... its tendency to make losses every few years, make it an unreliable financial partner'. Current events show the truth of this observation which is reflected in the extent to which our economy has been left dangerously exposed by the reliance on the City.

Instead, the Government must identify the sectors, whether in manufacturing, services or other parts of the economy, that are able to generate growth in the next decade. These will be the sectors that will lift us out of the current slowdown in a sustainable fashion, in every sense of that word. The Government's role is to provide the right policy and legislative framework and the right incentives and supports to allow those sectors to flourish. In particular, the Government must learn from countries such as Germany and Denmark where environmental enterprise has been positively encouraged leading the 'green economy' in those nations to become highly profitable sectors that employ thousands massively outstripping the UK's much smaller efforts in this area.

The TUC will produce two detailed reports on this pro-active approach to generating growth in the autumn.

This is not an old-fashioned attempt to pick winning companies and favour those over others, but a sensible assessment of the sectors in which the UK already does well but could do better. Yet even this common sense approach remains anathema to the Department for Business, Enterprise and Regulatory Reform (BERR) and it is increasingly clear that the creation of this new department with its distinctive built-in neo-liberal approach was a substantial mistake. Far from the dangers of excessive regulation, the world economy is facing a damaging downturn because of a lack of effective regulation.

After a decade of economic success in which the UK economy has proved more resilient than many to external shocks, we now face very different circumstances and require a different kind of response from the Government. If it is to show that it is on the side or ordinary working people and committed to fairness it needs to adopt the kind of realistic pro-growth strategy detailed here. This will ensure that the downturn is no deeper nor longer than necessary and that the UK emerges as a stronger and fairer country.

Adopted 9 September 2008.

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