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5 General Council statement on the future of the UK economy

Introduction

The country is still facing a profound economic crisis. Unemployment is growing particularly amongst young people. Despite the first signs emerging of a possible resumption of economic growth, there is a real danger of a so-called jobless recovery. From the TUC perspective, no turning of the economic tide can be regarded as a real recovery until unemployment starts to fall.

One year ago, the General Council delivered a statement on the economy to Congress 2008. That statement rejected the claims common at the time that interest rates needed to be held or even raised to stem the threat of inflation. It also rejected the argument that public sector wages had to be held down to avoid the risk of a wage-price spiral. Instead the statement called for a major fiscal stimulus of house building and tax cuts for ordinary earners to limit the likelihood of recession, for interest rates to be rapidly slashed, and for major resources to be committed to help those facing unemployment back into work and training. In addition, the statement called on the Government to end light regulation of the City which, it was argued, had become a risky liability for the UK and instead start identifying and helping those sectors in the 'real economy' that could drive economic growth in the future.

In the same month the General Council issued its statement, Lehman Brothers collapsed setting in train a series of consequences that profoundly changed the economic situation of the UK and the world. Well established and supposedly infallible economic approaches were rapidly ditched to be replaced by many of the very policies for which the General Council had called.

What is now clear is that however shocking the events of September 2008 and however damaging the ensuing recession, the really profound shift in economic policy priorities needed to meet the challenges of a completely new economic era has yet to occur. The current unorthodox approaches adopted by the Government and the Bank of England are generally presented as emergency responses designed to get the economy over this rather major bump in the road. Soon however, it is assumed, the work of these policies will be done and all can return to business as usual.

Hence we see bankers once again awarding themselves huge bonuses off the back of the taxpayer bailout and receiving little in the way of constraint other than stern words from the Treasury. And, most worryingly, public debate has been successfully steered by some political leaders away from the really pressing matter of limiting the long-term damage done to the economy by the recession and into the red herring of public spending cuts.

In contrast, the TUC calls for a major public debate about how economic policy must be rapidly rethought if we are not simply to return to business as usual and if the UK economy is to be fit enough to meet the challenges and opportunities of a new economic era.

It is time for a rethink based on the following policy imperatives:

• a bolder response to rising unemployment and a new approach to the labour market;
• a new policy focus on the ordinary wage earner;
• protecting public services;
• building on the industrial activist approach;
• creating a new role for the financial sector;
• rethinking monetary policy.

A bolder response to rising unemployment and a new approach to the labour market

In the past twelve months the shape of the UK labour market has fundamentally changed - unemployment is rising sharply, employment has experienced record falls, vacancies are down and redundancies are up. The latest statistics show that in the three months to June 2009 there were 2,435,000 people out of work - 750,000 more than the same period in the previous year. For the first time since July 1997 the number of people unemployed for over six months has moved over the 1 million mark. Over one in six young people aged 18-24 are out of work - 83 per cent of whom are not in full-time education. The TUC's 'want work' rate (which includes those who are economically inactive but would like a job in addition to those who are unemployed) shows that over four and a half million adults of working age would like to be in employment but aren't. And it is not only those who have lost their jobs who are suffering. Rates of involuntary part-time and temporary work are high and increasing, with just under a million workers are in part-time roles because they cannot find full-time employment.

Evidence from previous recessions shows us that it is likely to be at least a year from when growth returns before unemployment begins to fall, and many more years after that before unemployment returns to pre-recessionary levels - after the 1980s recession unemployment still hadn't returned to the levels of the late 1970s before the 1990s downturn began. Action to challenge unemployment, and to support those who have lost their jobs to re-train, is therefore essential both now and into the future.

We believe that Government needs to provide more support to viable firms struggling with short-term economic difficulties during the recession and the early days of recovery, and that a short-time wage subsidy scheme could do much to prevent more jobs from being unnecessarily lost. Across Europe, Governments have made subsidy packages available to employers moving workers to short-time hours or making temporary lay-offs - and recent evidence from Germany¹, where over one million workers are now on short-time working, suggests that the scheme has protected around 400,000 full-time jobs. As firms wait for the recovery to take hold a short-time working scheme in the UK could protect jobs and enable employers to retain essential staff and skills - making business success more likely in both the short and longer terms.

The Government has been bold in acting to tackle youth unemployment, guaranteeing a job, training place or work experience placement to all young people aged 18-24 who have been claiming JSA for 12 months or more. But the TUC is concerned that this welcome investment will be too short lived and too limited in its scope. The Future Jobs Fund will provide paid employment for 150,000 young people - but in June of this year 140,000 young people had already been unemployed for over 12 months, and the first jobs will not be available until October. Demand for the scheme will therefore be high, and many young people may find that rather than work they can only benefit from the training or work experience offer. It is therefore imperative that more jobs are created, and that the guarantee delivers meaningful opportunities that will have real impact on young people's job prospects. In particular, it will be essential that the most disadvantaged young people do not miss out on the Future Jobs Fund, and that they are not sidelined into stop gap work experience schemes with no promise of a paid job.

While the Government has been right to focus its resources on young people facing unemployment, who will feel the negative effects of early spells of unemployment for the rest of their working lives, the General Council is also concerned to ensure that other groups also receive appropriate support, and that existing labour market programmes take account of our changed economic circumstances. The introduction of the Future Jobs Fund demonstrates the Government's recognition of the need for demand side measures to provide opportunities for people to work - a departure from the focus simply on supply side interventions aimed at improving the 'work readiness' of unemployed people. The TUC now believes that this principle should be extended to wider labour market policy. We are particularly concerned about the 'work for your benefits' scheme for the long-term unemployed, proposed in the Welfare Reform Bill. The scheme will force people to do compulsory work experience, earning as little as £2 per hour, which will do nothing to improve the job prospects of workers - most of whom already have plenty of skills and experience. We believe that this scheme should be replaced with a jobs guarantee for all long-term unemployed workers, a policy which would provide real opportunities to access paid employment, and would recognise the need for a demand side response to support unemployed people in our changed labour market.

More broadly the debate around welfare reform must also change. For too long the focus has been on how to make the benefits regime ever harsher, underpinned by a view of benefit claimants as lazy scroungers who actively seek to avoid work. The recession has shattered this myth, and has also laid bare the insufficient support that our social security system now provides to the unemployed. Since the 1980s earnings have risen on average 1.6 times faster than unemployment benefits, with the result that Jobseekers Allowance is now worth around a tenth of average earnings - in the 1980s it was a fifth, and it was too low then. The TUC believe that we need to develop a new vision for our welfare state, allowing the creation of an infrastructure that recognises the world of work as it exists now, supporting people in precarious and insecure jobs and recognising the reality of under-employment. Our social security system should provide non-discriminatory support to all those who are out of work, recognising the diversity of workers' family arrangements and playing its part in eliminating poverty.

The scourge of rising unemployment is also set to have a hugely detrimental impact on our skills base unless urgent action is taken by the Government. In spite of the rapidly weakening labour market, recent reports have highlighted that employers are having significant difficulties in recruiting skilled staff.

The experience of previous recessions has shown that a significant decline in skills investment is a key factor in how quickly and robustly the economy and labour market can recover. The TUC has therefore pressed the Government to use skills policy in a much more proactive way to safeguard investment in training and also to make a significant contribution to protecting employees at risk of redundancy.

The Government has instigated a range of skills initiatives expressly designed to counter the recession, including measures to continue expanding the number of apprentices especially by increasing recruitment in the public sector. Obliging more contractors to invest in workforce skills by strengthening public procurement policies has been another welcome change in Government policy. Flexibilities have also been introduced to Train to Gain, the government skills programme, in order to relax the eligibility criteria and increase access to training subsidies especially for SMEs during the recession.

The Government is also of course prioritising the skills of young unemployed people through major programmes such as the Future Jobs Fund. School leavers are another key group and it was welcome that in Budget 2009 the Government announced additional funding of £650M over the next two years to ensure that it delivers on its guarantee of an education or training place for all 16- and 17-year-olds. The TUC has also welcomed a government initiative with other stakeholders to safeguard construction apprentices at risk due to the major contraction in the sector by making alternative arrangements to enable them to complete their training.

Welcome as all this is, there is a need for additional measures to ensure that more people have the opportunity to acquire the skills they need to either retain their existing job or to find another job if they are made unemployed. These measures include the need for greater flexibilities for all companies facing the threat of closure (e.g. companies moving to short-time working) to access government training subsidies, although significant pressures on the Train to Gain budget will make this difficult over the short-term. Sector Skills Councils and Regional Development Agencies have an important role to play in supporting skills investment in companies facing difficult times and trade union members of these bodies are playing an important role in supporting such strategies. Government also needs to urgently consider how the new Right to Request Time to Train can best support employers and trade unions to assist the workforce to re-skill to meet the challenges of the new economy.

Public procurement can also play an even greater role in maintaining skills investment. The Government needs to rapidly extend the progressive approach being introduced for central government construction projects to other major areas of contracting (e.g. government IT projects) and also to bring greater pressure to bear on government agencies and local authorities that are not currently using available procurement measures to oblige more contractors to meet a number of 'skills commitments.' The TUC has also been calling for the initiative in the construction sector to safeguard apprentices to be extended to many other sectors of the economy, including all parts of public services.

There is also a pressing need for all unemployed people to be able to access tailored skills training as early as possible in order to help them back into work or to give them the opportunity to retrain in a different sector. It is imperative that major initiatives, such as the Future Jobs Fund, deliver training opportunities that will genuinely help individuals to get the jobs that are being created as the economy recovers. We must not repeat the experience of past recessions where, all too often, the most disadvantaged young people were trapped in training schemes that did not lead to sustainable employment.

During the downturn we know that those who are already experiencing disadvantage will be some of the hardest hit. Unemployment is rising far faster among those in elementary occupations than in other groups, and many lower paid workers who manage to keep their jobs will face increased job insecurity and a higher risk of poor and illegal treatment. The recession means that for many workers the risks of vulnerable employment have increased - people may be more prepared to put up with bad treatment as they are scared of losing their jobs, and employers may use the insecure economic climate to justify exploitation.

Women, workers from black and minority ethnic groups and disabled workers are over-represented among those in low-paid and temporary jobs, and are more likely to be working below their potential in positions that do not make best use of their skills. For example 25.3% of workers from non-white groups are low-paid, compared to 22.6% of white workers, and jobs held by women are much more likely than those held by men to pay the minimum wage (or below). There is also strong evidence that disabled people are among the most socially excluded groups in our society and that some aspects of this exclusion - especially unequal access to housing, transport and education - increase the difficulty many disabled people face in getting and keeping a job.

Workers in these groups can therefore be particularly badly affected by unemployment. Lower paid workers are less likely to have savings or to qualify for substantial levels of redundancy pay, facing a greater risk of immediate poverty as they become unemployed. Evidence also shows that lower skilled workers are less likely to find new work than those who already have higher qualifications. In addition, workers who have caring or family responsibilities, or who face travel restrictions as a result of a disability, are even less likely to be able to access new jobs that are appropriate to their needs.

It is therefore essential that public policy recognises the disproportionate impacts that unemployment has for those who are already the worst off - and that new resources are appropriately targeted to address these existing inequalities. It is also vital that discrimination at work continues to be challenged during the recession -we simply cannot afford to hinder recovery by allowing discriminatory attitudes to limit people's potential. And the important role that public services, including health, social care and childcare provision, play in enabling many workers to overcome discrimination and disadvantage must continue to be recognised. Savage public spending cuts would only serve to exacerbate the disadvantage that many workers already face.

A new focus on the ordinary wage earner

Relative levels of income, wealth and social mobility for those on median incomes and those on higher incomes have diverged very considerably over the last thirty years. Under the Conservatives from 1979 to 1997, those on median incomes saw their salaries rise by 1.6% each year, while those on higher incomes enjoyed rises of 2.1% and the richest 1% experienced increases of 3.9%. Although, the divergence was not as strong under the Labour Governments since 1997, wealthier groups have still seen their incomes grow considerably faster. Median earners have had a 1.9% growth in their incomes each year since 1997, while those on higher incomes and the wealthiest 1% have enjoyed 2.1% and 3.2% respectively².

With such a long term trend in place, it is hardly surprising that inequality has increased significantly over the last thirty years nor that higher levels of social mobility have proved very hard to attain. Nor should it be a surprise that frustration amongst ordinary wage earners is high. A TUC survey of those on median incomes found that 45% felt their living standards were no better or even lower than their parents and that only 29% think their job has a higher status than their father's³.

The failure to address these inequalities has played a significant role in the creation of the current economic crisis. It is a little remarked fact that one fundamental economic trend in the UK and other advanced economies over the last thirty years has been the declining share of GDP going to wages. As the table below shows each decade since the 1970s has seen wages taking a significantly smaller share of national income:

The situation in the USA is even starker where average weekly earnings have fallen by 8.2% between 1964 and 2004⁵.

The risk of such a decline is that demand falls as consumers simply do not have enough money to buy the commodities and services being produced. This is particularly a risk in the UK which has also seen its export industries decline meaning that falling domestic demand is not being replaced by rising foreign demand. For a number of years, this crisis was forestalled by the rising provision of cheap credit; in effect, the shortfall in wages was made-up by consumers borrowing vast sums to continue buying. As a result, the ratio of personal debt to household income already stood at 98% by the beginning of 2000 but increased even further to 154% by the end of 2007⁶. However, with the era of cheap and easy credit over and extremely unlikely to return soon, there are clearly serious questions to be asked about the capacity of the UK economy to restore and maintain demand while the wage share remains so low.

Policy makers should also be asking themselves whether such a low level of GDP going to wages is sustainable. One consequence of the long term trend identified in the table has been the release of very large sums of money for investment. Maintaining a reasonable share of GDP for investment is, of course, necessary for the healthy functioning of an economy. However, if the amount increases too much then the probability of risky investment practices and the creation of an investment bubble grow. For example, it is notable that the exceptionally risky investment practices around the sub-prime housing sector occurred in the USA where, in addition, the opportunity to pay large salaries and bonuses to senior management of large companies and to financiers out of all proportion to their actual performance also increases. It is almost certainly no coincidence that the long-term rise of such practices and outcomes has occurred precisely alongside the fall in the wage share.

What this analysis signifies is that policy makers must begin to pay attention to the material well-being of the mass of ordinary wage earners if demand is to be restored to the economy in the longer term and if an important cause of future financial instability is to be closed off. Four areas in particular need to be explored.

Firstly, the tax system needs to be reviewed to ensure that ordinary wage earners are getting the best deal possible out of the system. Given that the progressive nature of the tax system in the UK has been eroded in recent decades and given that both the very wealthy and large corporations have proved ever more adept at avoiding tax⁷, it seems likely that a restructuring of tax and a concerted crackdown on avoidance and evasion could ensure that ordinary earners are not bearing an unnecessarily high tax burden.

Secondly, and most importantly, the nature of wage setting in the UK must be rethought. The cultural hostility to collective wage negotiation that afflicts so much of the private sector today and the forest of complex legal rules and anti-trade union rules that constrains trade unions from effective bargaining, organising and taking collective action needs to be rapidly addressed. There is also concern that recent decisions by the European Court of Justice have undermined established industrial relations procedures threatening the ability of unions to bargain, organise collectively and to take industrial action in some circumstances in order to promote decent working conditions, equality, skills and environmental standards.

In the three decades following the war, the trade unions not only played a central role in maintaining decent levels of equality and social cohesion but were also vital in ensuring that consumers had enough money in their pockets to support the rapid expansion of the mass market. Given the scale of the current crisis and the fact that the imperatives of the UK economy are suddenly very different to those of the recent past, it is now time to think again about the measures to promote collective bargaining as a force for equality, fairness and economic growth. In this context, it is vital that employers do not use the recession as an excuse to drive down wages and reduce terms and conditions in firms which remain profitable.

Thirdly, the Government must make every effort to ensure that the severe deterioration in the occupational pensions offered to ordinary workers is stemmed. In the short term, this must mean resisting the calls for weakening of public sector pensions arrangements. Such changes would do nothing to address the problems of private sector schemes and would instead add to the problems of declining pensions provision. In the longer term, it means pushing ahead with the Personal Accounts approach while resisting those seeking to undermine its goals and the integrity of the initiative. In addition, the Government must now deliver on the Labour manifesto commitment to introduce mandatory 50% member nominated trustees on the boards of pensions schemes. Most fundamentally, it will require allowing trade unions to act as the most effective bulwark against workplace pensions deterioration by providing unions with the rights and freedom to organise mentioned above.

Fourth, policy makers need to address the culture of very large, independently negotiated remuneration and pensions packages for the directors of our largest companies. This trend has ensured that the UK's most senior managers now have no stake in the pay and pensions packages of the wider workforce they lead. It also ensures that they are entirely divorced from even the faintest understanding of the material reality faced by their employees. Such a culture within business organisations is not conducive to the types of fair pay settlements which will be required to ensure that workers have enough money in their pockets to maintain demand. For this reason, the TUC has supported recent calls for a high pay commission to explore the problems created by excessively high pay and to propose possible solutions.

Finally, the Government needs to take firm action to deal with the crisis of personal indebtedness that now afflicts many working and unemployed people in the UK. In particular, the development and implementation of further support for mortgage holders facing repossession and forthright action against loan shark exploitation of individuals and families who have been thrust into desperate measures by debt.

Protecting public services

Public services fulfil a crucial role during a recession. The part played by Jobcentre Plus, the Rapid Response service and the wider welfare system is obvious but recessions of this depth have highly damaging social and economic consequences which would be far worse without effective public services. The deterioration in physical and mental health, the rise of alcohol and drug misuse and increases in criminal behaviour are all well-evidenced short and long-term outcomes of recessions. Such changes not only do damage to personal, family and community life but also inflict a high cost on the economy as normal business practice is disrupted by higher levels of employee absence, lower staff performance and crime. In particular, the very high levels of unemployment amongst the young experienced in this recession threatens long term risks for the UK economy as large sections of the newest workforce cohort fails to secure the adequate working practices, experience and skills to guarantee the future performance of business.

However, public services are not only crucial as a component of the response to the current crisis. The global economy is changing as a result of the crash and the UK economy will need to change with it. The role of the financial sector will be less significant as a source of growth for many years as will the role of rising asset prices in providing the (supposed) security necessary to maintain credit flows. As the Government has now acknowledged, this means the UK will have to place a new emphasis on effective infrastructure, skills, investment and productivity gains if it is to compete in the global economy. Public services are absolutely vital to the achievement of these factors. Well-funded and structured welfare, health-care, transport, education and business support guided by sensible strategic debate, rather than myopic headline chasing, must be part of the fundamental underpinnings of this new approach.

The area of housing is particularly important in this regard. The UK workforce and wider economy simply cannot operate at their productive best when the supply of adequate housing is so poor. Workers and their families who are forced by high house prices to live in inappropriate or over-priced accommodation often at a great distance from their workplace are less likely to be committed and healthy employees with high morale. This is why the TUC welcomed the Government's plans to build three million extra homes by 2020. However, with the private sector now unlikely to be able to help significantly with the meeting of this target for the foreseeable future, it is vital that the public sector steps in and launches a major expansion of public housing.

For all of the above reasons, it is to be deeply regretted that public debate has been hijacked in recent weeks by a shallow assumption that public spending needs rapid retrenchment. The TUC is clear that such a measure is not only unnecessary and ineffective but will also cause deep damage to the UK's economic prospects as the recession is lengthened and public services are unable to support the wider economy as necessary.

Those who are calling for rapid cuts do so on the basis of three assumptions, all of which are flawed: cutting spending will reduce the public finance deficit; failure to cut will create a higher tax burden for generations to come; failure to cut risks a negative reaction from the bond markets which could lead to higher interest rates or even the failure of the UK state to borrow as necessary.

It is widely assumed that reducing the public deficit is a simple matter of cutting spending but this is, in fact, not the case. Both historical and contemporary evidence reveals that cutting spending during a recession can lead to further deterioration of the public finances. The clearest historical example is the experience of the early 1980s. Margaret Thatcher's spending cuts of the time did nothing to strengthen the public finances. In fact, the deficit continued to rise rapidly from 1979 and only began to decline by 1985. The current experience of Ireland should also give pause for thought. Following two austerity budgets, the tax take is well behind target and the credit rating agencies are still downgrading Ireland's sovereign debt.

The harsh economic fact is that cutting spending when tax revenues are falling and the economy is shrinking only places further burdens on the state finances in the form of benefit payouts and heightened demands on police, healthcare and social services. This is confirmed by TUC research conducted earlier this year which found that a 10% cut in public spending would lead to at least 200,000 public servants on the dole and a significant reduction in the public contracts secured with private sector firms.

The second argument for cuts is that taxes will have to rise for many years and even decades into the future to pay for the growing levels of public debt. While there is certainly little doubt that taxes will have to rise to pay for the damage done to the economy by irresponsible investment practices in the City, the notion that these rises will afflict future generations is fanciful. The truth is that no-one can be clear about the extent of the recovery nor about the future direction of the economy over coming decades. Without such certainty, it is simply impossible to predict the likely levels of tax revenues available to the Treasury to pay off the increased debt and as such it is impossible to predict for how long taxes will be increased by that debt. The factor that will most determine the level of tax revenues and the reduction of the deficit is the level and sustainability of economic growth.

More importantly, the notion that cutting spending now will relieve future generations of the higher tax burden is false. Firstly, as explained above, there is no direct relationship between the cutting of spending and the speedy reduction of public debt. Secondly, the job losses and public service deterioration resulting from public spending cuts will cause long-term problems which will prove an expensive drain on welfare, social, police and health services which are just as likely to burden future generations with higher tax as the existence of public debt now. One cannot calculate exactly but it is certain that the intractable social problems existing in the communities affected by the recession and public spending cuts of the early 1980s have proved a very long-term drain on public funds. Major spending cuts now will only exacerbate this fiscal pressure for future generations of taxpayers.

One further argument is commonly used to call for cuts now. This is the claim that without such cuts there is a risk that the Government will soon find itself either having to offer higher interest rates to borrow, or may even be unable to raise the necessary funds on the bond markets, as investors lose faith in the security of gilts. In some senses this argument has been disproved already. Despite all the commentary about the unsustainable nature of the public finances (including the wide but false claim of a failed gilt sale earlier this year), gilts are still finding ready buyers at interest rates that are well within the long-term trends. The reason for the non-emergence of panic is because gilt and bond prices and interest rates are affected by a number of complex interacting factors of which public debt is only one. In particular, issues such as the future path of interest rates, the behaviour of prices in the wider economy, and the relative attractiveness of other assets play a big role in determining bond values.

And, very importantly, the actual performance of the economy will also play a role as this will determine the likely availability of tax revenues to honour the payments on gilts. If major spending cuts were to force the UK economy into a deeper or double-dip recession just when our competitors were recovering, then this would be more likely to cause panic on the bond markets than making no cuts at all.

This analysis makes it clear that cutting spending in the midst of the recession will not achieve the reduced deficit or debt that is claimed and may very well have the opposite effects to all the benefits that are claimed for such a measure. This is not to say that the current state of the public finances is sustainable in the long term. It is necessary that the Government outlines how it plans to reduce the deficit and the debt once the future trajectory of the UK economy is clearer. However, such plans can only be effective and avoid highly damaging consequences if implemented when both the economy and tax revenues are growing again. Furthermore, such plans must be based not on indiscriminate and arbitrary targets for cuts but on a full strategic review that balances the central role effective public services must play in the economy of the future with the need to ensure very high levels of public sector productivity to enable the sustainable reduction in the deficit.

Building on the industrial activist approach

The publication of New Industry, New Jobs by the Government in April marked a significant shift from a previous policy of relying on the market to identify strategically important industries for the UK. The TUC has always recognised that in the age of globalisation, there must be a focus on those high value, high skill industries where the UK can compete with the best in the world. Furthermore, as the UK strives to meet its climate change targets, there is a strong case for government intervention both to develop green industries such as the building of wind turbines and the greening of more traditional industries such as motor manufacture.

New Industry, New Jobs highlighted a number of sectors where the UK could remain successful in the future. These included low carbon industries, ultra-low carbon vehicles, digital industries, life sciences and pharmaceuticals, and advanced manufacturing. The Budget made available £750m for a strategic investment fund, to support this new policy. The TUC strongly welcomed these developments. We argued that every penny of this £750m must be directed towards industries with the potential to be jobs-rich.

New Industry, New Jobs marks the start of a process. Industrial policy must target other sectors that can provide economic growth, export potential, high research and development, and high quality jobs. In some cases, this will entail short term interventions to support strategically important companies that have a long term future but are struggling in the economic downturn. There should also be a continuing focus, in particular, on supporting those sectors, such as postal and telecommunications, which provide the infrastructure for the UK economy and without which growth is very unlikely to return in a sustainable fashion.

In addition, the vision of a globally competitive economy that is emerging out of the New Industry, New Jobs initiative must be fully integrated with the development of a new policy environment for our financial services sector. As is explained below in more detail, new growth sectors will only expand if they are able to secure the right sort of reliable investment that understands the longer term vision of our most innovative companies. This is an issue that applies as much to the provision of finance to aid improvements in productivity as it does to funding for complex product development and the capture of new markets. Whether the City as it is currently structured is able to do this is something that requires urgent investigation. And, of course, before we even start addressing this longer term role for the financial sector, lenders need to show they are meaningful partners for growth by restoring the flows of credit to struggling businesses in the manufacturing and other sectors which the bail-out of the banks was supposed to initiate.

Skills policy is also an integral element of the new industrial activism policy approach set out in New Industry, New Jobs and the government will be publishing a new skills activism policy approach later this autumn. This will put skills at the heart of industrial strategies designed to enable the economy to recover from the recession in a speedy and sustainable manner by giving a greater priority to planning for future skill needs, especially in key areas such as the development of the low carbon economy. The gradual evolution of skills policy away from a largely employer-led approach to one which gives Government a greater strategic and regulatory role and attributes more importance to the needs of the workforce is much to be welcomed. It is also important to substantially increase training in those skills which will be crucially important in the low carbon and energy efficient economy of the future and in particular, to promote the take-up of STEM skills.

It is vital that the new skills activism policy genuinely reflects the policy intent originally set out by the Secretary of State in his speech to the CBI in October 2008, when he stated that 'through policy, regulation and through procurement, we are able to shape and create markets, and the skills that will be needed to drive them'.

Furthermore, the New Industry, New Jobs initiative must include a determined focus on narrowing the productivity gap between UK and overseas business. In some sectors, there have been real productivity breakthroughs made particularly with the help of new information technology. But such productivity leaps are not consistent enough across the UK economy. In particular, UK business has yet to fully embrace the great improvements in efficiency and innovation that research has shown can be generated by offering workers more discretion over how they carry out their job while providing wide and continuing access to training and the acquisition of skills . In the longer term, it is only such breakthroughs in productivity which can ensure that British business remains competitive and the UK economy healthy.

It is also vital that the Government's recent and welcome efforts to take a more activist approach to shifting the UK towards a low carbon economy are maintained. Work to create the right legislative, regulatory, investment and skills framework to reduce carbon emissions in key sectors is already underway and the TUC welcomes the fact that trade unions are now playing a key role in the development of policy in this area. It is particularly important that such policy is shaped and implemented in the spirit of a 'just transition' which ensures that the move to a low carbon economy does not damage livelihoods and working lives but actually enhances them. For example, it is vital that the UK Government and wider international community recognise that high carbon industries, such as steel, can become green industries through targeted and adequate investment, training programmes and application of new technologies. With such support, the shift to a low carbon economy need not pose a threat to the livelihoods of those working in these sectors.

In this regard, we also welcome the Government's call for a global deal on the environment at Copenhagen that is legally binding, has an effective compliance regime and is subject to early and regular review. We urge the UK's negotiators to ensure that a deal with these characteristics does indeed secure agreement.

Finally, while the emphasis on high skill and high value-added sectors as drivers of growth is absolutely right, it is important that the Government does not lose sight of the fact that lower-skilled workers and other sectors also play a vital role in the economy and also have the potential to grow. Addressing the problems faced by low-skilled workers, many of whom are in vulnerable work, and helping their sectors to grow while also improving their working conditions should also be a key focus of economic policy.

Creating a new role for the financial sector

As has been extensively documented and analysed in recent months, the City of London and the investment practices it promoted were one of the fundamental causes of the banking crash of 2008, the resulting recession and the widespread hardship and anxiety that has resulted. Yet the regulatory response to the problems of the financial sector has remained limited and cautious and, more strikingly, that some financial organisations have returned with worrying rapidity to the bonus culture that helped feed the crisis in the first place.

The message from Government and from the interim report of the Walker Review of the banking sector that any regulatory response must be based largely on self-regulation and voluntary codes is entirely unacceptable. The City must not be allowed to threaten any future recovery through the continuation of light-touch regulation. As such, the TUC now seeks a robust statutory response to end the payment of bonuses out of all proportion to performance, to regulate those markets which have so far operated beyond the reach of normal values of integrity and responsibility, and to end the severe problems created by large banks indulging in highly risky investment practices.

Beyond this, however, it is vital that there is now a clear public debate and policy perspective about what UK citizens and businesses have a right to expect from the financial sector. As has been explained throughout this statement, the fundamentals of the global economy are changing as a result of the crash. The UK economy will now have to focus unremittingly and rapidly on improved infrastructure, skills and productivity if it is to maintain its position as one of the world's leading economies. The role of investment in this new trajectory is crucial but the success of such a trajectory requires a long-term commitment and painstaking programme of change which does not sit well with a financial sector which emphasises short-term share performance and the making of fast profits from speedy and volatile trading. In addition, questions must also be raised about the close interest PLC directors are bound to take in short-term share performance rather than the longer-term search for productivity gains when so many stand to benefit personally from higher share prices and from mergers and acquisitions.

The TUC is calling, therefore, for the Treasury, the Financial Services Authority and the Bank of England to launch a public debate about the role of the City in the economy of the future not simply to understand how the instability of the past can be avoided but to understand how the capital markets and wider investment sphere can play their part in ensuring that the UK economy is competitive over the coming decades. In this context, the TUC welcomes the recent comments by Lord Turner, Chair of the Financial Services Authority, which raised important questions about the size of the City relative to the wider economy and the extent to which financial services can play a more 'socially useful' role.

The TUC also believes that it is vital that financial regulators are more publicly accountable and more responsive to public concerns. This is a crucial way of ensuring that regulators are not captured by the powerful sectors over which they are supposed to exercise oversight. One important route to such public accountability, would be for representatives of the trade unions and other civil society bodies to hold seats on the boards of regulators and financial authorities such as the FSA.

Rethinking monetary policy

The role that the banking crash played in the recession has obscured the fact that very serious mistakes were made by the Bank of England through 2008 which has meant that the slow-down in the UK is now more severe than necessary. In particular, the Monetary Policy Committee consistently held interest rates at around 5% for the great part of that year setting greater store by the potential damage done by rising commodity prices, inflationary expectations and a wage-price spiral than by the risks to the economy posed by recessionary pressures and the credit crunch.

Even more surprisingly it is clear that monetary policy authorities around the world failed to identify the growing dangers to financial stability of ever more complex financial instruments dominating credit flows within the global financial system.

The simple-minded focus on inflation targeting as the sole determinant of monetary policy has been proved unfit for purpose. The Bank of England and the Treasury should urgently design a new economic and financial stability tool-kit with inflation targeting balanced by a new focus on sustainable GDP growth while containing unsustainable rises in personal and corporate debt and in asset values.

Conclusion

The last year has been a historic and troubling period for the UK and the world. A financial crash and recession of the depth we have experienced will inevitably change many of the fundamental economic facts that have underpinned the UK and global economy over the last three decades. The coming period will determine whether our policy-makers have the vision to identify those changed fundamentals and develop a new range of policies to ensure that the UK can operate a successful and fair economy over the next three decades. Currently a great deal of policy thinking and debate (although not all) is still focused on crisis management rather than transformation. This must change.

However, the deepest worry must be that policy makers not only avoid a serious re-think but actually prescribe precisely the wrong solutions. If 2010 becomes the year of ill-conceived and unnecessary public spending cuts then the risk is very great that the UK will be forced back into recession and will ultimately miss the opportunities - seized by our competitors - to grow into an economy fit to compete in a new economic world. The TUC and wider union movement will not let the current and future well-being of millions of working people to be lost and will put maximum effort into preventing this mistake being made.

For notes see overleaf

Notes

¹ H Bach H and E Spitznagel Betriebe zahlen mit - und haben was davon Institute for Employment Research (IAB) of the German Federal Employment Agency 2009

² M Brewer et al., Poverty and Inequality in the UK: 2008, IFS; the source figures for incomes for the top 1% were provided by David Phillips at the IFS.

³ TUC, Life in the Middle: The Untold Story of Britain's Average Earners (Touchstone Pamphlet No. 6), 2009

⁴ Data from Office for National Statistics

⁵ United States Bureau of Labor Statistics

⁶ BERR, Household Debt Monitoring Paper - H2 2007

⁷ TUC, The Missing Billions: The UK Tax Gap (Touchstone Pamphlet No.1), 2008

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