An economist's view of what Labour can do

There seems to be little that annoys Gordon Brown and Tony Blair more than the suggestion that nothing can be accomplished by a New Labour government without increasing the total of public spending and borrowing. Nevertheless, this seems to be widely believed by British opinion formers, which is why a book published last Monday is very helpful. The book - What Labour Can Do by Professor Richard Layard of the London School of Economics (LSE) - outlines a programme of major and minor reforms that would cost only the modest amount of money which could comfortably be raised by the windfall tax on privatised utilities.

The title of Professor Layard's book is highly appropriate, since the author is the epitome of "can do" economists. While much of the profession is characterised by "can't do" types, Professor Layard never analyses a problem without suggesting how it can be alleviated by feasible policy changes. His list of practical accomplishments is already legion. The Centre for Labour Economics at the LSE was established by him as the leading research grouping on the subject in Europe, and it has now developed into the wider ranging Centre for Economic Performance. Professor Layard was also the prime mover behind the launch of the Employment Institute and Charter for Jobs in the 1980s, organisations which were in the wilderness for many years, but which eventually helped change the tide of opinion on the unemployment problem in this country. After that, Professor Layard decided that the biggest challenge faced by macro-economists lay in the transition economies, so he upped sticks and moved to Russia, to assist the process of reform. As all his colleagues will testify, perseverance is his middle name.

I first encountered Professor Layard's "can do" spirit in 1978, when I was working in Jim Callaghan's Policy Unit. We were looking for new ideas to fill the 1979 Labour Manifesto, and Professor Layard was suggesting that a job guarantee should be offered by the government to all those who had been unemployed continuously for more than 12 months. The unit felt that this would prove an important initiative, since it would raise the cost to the government of allowing long-term unemployment to rise, and would therefore force other policies across Whitehall to be adjusted to this requirement. Somewhat to our surprise, Jim Callaghan agreed, and the pledge made its first appearance in a Labour manifesto that year. It has been something of a hardy perennial since then in opposition documents, but sadly this has never persuaded the public, or the Conservative government, to support the idea. Perhaps 1997 will be the year, and if the New Labour plan eventually succeeds in eliminating long-term unemployment for those aged under 25, much of the credit should go to Professor Layard.

What Labour Can Do explains in some detail how this job guarantee can be implemented via a combination of employment subsidies and job creation projects. Also in the area of "welfare to work", Professor Layard argues for an expansion of in-work benefits, especially Family Credit, and for a minimum wage, set at a relatively low level of perhaps pounds 3.25 a week, designed to help roughly 5 per cent of the working population. He recognises, however, that these solutions will only work in the context of a concerted programme to improve skill levels for the least educated segment of our population. He points out that in the UK, 40 per cent of British youngsters never reach National Vocational Qualification Level 2, the equivalent of five good GCSEs. This means that we have twice the number of unqualified workers as Germany and France.

The answer is to spend more money on raising the standards of this part of the population, while saving money in higher education by transforming student grants into student loans. The Labour programme called "Target 2000" could then be implemented. This would ensure that every youngster under 18 who does not have Level 2 attainment must be studying for it either full-time or part-time, implying that an extra 350,000 teenagers would be exposed to additional training. At the other end of the age range, nursery education should be available for every three- and four-year-old but nursery vouchers would disappear.

Reading the key chapters on "welfare to work" and the "skills revolution", it becomes clear that there is much work to be done by a government which accepts that it has a social responsibility to help those who have dropped out of the education net prematurely. But by the same token, it cannot be acceptable for young people to receive benefit while refusing to take up offers of help from the State. Provided that the nature of this bargain is clearly explained to the rest of the population - that voluntary idleness at the public expense is never an option - such an initiative could generate wide electoral support.

The book also argues for modest stakeholder-type reforms to discourage the culture of short-termism and hostile takeovers which permeates British industry. These would include enhanced compensation for workers laid off after a merger, much tougher competition policy (eg making price fixing illegal), the introduction of a Council of Institutional Investors to undertake efficiency audits of underperforming firms, and the like. But there would be no wholesale changes in company law, or in the duties of directors, which some supporters of the stakeholder system would like to see adopted.

On macro-economic policy, Professor Layard argues under the heading of "no more boom and bust" for a series of measures to enhance stability in the monetary and fiscal field, including independence for the Bank of England, followed immediately by first- wave membership of EMU. There would be no attempt to reduce the share of public spending or tax in GDP, since Professor Layard views this as irrelevant for growth, but there would be a gradual privatisation of the pension system.

What are the common threads that lie behind these ideas? The first is that plenty can be done to change and improve the workings of the economy without resorting to tax and spend. The second is that we still have something to learn from the way that things are done in the rest of Europe.

This latter notion is not fashionable, especially following the recent surge in unemployment in Germany. There are serious problems with the structure of the labour market on the Continent and several of our neighbours are reluctantly moving in the direction of the Anglo-Saxon model in this area. But, as this column pointed out a few weeks ago, we should not get too mesmerised by short-term cyclical developments, since long-term comparisons between Europe, America and the UK on growth, productivity and inflation remain unflattering to our system. On this, Will Hutton makes a sensible point - we are not forced to copy all the mistakes which the Germans and French have made, but there are many elements of their system which would enhance our own.

Also we should recognise that not everything done in America need be slavishly copied in the rest of the world. Ten years ago, copying America would have been considered insane. Professor Layard suggests - controversially - that it still is.

`What Labour Can Do' by Professor Richard Layard, published by Warner Books at pounds 6.99