Conservatives and Labour are both wrong about business

In outsourcing public services, Tories don't realise that private enterprise can be just as chaotic and disorganised

Suddenly the Labour leadership campaign has focused on how the party should relate to business. In a speech full of the obviously right things to say, Yvette Cooper, one of the contenders, observed, “Labour has to show we want to build businesses up, not knock them down. We need to reset our relationship with business around a shared vision for building an economy that faces the future.” Yes indeed – build, reset, share the vision, and face the future – but does it really mean anything? She could have safely said something much more challenging.

The evidence is that voters want governments to be without illusions regarding businesses’ behaviour. A survey last year by Populus found that 61 per cent of voters wanted the next election winner to be “tough on big business”. But business is an area of life that professional politicians, of all parties, hardly understand. Few have worked in it and they talk about business as if referring to a far-away country which they have read about but never visited.

Conservative and Labour supporters have different misconceptions. The Tories admire business methods and think that merely to copy them will produce better government. Thus the permanent secretary of the Department for International Development was given a bonus on top of his salary of almost £165,000 last year. Now the question with bonuses is always: what behaviours do they promote, good or bad? Often bad, as the banks have shown us. In the case of a senior civil servant, it is not obvious that this incentive is appropriate.

However, it has been in outsourcing public services to commercial firms that the Conservatives have made their most serious errors. They don’t realise that private enterprise can be just as chaotic and disorganised as public services. For example, it wasn’t long after a private contractor had been awarded a £300m monopoly of court interpreting services throughout England and Wales that the justice select committee of the Commons intervened. It called for evidence about the difficulties that had emerged since the appointment was made. Then there was the case of Atos Healthcare, given a £500m contract to administer millions of fit-for-work tests for sick and disabled people. Its methods, described as crude and inhumane, caused a storm of protest. Its decisions generated a large number of appeals until finally the disability minister admitted that Atos’ work had caused “real concern”. The contract was terminated early.

A further Conservative blind spot is the honesty of private-sector firms. No doubt it came as a horrible shock to find that G4S and Serco had been overcharging the Ministry of Justice on their electronic tagging contracts for eight years, including claiming for ex-offenders who had died. G4S apologised for getting it wrong and Serco said the affair was “unacceptable and unethical; frankly, we are deeply ashamed of it”. As Margaret Hodge, the formidable chair of the Public Affairs Committee, commented: “Too often the ethical standards of contractors have been found wanting. It seems that some suppliers have lost sight of the fact that they are delivering public services, and should do so in accordance with public service standards.”

As for Labour, compare Cooper’s exhortation to business with the passionate criticism expressed by the Governor of the Bank of England, Mark Carney. Last year he warned of a growing sense that the basic social contract at the heart of capitalism was breaking down amid rising inequality. “We simply cannot take the capitalist system, which produces such plenty and so many solutions, for granted. Prosperity requires not just investment in economic capital, but investment in social capital.” If only a Labour leadership contender would say something like that.

As Paul Krugman, a Nobel laureate for economic sciences, observed recently: “You might have expected conventional parties of the left to take a populist stance on behalf of their domestic working classes. But mostly what you get instead – from leaders ranging from François Hollande of France to Ed Milliband of Britain to, yes, President Obama – is awkward mumbling.”

So the Labour leadership candidates should stop their awkward mumbling and focus on the following: the most important fact about inequality is that if you reduce it, you will stimulate economic growth. You can see that this must be true when you consider inequality’s social consequences.

Wide differences in income and wealth are reflected in health inequality. The wealthy are better able to protect and improve their health than the poor. As a result, people in the UK’s poorest neighbourhoods, will, on average, die seven years earlier than those living in the richest.

There is also a wide gap between the educational successes of the rich compared with the poor. In fact, the attainment gap has widened in recent years. Only one in three pupils eligible for free school meals achieved at least five A* to C GCSEs (or equivalent) grades compared to 60.5 per cent of all other pupils; this is a gap of 27 percentage points. At the same time, high levels of inequality undermine social trust. We are evidently not all in this together.

What, then, does the authoritative work on inequality by the IMF and the OECD say? The IMF recently stated, “Lower net inequality is robustly correlated with faster and more durable growth.” And a few months later the OECD observed “inequality has a negative impact on economic growth. The impact turns out to be sizeable… In the US, the UK, Sweden, Finland and Norway, the growth rate would have been more than one-fifth higher had income disparities not widened.” So isn’t there a political opportunity here? Tackling inequality would benefit all, would demonstrate compassion and would involve the full range of government activities. For a party of the left, what’s not to like?