Tory disease, Labour remedy: There is a way to achieve steady growth and control inflation, explains Gordon Brown

THIS morning, at the first Shadow Cabinet meeting under Tony Blair's leadership, Labour will be planning the next stages of our policy preparations for the general election. The meeting comes three days after the Chancellor of the Exchequer announced the first interest rate rise for five years, the clearest sign yet that the Conservative government cannot deliver sustained economic growth and rising living standards.

Labour's criticism of Monday's rate rise is not of the judgement made by Kenneth Clarke, with the Governor of the Bank of England's advice, that inflationary pressures are building and warrant a rise in interest rates in order to slow economic growth to a sustainable pace. It is that they were forced to make this judgement so early in the recovery, when the growth rate had barely risen above its historic trend and with investment still 10 per cent below its pre-recession level.

Moreover, Mr Clarke has raised interest rates from levels already above those in the United States, Japan and Germany. When Alan Greenspan, the US Federal Reserve chairman, raised US rates earlier this year, not only was the recovery longer and more established but real interest rates were barely positive. Mr Clarke starts from a position where short-term real rates are more than 3 per cent, well above the average of the past 15 years, while long-term real rates are much higher still.

The reason is that Monday's increase owed less to normal cyclical pressures, and was more the product of deep-seated structural weaknesses in the British economy. It confirms Labour's analysis of the past two years, namely that the fundamental problem is that the capacity of our industrial and skills base is insufficient to accommodate rising demand without inflationary pressures.

Britain has too few export- orientated companies, not enough new products and ideas, a dearth of skilled workers and managers, and a decaying economic infrastructure. And the reason is that government, business, and individuals have all invested too little in the technologies and skills of tomorrow.

The dividing line between Labour and the Conservatives at the next election will not be whether any particular interest rate increases were justified, but rather the Government's failure to address these fundamental problems.

Voters will ask themselves which party can put the past decade of stop-go economics behind us, begin the huge task of reversing decades of relative economic decline and outline policies that can deliver good jobs and rising living standards through both high and sustainable levels of growth and low inflation. The winner will be the party that can claim to understand both how to manage the economy better, and the link between fairness and efficiency.

For 15 years, the Tories have refused to acknowledge that insufficient investment is depressing the economy's growth rate, claimed that they could repeatedly cut taxes and sought to tell us that they can treat low and stable inflation as an independent goal of policy, achieved by monetary policy alone. And they have failed - on growth, tax cuts and inflation.

Britain has had the lowest average growth rate of any G7 country since 1979, largely because we have experienced the two deepest recessions since the Second World War. The tax burden is higher now than when Labour left office, and is scheduled to rise every year until 1998, largely because taxpayers are paying for slow growth, high unemployment and rising poverty.

But the Tories have also failed on inflation. The two recessions of the past 15 years were split by a unsustainable inflationary boom, built on the flimsy foundation of a record trade deficit and a housing market bubble, while UK industry, and the skills of its employees, continued to fall behind those of our competitors.

The Government's central economic mistake has been to make fighting inflation the sole goal of economic policy, without seeing that Britain's inflationary problems stem from deeper structural weaknesses. Of course, government must be vigilant against inflation, and respond promptly when inflationary pressures emerge, as I have repeatedly said. But to tackle the symptoms rather than the disease condemns the British economy to stifled growth, high unemployment and rising deprivation, and to the repeated stop-go cycles which we have experienced for too long.

That is why this week's rate rise is an admission of a failure. The recession is barely over. Unemployment is still shockingly high. But already we see skill shortages and investment bottlenecks emerging. Nearly half of all manufacturers are reporting shortages of skilled labour. And we have a trade deficit which has persisted throughout the recession. These are the true sources of current inflationary pressures, the reason that we cannot match people's aspirations for rising living standards with higher productivity.

Which is why the Shadow Cabinet will today discuss the new policies that will allow a Labour government to tackle slow growth and inflationary tendencies simultaneously. A modern industrial policy is one in which government does not try to replace business but instead provides a tax system that encourages investment, and voluntary long-term investment agreements between industry and shareholders. We need bold policies to boost investment in education and skills, such as a University for Industry; and a public-private task force to reinvest in and modernise our social and economic fabric.

A successful modern economy also requires more open government and a free flow of information between companies, shareholders and employees. Which is why Labour will produce an annual Green Budget setting out our economic assessment and fiscal projections and encourage debate about options on tax and public spending. All employees must have access to the true financial state of the companies they work in and we will encourage an informed debate about the rate of real wage increases the economy can afford.

The very same policies that can put an end to stop-go cycles and the scourge of endemic inflation are those that can boost the long-run growth rate and put people back to work. Labour can reverse Britain's relative economic decline. Because today, in addition to standing for a fairer society and good and efficient public services, it is Labour, and not the Tories, which is the true party of economic competence.

The author is Shadow Chancellor of the Exchequer and Labour MP for Dunfermline East.

(Photograph omitted)