Ed Balls: Consensus politics is a UK strength, but fragile now

When Ed Balls took his first step into economic policymaking in 1997, the United Kingdom had just seen Labour pick up the biggest general election victory of the 20^th century.

It was a nation recovering from three decades filled with economic turmoil. The 1970s had seen the three-day week, high unemployment, and the Winter of Discontent.

The 1980s saw the rise of Thatcherism; inflation rested at around 20% when the UK's first female prime minister took office, and unemployment had risen further, before this all reversed somewhat with the so-called Lawson boom.

The following decade had even more to offer, with inflation and unemployment rising at the start of the decade as the longest recession since the Great Depression set in, and the infamous Black Wednesday of 1992 saw a run on sterling and Britain's exit from the Exchange Rate Mechanism.

Consensus politics

While Balls had been an economic adviser to Gordon Brown since 1994, Labour's landslide victory saw him step through the doors of HM Treasury for an eight-year stint as a civil servant where he rose to become chief economic adviser to the department.

The immediate task was to end the "fierce debate about the right way to make economic policy". The government was grappling with a number of questions, Balls explains: "How much should you be trusting the free market? How much should you be intervening? How much should you be trying to target fairness rather than simply growth?"

The biggest risk to the stability of the economy at that point was "governments making mistakes" - at least, that was the consensus view that helped lead to Labour making the Bank of England independent, a decision that caused deep divisions in parliament.

"There was, on the Labour side, scepticism among the trade unions, scepticism that it would be worse for the regions, and the Conservatives voted against it," Balls recalls.

But, eventually, a consensus position was arrived at.

"By the time you got to 2001 - let alone every election since - nobody has so far doubted that independence is the right thing. It lasts because it becomes part of the consensus."

It is this cross-party agreement that Balls thinks the UK needs more of, especially when the UK could not seem to be more divided amid the mammoth task of delivering Brexit.

But there are myriad examples of both sides of the House of Commons uniting around a policy and pensions is one area where this has happened with auto-enrolment (AE), public sector pension reform, and raising the state pension age all areas of consensus.

"The thing which is always depressing when you have been in government is when you see things being ripped up for the sake of it," Balls laments.

In the mid-noughties - by which time Balls had been elected a member of parliament and was about to be appointed economic secretary to the Treasury - the Turner Commission proposed a series of reforms to the pensions landscape, of which AE was one.

Embedding AE in the fabric of the UK

"When we started the full-on work around AE, our fear was always that a change of government would mean things would get ripped up," Balls says. "All the time, there was a worry in the industry. Is it really worth spending our time on? Is it really going to last?

"The fact is now, 12 years on, there's been a very big change. It's a huge piece of cross-party political success. More than 10 million people are now in pensions because of AE, savings of the under 35s have tripled, and all the fears that - when contribution rates were ratcheted up, that would either lead to drop outs or employers would try to find ways to cut their contributions - haven't come to fruition at a time which is not easy economically."

Now, the task is to keep this momentum going so that it becomes "sufficiently embedded as part of the fabric of the UK", with comfort in the belief it will last the next 50 years. AE may not yet be the paragon of retirement saving, but it has "surpassed what any of our expectations could have been".

"The vital thing is to take employers and savers on this journey to the next stage and to try and build cross-party consensus at a time when that's much harder than it's ever been," he says. "No Conservative prime minister gets applause at a Tory party conference from talking about implementing a Labour policy or vice versa."

It is important now that the government properly considers the ways to address the gaps in AE and strengthens the policy overall.

One way this could be done would be to draw on expertise from the industry through an independent commission, an idea mooted by current pensions and financial inclusion minister Guy Opperman and backed by Balls. Such a review could consider the future of AE, tax relief, and the tax allowances.

"We're almost at the end of that first stage of implementation now," he says. "If you're going to move into the second phase, maybe the right thing to do is to try and build a new consensus about the challenges in 2019."

Balls believes a sequel to the Turner Commission "makes complete sense" but only because the staging of AE with employers completed last year, and the stepped increases in contributions reached their current acme in April this year.

"If we're not going to lose the opportunity, now's the right time to have another hard look at the next steps in a way that has some independence and involves all the experts in the industry as well."

Economic risks

Extending AE must take account of the other economic pressures that savers face from the many other facets of their day-to-day lives. Retirement saving must compete with, among others, the likes of debt and saving for a home, as well as the expenses associated with elderly or childcare.

Each of these areas can be quickly affected by the macroeconomic environment - and can also have problems for defined benefit (DB) schemes, both in terms of the impact on their funding positions and their sponsors' abilities to afford contributions.

The global financial crisis of the noughties had a clear and significantly negative impact on the pensions sector, and went against the view that governments were the biggest risk to the economy.

"It was a crisis which happened at a time when inflation was low and fiscal deficits and debt levels were, in historical terms, low," Balls notes. "There were a lot of explanations as to why things were happening in the financial markets, but the general view is that the underlying environment was stable.

"The surprise was that something could start in the financial sector and destabilise the economy. Obviously, governments made mistakes in regulation and oversight, but it fundamentally started not with a government decision."

The last decade has been "tough", Balls argues, with a slow recovery for the UK, extremely low interest rates, and "investment never really getting moving again". Now, the risk is, again, the actions of politicians.

"The biggest uncertainty seems to have shifted from the macro economy or the financial sector to political risk and governments doing things which are unpredictable or kind of antagonistic, driven by populist politics," he explains.

"Whether that's the inability of politics to find a solution to Brexit or the emergence of new trade tensions between China and America, the dangerous thing at the moment is that political risk seems to be rising at a time when the ability of policymakers economically to do something about it is much more constrained."

The financial crisis resulted in the Bank of England using several levers to stabilise the economy - lowering interest rates and employing quantitative easing. The problem is the UK has not yet recovered from these decisions, meaning those methods cannot be deployed in their entirety again if the worst happens.

Populism

When interest rates or inflation go up, the ability of individuals to save for retirement can diminish as other more pressing expenses take precedence. It is in this arena where the Bank of England treads, and it must tread carefully.

Yet, the rise of populist politics is putting strain on the relationships between governments and central banks. This is most apparent in the US, where President Trump is extremely critical of Federal Reserve chairman Jerome Powell - and Boris Johnson has been highly antagonistic towards Bank of England governor Mark Carney.

Balls is concerned what this could mean for central bank independence, arguing you "can never take any regime or system or status quo for granted".

"A world in which the economy turned down now - with interest rates in the UK less than 1% - would be a world in which you get back into a big debate about how monetary and fiscal policy interact," he states. "That is inevitably a challenge to independence.

"We've seen this with Trump in America and Brexit in the referendum. When the Bank of England said things or the Fed doesn't do what Trump likes, they become another arm of the establishment, the out-of-touch elite, and that strikes a chord with some people."

He does not believe things have become too extreme for the Bank of England to handle, but this is "something you have to be wary of".

The danger is populist politicians constantly define themselves as against things - and this, perhaps inevitably, leads to short-termist thinking and a lack of enduring policies.

"We're in an era where politics, or some parts of politics, continue defining themselves against the system, against the establishment, against other parties," Balls notes. "Nobody talks about consensus. Nobody talks about agreeing.

"This is seen as being a sell-out, a taboo. They're against the market, or the opposition, or the Tories, or Labour, or business, or whatever. That just makes it really, really hard to make long-term decisions."

As long-term policy, pensions can be hugely disrupted by such behaviour, and Balls ends with a warning.

"One of the great strengths of the UK in the last 40 years is we've managed to have a more long-term view of pensions policy than maybe normal politics allows, and compared to other countries as well. That feels to me just much more fragile now."

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• Topics
• Law and Regulation
• Ed Balls
• HM Treasury
• Gordon Brown
• Global financial crisis
• Auto-enrolment
• AE
• PBUK
• PBUK 2019
• Pensions and Benefits UK
• Bank of England
• BoE
• Donald Trump
• Boris Johnson
• Turner Commission