We all know about the cuts. And the claims that getting the public finances in order will act as a spur to a revival of private sector economic activity. We’re all – quite possibly including the Government – less clear on exactly how that revival is supposed to occur. We are promised a budget for growth in a few weeks time. But the speech on the economy that Nick Clegg delivered last week was eagerly awaited. Perhaps it would give some early signs of how precisely the Coalition is expecting current policy to deliver this bright new private sector-led dawn.

The speech has not been universally welcomed. David Blanchflower over at the New Statesman dismissed it as “empty waffle”. That’s harsh. But is it fair? One of the challenges is knowing quite how to read what was said. Cynics might say the challenge is knowing quite what, in what was said, to believe.

Taken at face value some of Clegg’s rhetoric is striking:

It is important to be crystal clear about the problems we are addressing. Most people know that we inherited a crippling deficit. But perhaps it is not yet clear enough that we also inherited a failed economic model. The model of economic growth based on debt and on financial services is broken for good. So the Coalition is undertaking two very difficult tasks at the same time – dealing with the deficit and building a new model of economic growth.

Robert Peston posted in response to this speech and provides a slightly fuller summary of the model that is deemed to have failed. This includes – alongside unsustainable increases in personal debt and large increases in public spending – no constraints on multinational ownership of ‘UK’ assets, no constraints on international migration, very light touch regulation on the City and the shadow banking system, low income and wealth taxation for the highest earners.

The thrust of Clegg’s argument is that the ‘failed economic model’ that the Coalition has inherited is a child of Blair-Brown era Labour. That is clearly nonsense. One of the most powerful critiques of the Labour era was its failure to depart substantially from the Thatcherite neoliberal project. It was criticised for being ensnared and enslaved by market fundamentalism, rather than articulating a viable, progressive alternative. The failed model is thus one that many of Clegg’s new friends were complicit in advancing and embedding among the political classes in their various earlier incarnations in the world of wonkery.

In this sense, if we take Clegg’s speech at face value – and ignore his own attribution of the failed model to Labour – he is identifying as bankrupt an economic approach that has dominated thinking not only in the UK but across much of the developed world for the last 35 years. If that’s correct then the speech could herald a major reorientation in policy thinking.

But it isn’t clear quite how far Clegg is speaking with the backing of the Conservative politicians who will ultimately shape decisions on most of these matters.

Leaving that (major) issue to one side, Clegg identifies four ‘important steps’ to be taken to build a new economy:

• Weaning ourselves off debt-financed growth, and on to investment-led prosperity
• Investing in the ‘hard’ infrastructure that underpins growth, such as transport
• Cultivating the ‘soft’ infrastructure made up of knowledge, skills and education that businesses need
• Balancing regions and sectors, instead of putting all our economic eggs in one basket.

At this sort of general level many people would feel comfortable agreeing that this all sounds pretty good. But maybe it is worth unpicking it a little more.

The first point deploys the rhetorical strategy of contrasting debt-financed ‘growth’ with investment-led ‘prosperity’. What are we to make of that? There was us thinking that economic ‘growth’ was a good idea. But here is the Deputy Prime Minister telling us it is something we need to be weaned off because it is underpinned by debt. Instead we should be seeking ‘prosperity’, which sounds even more desirable than mere ‘growth’ – and is apparently led by investment.

Of course, this says nothing about how investment is to be financed. One way open to governments is to do so by borrowing. Is Clegg saying we have to rule this out? Only investment financed from current revenues is acceptable? If so then this is an extraordinary hair-shirt approach to economic policy. If the return on an investment is greater than the cost of borrowing the money to finance it then it is economically desirable for that investment to go ahead using borrowed money.

Labour would claim that much of its borrowing in the 2000s was precisely geared towards productive investment rather than financing consumption or transfer payments. We might contest the facts of the case. But the principle is not in dispute.

Investing in hard and soft infrastructure – presumably instead of spending money on undesirable activities such as income maintenance for poor households – is sensible. But are there indications that the Government is doing this? Certainly capital spending has not, overall, borne quite such a burden of cuts as current spending. While the Government is pursuing initiatives on the soft infrastructure side that are in themselves positive, is it plausible to argue that they are sufficient to neutralise the negative impacts of the cuts in funding for EMA, further and higher education?

The final step – rebalancing the economy – is an important one. Few would disagree that the economic base of the UK has narrowed more than is desirable. The Labour party relied too heavily on the City and housing market transactions to prop up tax revenues, disguising economic weakness elsewhere.

But it is important to recognise that while rebalancing the economy – both sectorally and spatially – is desirable that is not the work of a single parliamentary term. The economic profile of the UK in 2010 was not simply a product of failings on the part of the Blair-Brown Labour governments. There has been serious policy concern about industrial decline on the periphery for more than half a century. The post-World War Two architecture of regional policy attempted to resist deindustrialisation in the face of increasing global competition and increasing spatial concentration of economic activity in the South East. But its success was ultimately limited. The economic forces at work are too powerful.

The sectoral rebalancing of the economy is equally challenging. Clegg appears to remain committed to the need to tackle the structure of the banking sector. This is welcome and he needs to hang on in there against the siren voices arguing that it is inappropriate and unneccessary. But increasing regulatory oversight of the banking industry will reduce the contribution that banking will make to overall economic activity. In a sense that is the price to pay for reducing the risk to which the banking sector exposes us all. So there has to be something ready and willing to fill the gap, if overall economic activity is not to decline as a consequence.

When I started teaching regional economic development quite a few years ago now we used to spend time considering models of economic development that charted the course from the agrarian, through the industrial, to the post-industrial economy as some sort of ‘natural’ or evitable trajectory. The discussion was of whether the decline of UK manufacturing was a problem or heralded the fact that Britain was one of the first countries to embrace the post-industrial phase – an economy dominated by services. In the UK’s case that was domination by financial services. The current Government appears to be thinking of throwing processes of economic development into reverse. So, if manufacturing decline is a problem we think can be addressed, where do the roots of the problem lie? You can find economic historians who see the roots of British industrial decline lying in the nineteenth century, or the British class structure, or a culture that values white collar ‘professional’ work more than ‘trade’, ‘vocation’ and the muck and grime of manufacturing. And these were active debates well before Mr Blair arrived at No 10.

The ‘failure’ of regional policy was in an era of – what appears from today’s perspective to be – very active interventionist policy. Clegg gives us limited indication of what the Coalition is going to do – in concrete terms – to effect this rebalancing. This is not a developmental government of the ‘helping hand’ variety. It is much more of an ‘invisible hand’ government of the laissez-faire variety. So the extent of what it is proposing to do – beyond exhortation – to rebalance the economy is as yet unclear.

Clegg rightly points out that the Government has created a Regional Growth Fund worth £1.4billion over three years ‘tasked with stimulating sustainable private sector growth’. The Government is also emphasizing local enterprise partnerships, their favoured more localised vehicles for taking forward the type of work that Labour’s Regional Development Agencies have undertaken. Given the Government’s assessment of Labour’s active policy in this area as deficient, it will be interesting to see whether the current smaller scale approach delivers more effectively. Robert Peston, in the piece mentioned above, is cautious about the willingness of the private sector to engage with this agenda. The signs are not, perhaps, overly positive. But we should travel in hope.

If the Coalition is considering tackling the deeper roots of Britain’s industrial malaise then that is a massively ambitious undertaking, involving not only the revalorisation of, for example, vocational training but the reordering of cultural priorities. This is a government of bankers and the sons of bankers. I just can’t see it myself.

There is much more in Clegg’s speech that could be explored. Most obviously there is a tension between the emphasis upon Green Investment and the continuity in structuring the discussion in terms of ‘economic growth’ as conventionally understood. A more thoroughgoing green approach would also be questioning the premise. Equally, there is no discussion of increasing economic democracy, which one might have expected from a Liberal Democrat minister.

The Deputy Prime Minister’s speech mixes points that could signal a significant, and welcome, shift in emphasis for UK policy with some unnecessary and wrong-headed attempts to score points over Labour. If the speech indicates that the Government is seeking to tackle some long-standing and deep-rooted problems – and in doing so go against orthodoxy – then that would be a major development. We have to wait now to see if, and how, these laudable – though slightly vague – words are embodied in policy and action.

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