Monday, 26 September 2011

The UK Needs a Growth Strategy . . . . so here it is! (Part 1)

It's pretty widely accepted that the UK economy is in trouble again.  There's been no 'double-dip' recession so far, but the economy is flatlining.  We've had growth of only 0.2% over the last 9 months, and the forecasts are equally grim for the next months. Inflation remains high at 4.5%, consumer and business confidence is rock bottom, consumer spending is flat and the mini-manufacturing boom of the start of the year has vanished. Internationally the world is in even worse trouble. The EU is still neck deep in a sovereign debt crisis that it seems incapable of getting itself out of, the US has downgraded its previous growth since the recession, and even China and the other leading emerging economies are struggling. Having blown their reserves getting through the first crisis they are fighting even higher Inflation than us and, with eerily familiarity, the first signs of credit drying up in economies become dangerously dependent on cheap money.

All is not yet lost though. The British economy is not yet going backwards, but it is barely moving forward . It's like a car whose engine is grinding away but doesn't quite have the power to push it up the hill. But it hasn't stalled entirely.  The reason growth has ground to a halt is the over-hang of the incredible levels of debt that built up until 2008. Businesses, the financial sector, households have all been plowing money into paying off debts rather than increasing output, for the first time in 20 years.  And the government has been straining every sinew to cut the deficit, and bring the explosion of public debt under control. This is important, and indeed essential to future prosperity.  We have had a debt crisis, we need to reduce our debts.  But underlying growth is needed so we can pay off our debts.

The government's original economic strategy was to focus on getting the deficit under controls, thus securing confidence in the UK's ability to control its debt and through that secure the low interest rates essential to our tentative recovery. Beyond that, Monetary stimulus would improve liquidity and lending, the devaluation of the pound would boost manufacturing and exports, and tax hikes on consumption and financial services would raise extra money while further encouraging the economy to rebalance away from consumption, debt and banking towards manufacturing and exports. Business investment and export trade would provide the fuel for the economy to steadily rebalance itself and pay off debt allowing it to move onto a more balanced and stable long-term footing.

'Expansionary fiscal contraction' hasn't quite worked out the way it was hoped though. International conditions have deteriorated dramatically and confidence has collapsed. With the whole world sinking Business investment and Exports just can't provide enough boost to push growth along. No growth risks the economy sinking back into self-reinforcing recession. It means no extra money to pay off private debts and not enough extra jobs and profits to increase taxes, cut spending and close the government's deficit. There are, thankfully, at last signs that the government is properly facing up to the reality that they need to do more to encourage growth and that deficit reduction alone, while necessary, is not sufficient to ensure recovery.  Especially with International conditions so poor. Plan A has proved insufficient.  So what is the alternative?  Well, there are two main points of view on that one. Either Plan B, Or Plan A+. 

Labour and left-wing sources have called for Plan B 'to support jobs and growth'.  Unfortunately what they mean by this seems to just be more government borrowing and spending, and more debt, rather than facing up to the more complicated issues slowing our economy. They blame the slowdown in the recovery on the government's spending cuts. I still think this approach is rubbish. Overall Britain has the 2nd largest private and public debts of any country. We need to beat this as fast as possible or we will never get back to truly stable prosperity. Devotees of 'Plan B' seem to have a belief in the almost magical power of government spending. They seem to think that what is in reality merely a slower rate of growth in nominal state spending is entirely to blame for all our economic woes; but the massive convulsions shaking the world economy in Europe, the US and elsewhere, not to mention rampaging inflation, and the drag caused by households and businesses ploughing money into paying off their own debts, is totally irrelevant. This is plain nonsense.

They also cheerfully ignore the reality that Britain could face rising interest rate and collapsing economic credibility. We have to worry about the supplying our deficit as well as the demand for it in the economy. Our struggling economy increases the case for a higher deficit to support private demand, but it also simultaneously increases difficulty in funding that deficit, cancelling this argument out. This is not just some right-wing scare story. We have almost the highest deficit of any country but yet thanks to our commitment to taming that deficit in the next 5 years we enjoy interest rates almost the lowest in the world for both public and private debt. It is correct that we were never in as bad shape as Greece or Ireland. Nor has our political system been as dysfunctional as America's. But when even countries like Spain and Italy are facing interest rates of 6% it becomes impossible to deny that Britain could have faced similar problems, if strong and determined action hadn't been taken. A higher deficit might have helped cushion the fall in growth thus far, but it may also have pushed interest rates up enough to counter any beneficial effects, or even worse.

In addition, regardless of its intrinsic merits, having committed ourselves to this plan to abandon it would hit confidence hard, as a frank admission of failure. Our current relatively privileged position rests on global confidence in our government's plans, whatever they may be.  To dramatically change direction would quite probably shatter that confidence, thus bringing about the result it was intended to avoid. There is another alternative to a Plan B of increasing borrowing and debt. That is what has been called Plan A+.  This regards Osbourne's program of deficit reduction as an essential basis for stability, but accepts the argument that deficit reduction alone is not enough and that it needs to be 1 wing of government policy complimented by an equal 2nd wing, a push for growth. A major drive across the entire range of possible government policy to improve the UK's supply side economic efficiency and productivity and thus improve growth through measures other than just crudely increasing demand.  So what would a full Plan A+ look like? 

Here under 10 broad headings I outline the steps the government could take to give the UK the boost to growth is so desperately needs. 

1) Complete Measures to ease Planning Restrictions.

One of the Government's key pro-Growth measures is a radical overhaul of the regulation surrounding getting planning permission for new construction and development.  Business leaders have long identified restrictions on planning and development as a major brake on growth in the UK. Official guidance on planning decisions now spans thousands of pages and it is reportedly slower and more expensive to gain planning permission for major projects than in almost any other European country.  According to some reports between twice and ten times more expensive.  The government has committed to massively cutting down regulation, from thousands of pages to 60, while simultaneously localising decision making and abandoning central targets and planning quotas.  For the first time a presumption in favour of (sustainable) development is being introduced.  It is estimated that our slower and less responsive planning system costs the economy £3 billion a year relative to the average of our competitors. If reform could deliver benefits of even a part of this figure it would be a significant economic boost.

2) Even-handed Business & Employment de-regulation.

The Labour years from 1997-2010 saw a vast explosion in the quantity of regulation surrounding Businesses and Employment. From the Social Chapter to the Equality Act the government imposed a vast range of new requirements around environmental issues, health and safety, employee rights, anti-discrimination measures, etc.  All these impose costs on businesses and especially small businesses that lack the capacity to spread the costs across a large turnover. Labour never found a problem they thought they couldn't regulate into submission, often in a haphazard and expensive way. The government should hold a wide-ranging review on all regulations on Business and Employment seeking to save the economy Billions of pounds a year through time and expense saved by reducing this burden.

There is a right way and a wrong way to do this though. Some right-wingers figures have recently campaigned on this front against the introduction of the latest Working Time Directive, which extends employment protection to temp workers. This is to take the wrong approach though. We don't need one class of workers who are cossetted and one group that lack even basic protections, whether that's between permanent and temporary workers in employee rights, or between public and private workers with the issue of pensions. What we need is comprehensive approach that works out what is a decent minimal level of protection and support that should apply to all workers, but which minimises the cost in time and expense to employers. Some amount of regulation and worker protection is an essential feature of a decent country and economy, but too much of it can backfire. Regulation that makes it very difficult to fire permanent workers will also reduce the willingness and likelihood of hiring workers, thus protecting those in a job at the expense of those without one, and encouraging employers to hire temporary staff with more flexible conditions. On a large scale this may even have detrimental social effect, introducing division between those workers who are so secure and those who aren't, as has actually happened in some European countries. Another argument is that extensive regulation does give protection we would like to have, like good services and lower taxes, but when the country is broke we accept that this may require paying more taxes and getting less services than we'd like, equally it may mean having less regulatory protection for a while as a cost of getting our economy back to a stable position.    

3) Reign back on and re-target 'Green' Polices.

There is a growing focus in government on bringing in 'Green' policies that are aimed at reducing our Carbon emissions over the next 20 years to hit various targets to combat Global Warming. Largely this consists of subsidising renewable energy and attempting to raise the price of energy generally to make renewable energy competitive, and to spur investment and research into these fuels. Unfortunately this is forecast to lead to a significant increase in fuel and electricity bills, particularly hitting those most energy intensive businesses, generally manufacturing and industry, to the tune of billions of pounds. This obviously goes right against our need to rebalance our economy. It may also prove largely futile if our efforts merely lead to industry relocating to countries with cheaper energy. 'Greening' our economy, like a strong welfare state is something that relies on general prosperity to fund it. They cannot be opposed. The public will not accept green measures that cut their standard of living, and Green measures that hit the economy will not last past the damage they cause. Environmentalists must abandon any policy plan built on such a basis. But the public can and do embrace Environmentally friendly measures when these measures work with them and make life easier. The massive growth in recycling coincides with government taking steps to make recycling easy, not with people being threatened into it. Also environmental targets must be feasible. We are currently signed up to strong theoretical targets for emission reduction that look good but like almost every other country we are on the way to missing by a clear mile.

This is all clearly ridiculous. But the government can take action to change these features.  It could soften our targets for Emission reduction somewhat, leaving targets that are still strong compared to where we are at the moment, but which we have a cat's chance of hell of hitting, rather than just sounding nice, and then make sure we really hit them. It should cut the cost of Green policies by reducing ridiculous levels of subsidies on certain renewable energy sources, like feed in tariffs for solar energy that are more twice the general cost of electricity. It should abandon a restricted view of what is acceptable renewable energy, and concentrate on what is practical, embracing nuclear as a relatively cheap and non-carbon intensive source of power, as well as off-shore hydro and wave, while abandoning its Quixotic obsession (if you'll excuse the pun) with Wind energy, which is expensive, ineffective and a total eyesore, even if very Green. It should focus efforts on helping households and businesses save and reuse energy, through programs to insulate homes, like the 'Green New Deal' and re-use heat and energy in industrial processes rather than just raising the price of energy until no-one can afford it. These measures would cut the cost of green policy and focus it towards saving energy, and thus cutting costs for homes and businesses and increasing their efficiency rather than pricing them out of energy.

4) Continue pursuing Public Service revolutions in Justice, Health, Education, Welfare.

The current Coalition government is currently pursuing major reform in almost every one of our major public services. These reforms have the possibility of dramatically increasing the effectiveness and efficiency of our public services at the time we need it most. In our Justice system, the government is attempting a rehabilitation revolution.  If even moderately successful this could cut serious sums of money off the massive costs to our economy from crime, as well as the expense of locking up an ever expanding number of people.  In Education, Britain has slipped down the international league tables for basic Maths and English skills, and too many of our schools are average rather than excellent. Businesses frequently complain about the standards of basic skills of high-school and even university graduates. The government is expanding spending on apprenticeships and technical education, and attempting a revolution in Schools, giving many schools extensive freedoms to run themselves while nationally improving the quality and rigour of qualifications. In Welfare the government is transforming welfare to alleviate the welfare trap that many people find themselves in and incentivise employment and work.  These measures will hopefully cut welfare spending and encourage into jobs. In Health the government is transforming the NHS in order to help is make an unprecedented £20 billion of savings and improve productivity in one of the largest organisations in the world. Improving productivity in these vital services would be worth billions to the economy a year and with the continuing likelihood of there being little extra money to spare they are vital to driving improvement in these essential public services that our economy relies on so heavily.

5) Continue efforts to improve Public productivity: procurement, quangos, PFI etc.

The Public sector in Britain generally consists about 40% of our economy, and over the last 3 years since the recession it has made up 50%. How efficiently this money is spent makes a huge difference to our economic performance and our capacity for growth. It is estimated that if public sector productivity had grown at the same rate as private sector productivity over the last several years then it would add 0.5% to our annual growth. There are various the ways that government can boost the general productivity of public sector spending.

The current government has launched reviews of procurement led by Philip Green, to look at the opportunity to use central government's spending power to gain better economies of scale in procurement, and this has outlined £3 billion of savings that could be achieved by co-ordinated action.  There has been a 'bonfire of the Quangos', operationally independent but publicly funded bodies that Labour set up in vast numbers. Dozens of these bodies have been abolished or merged, or their functions returned to the relevant government departments, with the best estimate for savings at around £1.5 billion a year. The spending cuts themselves have led to a massive drive to save money in back-office functions, in attempt to make cuts while sparing highly visible 'front-line' services as far as possible. Both central and local government are making huge efforts to save money by merging and cutting back office functions between departments. This is estimated to save £6 billion a year by 2015. 

PFI has been another area the government has attempted to gain better value-for-money. PFI is a program where the private companies build major public infrastructure projects, like a school or hospital, and the public sector rents them back for a fixed period after which they become public sector property. It is possible for PFI to deliver good value for money, but Labour went at PFI like a drunk let loose in a wine cellar. A government investigation has suggested that the public sector got only £50 billion worth of assets for a £200 billion commitment and on average PFI were 50% more expensive than conventional government borrowing. In an attempt to recoup some of these huge costs there has been growing calls for a massive across-the-board re-evaluation of all PFI contracts. The problem is that these companies have legal contracts, so even if the government does decide the contracts were insanely generous then they cannot force companies to re-negotiate. If companies refuse one other option is to levy a windfall tax specifically on those companies deemed to have made excessive profits from PFI. This is still a remarkably complicated move though.  Either way it is done it is possible that serious drive in this direction could save £1-2 billion a year in costs on these projects.

(That's 1-5. I decided to cut it up for time constraints and to keep it short.  I hope to be posting entries 6-10, from tax reform to allowance rushing shortly, so please come back soon.)


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