Slow growth here to stay23 July 2012
Who is right, George Osborne or David Cameron? Last week the Chancellor, along with the International Monetary Fund, argued that the Government could boost economic growth in the short term. Ministers announced a £40 billion stimulus package of infrastructure credit guarantees, aiming to drive growth in the next 12 months.
The IMF called for more of the same in next year’s Budget. But the Prime Minister took a very different view. Speaking on Parliament’s last day before summer recess, he said that he “did not see a time” when the tough fiscal climate would end, certainly not before 2020. He said that the economy was in a “very difficult situation” that was “much tougher” than forecasters had expected. It was a clear attempt to lower expectations for growth and, instead of a stimulus, increase the appetite for serious reform measures to boost productivity.
The £40 billion package can be criticised on the ground that it will not actually happen. It is limited to projects that are already “financially credible”, “ready to start construction” and “good value to the taxpayer”, so the Government’s guarantees are very unlikely to be called in on any meaningful scale.
Further, infrastructure is a particularly bad form of stimulus, as even stimulus enthusiasts admit. Big projects have long lead times.
At a Reform event in June, Ian Tyler, the chief executive of Balfour Beatty, noted that decisions today may well have an effect in the next economic cycle rather than this one.
Modern infrastructure is highly skilled-intensive rather than labour-intensive and so a poor solution to high unemployment.
Most importantly, even when borrowing is “cheap” the wrong infrastructure projects can fail to provide any real return on investment, as countries such as Spain have found.
John Taylor, of Stanford University, has emphasised that the quest for government-inspired short-term growth can be self-defeating. Professor Taylor highlights academic studies that point to a link between increased regulation and slower growth and policy uncertainty and slower growth. Regulatory change and uncertainty simply add to the corporate sector’s nervousness. As Deloitte has shown, the Government’s fiscal projections depend on a rate of growth of business investment of 7.2 per cent per year for the next five years, compared with an average of 4.7 per cent between 1998 and 2007.
One FTSE 100 chairman said to me last week that the gravity of Britain’s economic situation is dawning on the market only now. Companies have been holding off investment because of the thought (fostered by politicians in all parties) that high growth is only one well-judged intervention away.
He suggested that, paradoxically, companies might feel more ready to invest if everyone understood that slow growth was here to stay. Deloitte has also shown that British companies are sitting on £750 billion of reserves, a little more than the annual UK government spend.
This is why David Cameron’s words were so heartening. They point to a much more honest discussion about growth and the size of government.
That discussion would recognise that all public spending needs to be made more productive. The original “Plan A” lacked force because it protected the big budgets of the NHS, schools, the state pension and other pensioner benefits — ie a ring-fence around £250 billion of the £700 billion annual government budget.
Some ministers have to argue that it is the quantity of spending that matters while others, rightly, look to put quality first. In fact it is only some leaders in the services with tighter budgets, such as the police, prisons and local government, who are fronting up to the need for change.
The new approach would embrace creative destruction in both public and private sectors in order to shift resources from the unproductive to the productive parts of the economy.
It would show that “austerity” and “growth” is a false dichotomy, because the need to control public spending can contribute itself to the productivity agenda that really matters.
In political economy terms, next year’s Budget should deliver a new Spending Review that makes a genuine effort to get value out of the 44 per cent of the economy at present spent by the public sector, including transfers. It may put ministers on a collision course with the public sector trade unions since the majority of the cost of public services is in their workforce, but that is a fight worth having.
Last week David Cameron spoke of a “global race” in which some countries were going to “make it” and some weren’t. Those that made it, he said, would be on top of their debts and have affordable pensions within an affordable overall public sector. There is his agenda for the rest of this Parliament and thereafter.
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