Autumn statement: keep calm and carry on22 November 2011
Next week’s autumn statement should not be an occasion for U-turns. There will be no long-term gain without short-term pain
There is a concern that the UK economy is taking too long to recover from recession. There is also concern that the UK’s performance has fallen behind its major partners. Yet recovering from the global financial crisis was always going to take time. All the evidence shows that fiscal crises that originate in financial sectors tend to be severe and prolonged.
Calls for the government to ‘do something’ on growth are increasing. But the coalition must be careful. As Sir Humphrey Appleby put it, there is a risk of falling prey to the ‘politicians’ logic’ that says: ‘We must do something. This is something. Therefore we must do it.’
As Reform argue in a report released today, the desire to introduce eye-catching initiatives, to be seen to be ‘doing something,’ is bad for growth. Instead the coalition needs to hold its nerve, continue to restore the public finances and focus on improving the overall business environment.
A lack of confidence is a major barrier to growth. Firms, including smaller ones, have strengthened their financial situation since the recession. Office for National Statistics data show that in 2010 firms in the UK saved £66 billion more than they borrowed in 2010, up from £33 billion in 2008. The problem is less about cash and more about a lack of confidence to invest. Inconsistency increases uncertainty, and this reduces confidence and firms’ willingness to invest and expand. Without consistent government policies firms will continue to sit on cash rather than invest.
For this reason the government needs to iron out inconsistencies in its policies. It is inconsistent to argue that the UK is open for business while restricting visas to skilled migrants and damaging the operation of the labour market. It is inconsistent to argue that more private funds will be required to build infrastructure while damaging investor confidence with windfall taxes on North Sea Oil producers and a PFI rebate. Underwriting the mortgages of first home buyers and asking banks to lend more, while also demanding banks increase their capital ratios and make less risky investments, do not sit together. And the list could go on.
The government is being urged to bring forward spending on infrastructure to create jobs and growth. Yet the decision to begin or expand an infrastructure project is often a financially large decision and difficult to reverse once made. Increased capital spending is unlikely to significantly and rapidly increase employment as modern infrastructure projects are less labour intensive and the labour that they employ is often skilled. The days of building infrastructure with ‘picks and shovels’ are long gone. The employment created is not likely to match the areas where unemployment is currently highest. A short-term approach to building infrastructure increases the risk of poor quality decisions and white elephant projects.
Next week’s autumn statement needs to emphasise that what really matters for growth is not just temporary factors but the underlying potential of the economy. Some short term pain now is justified by a long term gain of putting the economy back onto a stronger footing.
Patrick Nolan is chief economist at the Reform think tank