Austerity is the new normal29 November 2011
Today’s autumn statement will be all about growth. The Chancellor will face immense pressure to pull some rabbits out of hats in the form of policies that will revive economic growth in the short term. What he should do instead is hold his nerve and take a longer view on creating a stronger and fairer economy.
As Reform’s new report ‘The long game: increasing economic growth’ argues, no ten-point plan for growth holds the key to strong growth in the short term. The amount of debt in the economy prior to the recession had reached eye-watering levels. The UK must now go through a long period of de-leveraging. Even under the best economic scenario, the programme of austerity should be at least a ten-year project with the first parliamentary term achieving deficit reduction and the second consolidating the gains. That means below-trend growth and less money in everyone’s pockets for some years to come.
Stick to the plan
The Chancellor must therefore stick firmly to Plan A. In fact, the deficit reduction package should go further – it depends on growth and public service reform, both of which are behind schedule. To keep Plan A on track, George Osborne needs further reductions in the NHS and welfare budgets, the least productive areas of government spending.
Just as importantly, he must resist the calls for the government to ‘do something’ to stimulate growth. Shopping lists of growth initiatives include policies to support small- and medium-sized enterprises (SMEs), incentives for companies to hire younger workers, temporary cuts in employment and consumption taxes and bringing forward capital spending on infrastructure. But prioritising immediate wishes while postponing hard decisions is one reason the UK economy is in the mess it is in.
Bad for business
Moreover, constant tinkering creates an uncertain environment for businesses and investors. It also leads to inconsistency, as the quick fixes that tempt policy makers are invariably contradictory. The government’s ambition to show that the UK is ‘open for business’, for example, is undermined by restrictions on skilled migration and equivocation on supply-side reforms to health and safety and employment law. Targeted support for SMEs makes little sense given that large firms contribute 86% of total tax revenues collected from business, as well as significantly more in terms of total employment, turnover and productivity.
The Chancellor should also resist the CBI’s calls for a £1,500 tax break for firms taking on a jobless young person, at a cost of £150 million a year. Data from the Office for National Statistics shows that while unemployment amongst 16-24 year olds has reached an all-time high, as a proportion of the total jobless number it has actually stayed almost constant. The biggest rise in unemployment has been among 25-34 year olds and 50-64 year olds.
The best measures to address unemployment would be those that improve the business environment for all firms, regardless of size or sector, and that make it easier for companies to hire the staff they need, of whatever ages.
One clear lesson from Gordon Brown’s time as Chancellor is that micro changes to tax and regulation are in fact own goals that undermine investor confidence and damage productivity. Real growth will not come from government but from a dynamic, highly productive private sector. George Osborne should be clear on where government can add value, and where it does not – and above all he must avoid the temptations of quick fixes.
This piece originally appeared in Ethos Magazine.