Kwasi Kwarteng: Four policies to kickstart the economy
Kwasi Kwarteng was Conservative Candidate for Brent East at the General Election of 2005 and Chairman of the Bow Group in 2006. He holds a doctorate in Economic History from Cambridge University, has worked as an investment analyst, and is currently writing Ghosts of Empire, a book about the international legacy of the British Empire.
There is a lot of confusion now about our economic mess. Where do we go from here? I have four suggestions. These aren’t a quick fix solution; we have hard times ahead, but they are a start.
Firstly, we should slash business taxes. Capital formation, the ability of businessmen and women to start up new businesses, is crucial in any recovery. That’s why the government wants to keep up lending. We should help businesses by cutting their tax burdens. It seems crazy to increase lending to business, while keeping their tax burdens the same. We should be cutting these tax burdens, even before trying to lend more money. The private sector is the key to recovery. Cutting taxes for business acknowledges this.
Secondly, we should nationalise the Royal Bank of Scotland and Lloyds and get them lending again. The situation of the banks is insane. Last October, we committed £37bn to them. Their share prices have almost halved. More than £10bn of taxpayers’ money has evaporated in the last three months. We have just committed a further £25bn to RBS. We are guaranteeing up to a staggering £325 billion of bad assets for this one bank.
No one pretends that RBS or Lloyds is now being run on free market principles. Who knows how much more money these banks will ask for? In any genuinely free market system, these banks would have been declared bankrupt months ago. Let’s admit this. To say that RBS is a private company is an elaborate fiction. It’s like insisting that Santa Claus exists, when the kids are well into their teens. The UK Treasury is now ultimately responsible for footing the bill. Temporary nationalisation simply recognises this; it simply recognises who is paying the bills.
Thirdly, we need an industrial policy. Free trade is a great abstract idea, but it exists only in the sense that a perfect circle, or a perfect line, exists; it’s an abstract principle. In practice, countries help their industries and work out what kind of economy they want. There’s a lot of guff spoken, half-remembered from undergraduate economics courses, about the virtues of free trade. Economic history, however, runs against quaint economic theory.
Free trade did not create Toyota or General Motors, for that matter. The Japanese threw Ford and GM out of Japan in 1939 and then, after the war, proceeded to build, deliberately and at great initial cost, the greatest car companies in the world; Toyota, Honda and the rest were not the spontaneous creations of the free market. They were nurtured and subsidised. The Finnish firm Nokia, a world-beater, didn’t make a profit for 17 years, yet it was supported. This is what happens in the real world. Even Ronald Reagan imposed a 50% tariff on Japanese motorbikes to save Harley Davidson.
We thought finance was everything. It wasn’t. Our economy needs to be more diversified. It isn’t perverse to create some ongoing structures to bring this about; it’s common sense.
And fourthly, we need budgetary restraint. The programmes I have outlined cost money. These are extraordinary circumstances, so we need more money to spend. Yet the Government has left Britain’s treasury empty. We spent more than we could afford, even in the good times, and have nothing left in the kitty. Savings have to be made. We cannot, even if we wanted, borrow and spend infinite amounts. Other savings need to be found to pay for this new, exceptional spending.
In lean times, families stop eating out as much; they cut back on visits to the cinema; they don’t go on foreign holidays. The Government needs to do the equivalent of this.
These are four solid principles. They will not solve our problems overnight, yet if all four were implemented this year, we’d be in a much better position next year, and in the years ahead. As Americans say, “you gotta do something”. Sitting on our hands, being confused and intellectually lazy just won’t do.