Howard Flight: The medicine needed to rebalance the economy
While there are other, highly important long term issues where the Conservative Party needs to make clear its objectives and intentions – such as Britain’s relationship with the EU, rolling back the intrusions on personal liberty and the restoration of upwards social mobility – it is clear the election will again be largely about which party the country most trusts to sort out the economy.
Part of the Conservative message is already in place – that we intend to be tougher than Labour in reducing the unsustainable deficit and sorting out the public finances; but without it being about policy detail, I suggest there is a more understandable and constructive overall “picture still to be painted”.
Background to and Causes of Economic Problems
- For the third time in 60 years the task should fall to an incoming Conservative Government to sort out the economic mess created by a Labour Government, where this is the worst yet.
- While there were important global, and specifically US, ingredients contributing to the banking and credit crisis, Britain’s problems have been substantially the result of Labour’s disastrous economic, monetary and regulatory policies; and our massive public sector deficit problem is substantially the result of Labour’s reckless public spending since 2001.
- It was correct, when the crisis broke, to use Keynesian “insurance” measures to keep the economy afloat in terms of both fiscal measures and, more particularly, monetary measures – with Quantitive Easing restoring destroyed money supply. But these measures can only be temporary or would otherwise lead to potential national bankruptcy and rising inflation. The task and challenge are to phase in the restoration of sound long term finances, without causing a major economic shock.
- It is necessary to start on the reduction of the public sector deficit (currently some £200 billion per annum), followed by a phased programme to eliminate the structural deficit which is of the order of £100 billion per annum, by the end of the next Parliament. This should provide the necessary confidence to be able to sell the huge volume of gilts required into the international markets, without this leading to punitive gilt yields or a further major Sterling depreciation.
- It is also economic common sense that the deficit reduction must come from reductions in Government expenditure. Increases in personal and/or corporate taxation would impede the pick up in the private sector of the economy which is needed to restore economic growth. (The State already takes too much from the private sector in taxation where this needs reducing not increasing further).
- It is also common sense that the substantial fiscal tightening from cutting the public sector deficit should be accompanied by a continuing, expansionary monetary policy, keeping short term interest rates as low as possible; and a continuing recovery in bank lending. Again, this is necessary to enable the private sector to take up the economic slack in the economy which will increase with reduced Government spending.
- Sustained economic recovery also needs to be built on an increase in investment and output rather than on increased consumer spending. This will require a gradual increase in the Savings Rate, back to sustainable long term levels of around 7%.
The Positive Message
Brown’s disastrous economic management since 2001, and in particular the massive increase (near doubling in monetary terms) of public spending has served to slow economic growth by transferring (“squeezing”) resources from the private sector to the public sector. The increase in public spending and the 1 million additional jobs in the public sector have created little increase in output – in technical terms public sector productivity has declined. In everyday language, most of the expenditure has been wasted. Moreover, “sorting out” the public sector has been an issue waiting to be addressed and a growing and pressing issue for many years, analogous to the need to sort out excessive Trade Union power in the 1970s.
The positive point is that financial necessity now requires this to occur - giving the opportunity to rebalance the British economy to deliver better economic growth, better improvements in living standards and better prosperity over the long term.
This is the key challenge to which the next Conservative Government must rise where there are of course major difficulties to overcome. I believe, collectively the country understands this and is looking to the Conservative Party to give a committed lead here.