By Nick Bosanquet.
It is not yet a recovery – just a blip from Christmas shopping. If the
effects of Christmas, the car scrappage scheme and the stamp duty holiday are deducted from UK GDP, national income probably
also fell in the fourth quarter of 2009. We
seem to be in the grip of short-termism with no clear medium term recovery plan
on offer from the government.
The first step is to make a clear
distinction between the short term expenditure multiplier and the medium term
growth multiplier. The expenditure multiplier depends on public spending: but
this cannot promote growth in the longer term for it is quite clear that this
expenditure is going to decline in the next four years.
The growth multiplier depends on
containing tax rises and maintaining lower interest rates. This regime requires
greater confidence and to improved expectations about the future.
Future growth will be driven by
smaller and medium sized business. It is already clear that large companies are
shifting east. For insurance the Pru
has already halved its capital in the UK and is expanding in Malysia, Vietnam
and Indonesia. The large pharma companies are also shifting their investment
east. Financial services giants
are also moving offshore.
Small and medium sized companies
are the best realistic source of growth in the UK regions. The growth
multiplier is much more important for them than the expenditure multiplier
since the public sector buys little from small firms and is even now being
urged to centralize procurement even further.
How do we move from the
expenditure to the growth multiplier? Different types of public
spending contribute in differing degrees to economic stability. Some
spending directly helps reduce unemployment and assists small business, but the
total weight of spending tends to threaten growth through higher taxes.
A new government is not in
practical terms going to be able to reduce spending very much in the 2010-11
fiscal year. By the time many measures come into effect the fiscal
year would be mostly over. The key question for recovery is whether we have a
credible plan for the following three years and an emergency
budget would be a vital step forward.
Such a budget should set the role
of public sector reform to get more
value from public spending. A recovery plan must include a strong
commitment to a more flexible growth orientated public sector. The focus on
deficit reduction is obscuring the fact that even after the deficit reduction
public spending will still be 45 per cent of GD in 2012-13—with a very high
opportunity cost in terms of lost private sector activity.
The growth agenda should include
medium term such measures as reduced taxation for smaller firms, more use of
local growth related bonds by city regions and promotion of access to
international markets through the internet. Again the emergency budget should
include a phased recovery plan with a stronger focus for private sector growth.
Any reduction in spending in the
2010-11 fiscal year is seen as jeopardizing
the recovery but in practice a large scale reduction in this year is
unlikely. Choices are limited and cramped by the government’s own past decisions
to rack up a large structural deficit during the years of growth. Without this
deficit there would be wider options for public spending in line with those
used in Australia, France, Germany and
elsewhere.
The high risk course is to
continue with short-termism and illusions about public expenditure. The UK
needs a new focus on local enterprise and workforce capability. Building a new
economy and encouraging new growth means creating a more competitive economy
and a competitive business environment. Reform's upcoming business
conference "A
new business agenda" will discuss the best way for Government to support
business at a critical time for the future of economic growth.
