Brian Binley: Monetarism and this week’s low growth figures

Brian Binley is Conservative MP for Northampton South.

This week’s growth figures do not make happy reading.  The Government’s strategy relies on steady growth and rising exports and neither is happening to the extent we need.  Growth has declined to negligible proportions and our trade deficit continues to deteriorate.

The reason is clear.  Demand is weak thanks to an absence of confidence and it’s not difficult to understand why.

The world economy is bracing itself for further shocks, households and businesses are protecting their financial credibility, inflation is well above expectation, real incomes are shrinking, living standards are eroding, and house prices are still falling.  Unless we can sell more in the global market place and encourage people to spend our economic difficulties are likely to continue.

There is no doubt that tackling the deficit is a major priority: the mess left by the previous Government is well understood.  But it is important that policy reflects reality on the ground and the need to balance our International economic credibility whilst doing more to increase demand is apparent.  We must clearly divest ourselves of Mr Brown’s legacy of self perpetuating momentum in the public sector, not least because public spending of just under 50% of GDP suggest the rider is almost heavier than the horse. But we must do more.  Sadly the debate amongst economists seems to revolve around ideological preference with little thought for reality.

Neo Keynesians advocate a slow and steady withdrawal of Government using fiscal injections to stabilise the less robust elements of the economy whilst providing protection for the vulnerable.

Yet it is “boom” which creates “bust” not the other way round.  Deficits cannot be stimulating in the long run because they have to be paid for and that is likely to counter balance any positive effects of additional spending.  Public spending might indeed be higher but if the result is to squeeze out private spending, where is the gain?  The lessons of the 12 years of Labour Government is that “boom” expands the state which puts further pressure on the private sector and on households during the “bust.” 

Monetarists have a different view which is harder to explain.  They say that fiscal policy is ineffective at controlling short term movements in the economy.  It’s the quantity of money in the economy which affects prices and sends market signals on the appropriate levels of savings and investments whilst providing a temporal dimension to stimulate short and long term investment. They believe that, left unhampered, the free market will send signals through interest rates, which reflect trends in demand and supply of money, and those  signals tell us how we can most productively use resources through either capital accumulation or investment.  However, with lending rates at rock bottom, attempts to stimulate investments by encouraging savers to find more attractive returns have had a mixed response, to say the least.

Yet while the proponents of those competing theories focus on what the major determinants of aggregated economic activity are, fiscal variables or money supply, we are left in a hole.

In truth the scale of the proposed cuts are fairly modest although they often seem deeply painful.  Public expenditure can be made to seem draconian by a skilled public sector manager wishing to present the worst of cases.  Furthermore the institutions of Government are far less responsive to changing circumstances than a business or an individual would be and the struggle is made to seem endlessly difficult as a result.

Individuals, however, making personal or commercial decisions, need a predictable and stable economic outlook.  They do not deal in the niceties of economic theory.  They look at the balance sheet and assess the bottom line.  They see money taken from them in taxes, with commodity prices and service cost increasing faster than their incomes.  No wonder they are cautious.

We should therefore encourage them to do what they most wish, by helping businesses to sell and consumers to buy.

Economists might argue that the levers of fiscal policy have limited impact but for hard pressed families the need is for respite from the tax onslaught they face.  Taxes affect behaviour far more effectively than Government expenditure and that is why I want selective tax cuts to stimulate demand and provide relief.

We need to stop trying to engineer the economy to meet arbitrary social ends, but we need to deliver wider growth thereby providing the impetus needed to create the wealth and rebalance the economy in the way the Government’s growth strategy demands.  We need to instil confidence to stimulate spending and we need to enhance our position as a trading nation to enable our companies to export in ever increasing numbers.

And that means we need to be more pragmatic.

This crisis started with the housing market and the associated financial service products.  I want the Government to be alive to the difficulties people face and that is why we need to support the development of private demand in the economy.  The public sector cannot be an adequate substitute.

Given our current situation we need to be more proactive in tackling inflation which itself would remove fear and provide greater confidence.

We need to use limited fiscal measures to encourage that demand and housing would be a good place to start.

Perhaps it is time for the Government to reintroduce MIRAS for first time buyers for a limited period.  Perhaps we should reduce VAT on house extensions and improvement projects.  Perhaps its time for the Treasury to be slightly less conservative in this respect.  And while we are at it we certainly need to pressure banks into reducing the levels of deposit being demanded from first time buyers. 

In the real economy things are not as convenient or accommodating as economic theorists would wish.  The policy response to date has become mired in accusation and counter argument focused on defining the philosophy underpinning the prospectus and it should be abandoned.  The economy is unhealthy and our response cannot be theoretically pure.  We need to be creative and recognise that the process of thesis, antithesis and synthesis has value.

Oh, how the Marxists will love that.

“Until the state contracts and indeed until enterprise is encouraged both by its contraction together with some assurances that it will stay contracted and by less destructive taxation and intervention, there will not be the confidence nor the climate for entrepreneurship and risk taking that will alone secure prosperity, high employment and economic health: pseudo cuts of future programmes will not be enough.”

Not my words – but those of a Centre for Policy Studies Pamphlet from 1976.

We do not need to reinvent wheels, but we do need to recognise the grave dangers confronting our economy at present.  We need to act if we want to avoid the risk of further economic bad news in the coming quarters.  We don’t need plan B.  Just a little more pragmatism, a little less theorising, and a modicum of courage.  It’s down to you George.