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Andrew Lilico: The New Statesman's "Plan B" list is mis-directed - we need medium-term growth, not short-term growth

By Andrew Lilico

The New Statesman has this afternoon previewed a set of "Plan B" growth-promotion recommendations.  They should not be seen as a set - as if they were all to be introduced together.  Instead, they are various pet schemes of the authors.  A number of them are things the government is likely to do, others it may consider at some point, some it will certainly not be interested in even though they aren't terrible, and a couple that are plain daft.

Temporary VAT cut

Christopher Pissarides of the LSE proposes a temporary VAT cut, funded by additional debt.  In economic terms, not a terrible idea.  The temporary VAT cut introduced at the end of 2008 in fact worked quite well.  Temporary VAT cuts aren't as effective in promoting short-term growth as temporary income tax cuts, but they tend to do something.  If it were sufficiently temporary (e.g. one year) it wouldn't even affect George Osborne's fiscal target ("mandate") - which was to eliminate the structural current deficit in five years (i.e. by 2015/6).  That main problem with this (apart from the fact that, if you are doing temporary tax cuts, basic rate income tax rebates are better) is threefold.

(a) It's unlikely to achieve much positive, as a temporary debt-funded tax cut effectively borrows growth from the future and thus has a purpose when the economy is comfortably below its potential output.  But the UK economy probably isn't far below potential - indeed it might even be above potential (after all, even the little growth we have been having has driven inflation up to 5 per cent).

(b) The proposal misses the point of the VAT rise.  The purposes of tax rises in the government's deficit-reduction programme is fundamentally political, not economic.  They are there so that we feel we are all in this together.  It would not have been politically feasible to cut spending by more than £80bn without also raising taxes.

(c) Because the government has (unwisely - but we are where we are) chosen to focus its political case upon the merits of reducing the deficit rather than of reducing spending, if it started to back-track on deficit reduction there is a significant risk that the spending reductions would unravel also.  Failure to cut spending would drive us from a certainly-difficult-and-perhaps-disastrous situation into a probably-disastrous-and-perhaps-catastrophic one.

Print money to fund income tax rebates

Sushil Wadhwani, formerly of the MPC, proposes printing money to fund tax rebates that are then sent as cheques to households.  This is, in principle, an excellent idea if we need an extremely powerful stimulus and extremely aggressive money supply growth.  It is what I said, in late 2008, should have been part of the package that was an alternative to bailing out the banks and raising public spending.  If UK banks collapse because of collateral damage from the Eurozone, this will indeed be one of the weapons we should try.

But we aren't there yet.  At this stage, printing money to fund government spending would be a panic measure with adverse consequences.  The fear that it meant the banks were collapsing could trigger that very event.  If the banks did not collapse, it would create a huge sudden surge in inflation that would create its own bust virtually as bad as if the banks did collapse.  Either way, it could bring on a serious bust.

It's an excellent idea, but must await its moment.

Introduce a Financial Transations Tax

Jeffrey Sachs, of Columbia University, proposes introducing a Financial Transactions Tax.  Regardless of its other merits (not many) in terms of reducing long-term economic volatility, why this should be conceived of as a pro-growth measure is beyond me.  The New Statesman's summary does not tell us.

I think this is plain dotty.

Reduce NI contributions for the young

This is one of two proposals from David Blanchflower, formerly of the MPC.  The government already has a rather ineffective scheme for reducing NI for new employees in some parts of the country.  It might extend this to the whole country.  And of course the Conservatives, before the election, made much of the jobs damage caused by employers' NI (aided and abetted by yours truly).

I don't myself see much point in applying this especially to the young.  And it also seems to me to fall foul of the same problem as the temporary VAT cut proposal - namely that it fails to understand why there are tax rises in the deficit reduction programme at all.

I'd see this as unlikely to achieve much, and a bit of a waste of money.

Increase the number of university places by 100,000

This is Blanchflower's other proposal.  If people want to go to university, I see no problem with that, provided they'll pay.  The government's funding structure for university seems to me to be rather poor, and to make it more difficult than necessary for universities to accept people that simply want to pay to go.  But I suspect that Blanchflower imagines that the government is going to pay something towards this.  He also seems to imagine that this will promote long-term growth, as if Britain were an economy that didn't produce enough graduates.  I'm doubtful about that.

Overall, I think we can safely say that the government won't be doing this.

A national investment bank

Robert Skidelsky, the economic historian, proposes this.  We already have a bit of one in the Green Investment Bank.  He imagines something more extensive, focused on more general infrastructure.

If the UK's banks do go down this time, then one option could be for the government to create its own new "good bank" instead of bailing out the old failed ones.  I don't believe that's necessary, but have argued before that the government should stand ready to do it at some point, if required.

My verdict on this is: probably not necessary, though not nuts, but not yet.

Lift the cap on skilled immigrants and students from outside the EU

Jonathan Portes proposes this.  I suspect many Conservatives might want to respond "If only it were so!"  If we could get immigration under more general control, perhaps we could revisit skilled immigration.  But for now I think it's a pointless discussion as we're failing in the opposite direction.

Lend directly to small businesses

George Magnus proposes this.  This can be conceived of as another "good bank" scheme, or perhaps it envisages governments buying small business corporate bonds as per George Osborne's credit easing proposals.  It looks like this is going to happen.

Extra infrastructure spending

Christopher Allsopp proposes this.  It has been rumoured for months that the government is about to try something along these lines.  I guess the most obvious candidates are high-speed 2, a new London airport, toll roads, or new nuclear power stations.  I think there's every chance we will see something along these lines.

Personally, though the government is quite likely to try this, I'm basically agin it, because grand infrastructure schemes tend to fail in these sorts of crises.  Governments simply don't have sufficiently precise information about the future to anticipate, properly, what the infrastructure requirements of the future will be after the economy has undergone what could be quite significant structural adjustment.  So the danger is that - as happened in Japan - schemes end up wasting vast sums in pointless busy-work producing grand white elephants that nobody ever uses.  But it's good for the GDP statistics...

Overall, my verdict is Comme Ci, Comme Ça.  It all seems a bit mis-directed to me.  The issue isn't yet the short-term growth rate - we probably aren't far below potential.  Of course, short-term growth could go very ugly if the Eurozone crisis spreads, but we should cross that bridge when we come to it.  For now it's medium-term growth that counts.  And that's simple: cut spending, and spend what you do spend more efficiently.  Each percentage point of GDP public spending is cut could add 0.1 percentage points to the annual growth rate.  And if public sector productivity grew at the same rate as private sector productivity (instead of shrinking, as happened under Labour), the economy would growth 0.5 percentage points faster each year.  That should be eminently feasible, as there is a productivity gap of more than a third to catch up.  How to do it is simple: use private sector methods, such as profits and quasi-markets in public services such as health and education.

Beside these two items, everything else is a rounding error.  If you actually want growth, as opposed to wanting to talk about growth, then those are the places to go.


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