Mel Stride is Member of Parliament for Central Devon. The PPS to John Hayes MP, Mel is also founder of the Deep Blue group of 2010 Conservative MPs. Here he presses the case for a radical new approach to growth.
The news that the UK economy has contracted for the third quarter in succession and by a jaw-dropping 0.7% is grim by any measure. We are now in the most protracted double-dip downturn since records began half a century ago and this latest news comes on top of the IMF’s downgrade of its UK growth forecast for the rest of this year – one that is harsher than for any other EU state with the exception of Spain. And bear in mind that the IMF is our preferred pundit when it comes to our economic prospects. It is true that the World economy is much troubled. It is true also that much business confidence and trade has now haemorrhaged as a result of the death from a thousand cuts that is the slow motion marital bust-up of the euro-crisis. But for all this, the latest deterioration in our economic position will undoubtedly get people thinking harder than ever before about whether our approach to the economy is right. It will provide added lead to the opposition’s calls of ‘too far, too fast’ and the neo-Keynesian arguments around rowing back on deficit reduction.
I hold fast to our position that any significant attempt to conjure growth through fiscal loosening risks spooking the markets, increasing our borrowing costs, jacking up interest rates for businesses and mortgage holders, increasing personal indebtedness and spiking up the cost of servicing our debt. George Osborne deserves far greater credit than he is currently receiving for sparing us this outcome. The political thump and grind of the last budget has been painful but largely irrelevant in the context of his enormous achievement in reducing our deficit by a quarter whilst keeping our economy well out of the bailout zone.
Unfortunately the electorate has substantially banked this achievement and when it comes to arguing for turning on the spending taps Balls and co. will now find their views gaining increasing traction. They already have one powerful ally in the form of Nobel Prize winning economist Paul Krugman. Mr Krugman has got around the studios pressing the view that a fiscal loosening will raise growth whilst not unduly affecting the markets and our interest rates – his argument being in part that the evidence shows that, within limits, countries that have their own free floating currencies have the ability to run a slacker fiscal policy than those that are locked into a currency union – Japan is his oft quoted example – a country whose debt is twice our own. My view, if I may be bold enough to lock horns with a Nobel prize winning economist – which I do with some confidence as I suspect that I could find another one to support me – is that what Mr Krugman is overlooking is that we have now so repeatedly and uncompromisingly seared the importance of Plan A upon the collective consciousness of the financial markets and the economic commentariat that any significant move in our position is likely to have an immediate and damaging effect upon our credit rating, quite irrespective of whether it was good for the real economy or not. In this sense we are where we are and had best stick to it.
Mr Krugman is however absolutely right about the importance of Keynesian multipliers especially when there is slack in the economy and we must step up our efforts to work them ever harder though strictly within the fiscal envelope we have set. We must throw everything we have at breaking the cycle of weak demand dragging down growth, in turn feeding into a loss of business confidence – tripped along by its cruel cousin the paradox of thrift – and on into further reduced demand and output. We are of course beginning to take further action on this including ramping up our spend on infrastructure and I welcome the latest announcement of £40 billion in infrastructure credit guarantees which are themselves another manifestation of the Chancellor’s significant achievement in protecting the strength of the government’s balance-sheet. But announcements and diggers on the ground are different matters and the art here must be to quickly find value for money projects that put the cash to work fast, provide maximum employment opportunities, especially amongst lower-skilled workers (we still have skills shortages even in the current climate albeit that John Hayes’ outstanding work in promoting apprenticeships and further education is fast closing this gap) and projects that keep the money circulating within the domestic economy. This will be a real challenge as getting projects moving takes time and much infrastructure development actually uses relatively low levels of unskilled labour (forget the grainy black and white movie-flicker of hundreds shovelling tarmac onto new-built roads). Ministers should be judged rigorously on how well they achieve this goal. Every department must play its part. We should have another Government Spending Review in which we aggressively push funds to those departments that can encourage private sector growth and away from those that consume without these benefits. Key criteria for the Treasury to assess departmental bids should include the degree to which they will use the money to drive growth. We should also look at more aggressive off-balance sheet financing where this meets the kind of tests set out above – though not, of course, in the manner of the wasteful PFI deals struck under Labour. In short, working with what we have we should shift towards pumping up the kind of demand that quickly employs people and avoids demand leakage outside of the domestic economy.
Airports, energy infrastructure, broadband roll out, water and roads should all have an increased emphasis. Housing is also a critical area. In the early 1930s when the economic situation was also one of double-dip recession, massive national debt (over 150% of GDP compared with 66% today) and uncertainties across the channel, increased private house building was a major element in the economy’s revival (in its peak year around 300,000 homes were built – three times the current level). It is true that we are now in different economic times with higher levels of personal debt, lower levels of relative spending power for those in work and banks less ready to provide the funds. Land was also relatively cheaper then and planning constraints far less onerous, but we should look at this area anew – we need more affordable private sector homes and we need to come up with more creative ways of bringing the government’s balance sheet to bear in this sector – perhaps channelling activity through a specific housing focused scheme along the lines of the government’s ‘funding for lending’ approach to boosting bank lending? And we need to build on Greg Clark’s excellent work on planning reform to see how new private sector housing development might be further encouraged. Politically not easy, I accept.
Going forward we must also look again at the balance between government spending cuts and tax. Economies do well when taxes (especially those that relate to business growth, wealth and employment creation) are low and when public expenditure is at a level that allows private enterprise to flourish (in my view at well below 40% inclusive of transfers). For any particular level of fiscal deficit or surplus for that matter (yes we ran them at the end of the 80s and at the turn of this century), the lower the proportion of the country’s output consumed by the state the more that can be injected into the non state sector in the form of lower taxes. Consider this stark example of how great the prize could be if we get this approach to really bite. If, in real terms, public expenditure had been held at its 1997 level (which was around 38% of GDP) then by today we would not only have no deficit at all but would also be able to remove from income tax anyone earning less than £100,000 a year. Yep, the number of zeros is correct, that’s a £100,000 zero rate tax threshold.
We must now take the opportunity to press harder on reducing the level of public expenditure – transferring more employment out of the public sector and into the more productive private sector – something that we have already shown we can achieve with the 800,000 jobs created in the private sector to-date more than offsetting the loss of 270,000 jobs in the public sector. My view is that we should aim to get the level of public expenditure down dramatically from 45% of GDP today (and bear in mind this is an average figure – there are parts of the country where it is way above this) to around 35%. To those who blanche at this bear in mind that it was only a decade ago that we were at the 35% level. This plus more radical measures to address supply-side rigidities (another article, another time) would provide dramatic dividends.
Success here will be critical to addressing the greatest brake on growth of them all – the lack of business confidence or the dampened ‘animal spirits’ of Keynes’ world. UK businesses are currently sitting on £750 billion in cash. A sum that is greater than annual public expenditure. To lever out a chunk of this cash mountain – especially when inflation is reasonably under control and so the cost of holding cash is relatively low – a marked increase in business confidence will be required. With greater confidence this money will start driving investment, jobs and critically tax receipts. As an entrepreneur who, over a period of 25 years, built businesses from the ground-up both here and in the United States, my view on this is instinctive – I have experienced, first hand, within my own activities and those of my entrepreneurial friends just how sapping a lack of confidence can be. It delays decisions, it holds back investment and it pushes towards the kind of ‘beggar thy neighbour’ retrenchment that causes all to suffer. It is, in my view generally a more powerful factor in business growth than the level of interest rates – although the two are clearly related. And when I say ‘confidence’ bear in mind that this is now being judged on an extraordinarily wide range of risks. When I was growing my businesses I well remember the slow-down of the early 90s. It was tough but you knew it would not last more than a year or so. My response to it was to hold my nerve and to go out and grow into new markets – this was achievable then (with a struggle) and resulted in strong profit growth further down the line. By staying in the game, continuing to invest and to focus on value and quality I discovered, first hand, that you can trade yourself into an improved position relative to your competitors in a temporarily declining market. The problem now is that the grim outlook appears to have no obvious horizon at all and the range of risk is everything from a painful and very long road to revival to a euro-zone wipe-out that will make the collapse of Lehman Brothers and the 2008 credit crunch look like a bonus day at Barclays. The incentives under these circumstances for doing what I and others did in the early 1990s are significantly diminished.
So the quest to inject confidence into our economic veins is both mighty and imperative. And just as it will take more than a tack here or there to pull us through to winning the next election, it is likely to take something pretty dramatic to pull us out of the current economic mire.
Some will say that too radical an economic shift will play against the hard-won re-branding that our party has pursued. I accept that we should not underestimate the importance of that work (not least the vital and correct decision of our Prime Minister to elevate the party’s commitment to the NHS) but I also believe that the electorate will judge us no more harshly in the medium-term if we take a more radical economic path now and they may just credit us if we take a bold approach that bears fruit as we near the next General Election. Others will rightly point out that any shift in economic policy will need to command the support of our Coalition partners. Here I do not think we should be without hope. David Laws, one of the Lib Dem’s best and brightest has already argued powerfully for government expenditure to be reduced through time to 35% of GDP. And there is a mighty and powerful point of mutual interest as well – the Lib Dems rightly value the longer term electoral health of their party and it is their fortunes as well as our own that now ride on the stormy seas of the UK economy.