Kwasi Kwarteng was Conservative Candidate for Brent East at the General Election of 2005 and Chairman of the Bow Group in 2006. He holds a doctorate in Economic History from Cambridge University, has worked as an investment analyst, and is currently writing Ghosts of Empire, a book about the international legacy of the British Empire.
There is a lot of confusion now about our economic mess. Where do we go from here? I have four suggestions. These aren’t a quick fix solution; we have hard times ahead, but they are a start.
Firstly, we should slash business taxes. Capital formation, the ability of businessmen and women to start up new businesses, is crucial in any recovery. That’s why the government wants to keep up lending. We should help businesses by cutting their tax burdens. It seems crazy to increase lending to business, while keeping their tax burdens the same. We should be cutting these tax burdens, even before trying to lend more money. The private sector is the key to recovery. Cutting taxes for business acknowledges this.
Secondly, we should nationalise the Royal Bank of Scotland and Lloyds and get them lending again. The situation of the banks is insane. Last October, we committed £37bn to them. Their share prices have almost halved. More than £10bn of taxpayers’ money has evaporated in the last three months. We have just committed a further £25bn to RBS. We are guaranteeing up to a staggering £325 billion of bad assets for this one bank.
No one pretends that RBS or Lloyds is now being run on free market
principles. Who knows how much more money these banks will ask for? In
any genuinely free market system, these banks would have been declared
bankrupt months ago. Let’s admit this. To say that RBS is a private
company is an elaborate fiction. It’s like insisting that Santa Claus
exists, when the kids are well into their teens. The UK Treasury is now
ultimately responsible for footing the bill. Temporary nationalisation
simply recognises this; it simply recognises who is paying the bills.
Thirdly, we need an industrial policy. Free trade is a great abstract
idea, but it exists only in the sense that a perfect circle, or a
perfect line, exists; it’s an abstract principle. In practice,
countries help their industries and work out what kind of economy they
want. There’s a lot of guff spoken, half-remembered from undergraduate
economics courses, about the virtues of free trade. Economic history,
however, runs against quaint economic theory.
Free trade did not create
Toyota or General Motors, for that matter. The Japanese threw Ford and
GM out of Japan in 1939 and then, after the war, proceeded to build,
deliberately and at great initial cost, the greatest car companies in
the world; Toyota, Honda and the rest were not the spontaneous
creations of the free market. They were nurtured and subsidised. The
Finnish firm Nokia, a world-beater, didn’t make a profit for 17 years,
yet it was supported. This is what happens in the real world. Even
Ronald Reagan imposed a 50% tariff on Japanese motorbikes to save
We thought finance was everything. It wasn’t. Our economy needs to be
more diversified. It isn’t perverse to create some ongoing structures
to bring this about; it’s common sense.
And fourthly, we need budgetary restraint. The programmes I have outlined cost
money. These are extraordinary circumstances, so we need more money to
spend. Yet the Government has left Britain’s treasury empty. We spent
more than we could afford, even in the good times, and have nothing
left in the kitty. Savings have to be made. We cannot, even if we
wanted, borrow and spend infinite amounts. Other savings need to be
found to pay for this new, exceptional spending.
In lean times, families stop eating out as much; they cut back on
visits to the cinema; they don’t go on foreign holidays. The Government
needs to do the equivalent of this.
These are four solid principles. They will not solve our problems
overnight, yet if all four were implemented this year, we’d be in a
much better position next year, and in the years ahead. As Americans
say, “you gotta do something”. Sitting on our hands, being confused and
intellectually lazy just won’t do.