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Flight_howard_2
Howard Flight was MP for Arundel and South Downs between 1997 and 2005,
is a former Shadow Chief Secretary to the Treasury and Deputy Chairman
of the Conservative Party, and is now chairman of Flight & Partners
Recovery Fund.

Now that Labour’s plans for large spending cuts have been exposed, we have the depressing prospect of “both sides” arguing that “yours is bigger than mine”, rather than moving on to think about how the UK economy can be revived during a period in which significant cuts in public spending are necessary. 

I believe the Conservative Party is seeking to learn usefully from the Canadian, New Zealand and Swedish experience of both implementing a programme of substantial reduction in public spending and, at the same time, enabling the private sector economy to take up the economic slack – the resources released – to raise the growth rate of the more productive, private sector economy.  Self-evidently, the more this can be achieved the less painful will be “the cuts” – a growing private sector will increase tax revenues and so make it easier to restore the public finances to a sustainable basis.

It is a daunting task to start from where we now are, as sorting out the public sector will inevitably entail substantial job losses and bring with it a reduction in overall demand in the economy represented by the value of the cuts.  The objective has to be to get the private sector to take up the resources released as quickly as possible, in both human and economic interests.

There is clearly a macro context in which this should be achievable.  With the terrible statistic that current private sector output is hardly greater than in 1997, it is clear that Brown’s reckless expansion of the public sector served to drain resources away from the private sector to the public sector and so limit the private sector’s growth potential.  For the next decade there should be the opportunity for the reverse to happen.

Moreover, where public sector productivity growth has been negative for over much of the last decade, even during a period of resource pressure on the private sector it continued to contribute most of the productivity growth that has occurred in the UK economy.  A reversal of down-sizing the public sector and an increase in the private sector should also bring with it higher growth rates because of the higher productivity of the private sector.

What is needed, therefore, is consideration of both macro and micro policies which are likely to encourage growth in the private sector – when there will be little or no scope for fiscal incentives.

The first point is that an approach to reducing the public sector borrowing requirement to a sustainable level, consisting of a mixture of public spending cuts and higher taxation, would be likely to generate the worst combination, with higher taxation, directly and indirectly, falling substantially on the private sector and inhibiting its ability to boost growth.  Radical reform of the public sector is anyway long overdue – where even the 2004 ECB Report found some 20% of UK public spending was “wasted”.

The second macro point is that as a programme of reducing public sector expenditure is a form of fiscal tightening, there is a “balancing” logic for this being accompanied by expansionary monetary policies in terms of both keeping interest rates low and continuing to replenish destroyed money supply through quantitative easing, until monetary growth has returned to acceptable levels.

The third big picture observation is that a competitive exchange rate helps make the UK more competitive and supports private sector growth, as occurred both with the fall in Sterling when Britain exited from that the ERM, and back in the 1930s when we came off the Gold Standard.  There is a dual effect of increasing exports and boosting corporate profitability to sustain expansion and new investment.

There is clearly the need to increase the availability of finance for small business – still representing some 13 million people employed.  The banks are likely to recover their willingness to lend only gradually, no matter their public ownership and Government exhortation.  There is clearly a case for some form of state sponsored development bank, copying precedence in Singapore and elsewhere in Asia, to help provide funding for new technology companies with serious business potential.

One of the disasters for the UK over the last decade has been that, in the round, venture capital has had a very poor record – in part because, overall, the private sector economy has grown little as the result of the “squeezing out” by the public sector.  The one area where I would advocate increasing fiscal incentives is venture capital and, particularly, the Enterprise Investment Scheme (EIS) where with a 50% top rate of income tax coming there is logic for increasing the EIS income tax incentive to 30%.

In an economic climate where the key objective must be the creation of new jobs in the private sector, it is demonstrable that the Minimum Wage reduces potential employment and thus serves to increase the welfare expenditure bill.  Labour’s introduction of employment tax credits makes it difficult not to have some level of minimum wage as otherwise employers would be incentivised to cut their labour costs further, and exploit the tax credit top up.  But above all what new and small businesses need is relaxation of the regulatory and bureaucratic costs and burdens that have been put on them by the Labour Government over the last decade.

By way of a foot note, the more financial services the City is able to export the better is the impact for the UK economy; not only does it help pay for all those imports from China, but it also boosts tax revenues.

In short, while the incoming Conservative Government will need a mandate to be bold in reforming the public sector and cutting back the bloated costs of the Brown era, they will also need a “manifesto” for growth in the private sector.

17 comments for: Howard Flight: The Conservative Party needs a manifesto to promote growth in the private sector

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