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Julian Wolfson (left) has worked in government, commercial and voluntary sectors. Tim Bond works is an investment strategist. They work at Odey Asset Management.

Screen shot 2011-02-14 at 05.47.18 The economic cycle puts wind in our sails.  Growth is a fact.  The Government’s deficit stance has bought the UK time, and despite real risks UK plc is moving faster than people think.  Look through the impact of winter weather on the economy and annual GDP growth is above 2%, probably higher than the rest of Europe.  This is welcome, but only as far as it goes, and only for 2011.

The Spring Budget should launch a policy for growth beyond 2011 and set out a two-term agenda to deal with the weaknesses and seize the opportunities on offer.

We face two key long term economic risks.  First, the risk derived from excessive debt, particularly government debt.  This is something the public is starting to understand.  Second, there is resource price inflation risk, driven by the developing economies’ surging appetite for raw materials and the other building blocks of modernisation.

The debt is so big that the UK cannot afford – has no room to manage – recession.  Were we to have an unexpected downturn in 2012 it is questionable whether government finances would allow the normal operation of automatic stabilisers, let alone additional fiscal stimuli.  The cupboard would be bare.

Recession would mean ‘soft’ default on external creditors through currency falls, and domestic default on the covenant the British have with their government.  A series of actions would trigger in which successive, toppling governments would endeavour to make ends meet through welching on everything from free NHS treatment to help for the old, the weak and the young.  We HAVE to get growth now and at any cost other than a rising deficit.  Even at the cost of inflation.

The second problem, inflation, is more complex.  Neither simply good nor simply bad, it is both risk and opportunity.  Nor is it under our control when it is inflation which we import.


Consumer prices are rising because the world is having trouble accommodating the raw material, food and energy appetites of the large developing economies.  Initially, the impact on the UK citizen is to lower living standards, squeezing monthly disposable incomes as real incomes are cut.  However the inflationary impact is much greater in the developing world whose competitiveness is eroded at a clip as local wage rates rise faster than productivity.  Over time, enhanced relative UK competitiveness will allow our own real wages to recover.  Patience is required.  The drop in UK living standards should be a temporary price paid to regain national competitiveness.  But it could be a near run thing.

Inflation indicates opportunity.  The rise in natural resource prices is a market signal that the world has a problem seeking a solution.  It requires technological innovation to prove Mr Malthus wrong once again.  Technological innovation will create jobs, tax revenues, and wealth.

Resource scarcity will ultimately be solved in a university laboratory, a garage, or a research lab.  Here lies the UK’s opportunity.   We score extremely highly – usually in the top five countries – in rankings of national citations in scientific publications, testifying to our competitive edge in basic research, the raw stuff of technological progress.  The UK scores less well in rankings of patents granted per capita, suggesting that we fail to capitalise on our scientific ‘balance sheet’.  Yet the UK also excels in financial services, in particular in innovative Small and Medium sized Enterprises (SME, companies up to 200 people) which employ half of all workers in the industry and carry neither systemic risk nor government subsidy. 
It is within our capabilities to link global excellence in finance with excellence in scientific research and the manufacturing capacities we have, and create a vibrant new industrial base to solve and own the solutions to the global challenge of resource scarcity.  This is a strategy for a national and international “moon shot”.  If the UK does not seize an opportunity almost tailored to the unique specialisations of our economy, we have only ourselves to blame.

As adjunct to a growth programme seeing opportunity in the shock of rising prices, but minimising the painful effect on the disposable  income of consumers, the Government must be ruthless with Ministers and policies set to add cost to British families and firms.  A poster child is Energy Policy.  Credible investor estimates indicate that if the UK follows through on energy and Green policy British consumers will pay monthly bills a third higher in real terms than they are today by the back of the next Parliament.  Spain and Germany are executing U-turns while DECC appears to hide from the numbers.  George Osborne needs to see that UK energy prices are moved to centre stage, and Vince Cable should insist that energy price assumptions are put out in the public domain for all to test.  This one example illustrates the wider point that after measures for deficit reduction, pro-growth policies must take precedence over other concerns, including international commitments and European constructs.

Not only should we welcome growth wherever it comes from, but need to be activists in its favour.  There is a parallel here with the debate on the Income Tax.  Either you cut the tax for all, or if you cannot manage this then you raise as many as you can out of paying it.  Since the UK does small entrepreneurship really well it should set out to favour the SME sector en masse.  The recommendations in the Institute of Directors' report ‘Freebie Growth Plan’ are a start but only tickle what is to be done.

The aim should be to make the UK the world’s location of choice for creating and growing small and medium sized companies.  Words won’t do this but differential tax, regulatory, immigration and employment regimes for companies employing under 200 people would.  We must choose growth.  We should back the entrepreneurial SME sector.

The Coalition has often done the right stuff at macro-economic level.  Matt Hancock argued here last week that this has improved the “likelihood of higher growth”.   The Government has now to reach further and affirm the primacy of growth.

6 comments for: Julian Wolfson and Tim Bond: A two term growth agenda

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