by Ian Mulheirn / 21 Nov 2012
This article is from the December 2012 issue of Total Politics
At last, some good news about the economy. Figures for the third quarter of the year were, as the prime minister had hinted they would be, “good news”. In fact, they were almost twice as good as commentators expected. Even when you discount the Olympics bump, it looks like output grew significantly between July and September. But one quarter’s figures, even if they aren’t revised away by the ONS’s statistical sages in Swansea, don’t change the fact that the economy is still limping along.
Could it be the start of an upturn? Perhaps, but that seems premature. Households are still deep in debt, their income growth is weak, and families will also have to contend with bigger energy bills as price hikes kick in. That means that a sustained revival of domestic consumption growth is unlikely just yet.
Meanwhile, with perma-crisis in the eurozone and slowing growth elsewhere, foreign customers don’t look likely to be able to tow the UK economy out of the doldrums either. With little prospect of new customers at home or abroad, UK firms are wary of investing: the private sector is engaged in a standoff. And the government’s laissez-faire approach means that sustained growth will have to wait until some of these problems unwind themselves.
If the economic backdrop wasn’t dismal enough, the state of public finance is pretty sobering too. Already the government has pencilled in further spending cuts after 2014, while the 5 December Autumn Statement, although anticipated in some quarters, is likely to add to the pain. Economic stagnation over the past year will mean yet another year’s cuts to tackle the deficit. The OBR is also likely to tell the chancellor that he is no longer on track to meet his second fiscal rule to have national debt falling in 2015–16. Having set so much store by the importance of the fiscal rules, ditching that second rule just over two years after setting it would be a big blow to the government’s economic credibility.
To restore said credibility, the chancellor needs a plan that can break the private sector out of its torpor and stimulate growth, while sticking to his deficit reduction plans. Paradoxically, the years of fiscal retrenchment ahead offer him an opportunity to do just that by altering the composition of spending and taxation, and making it much more supportive of growth. Instead of waiting to phase in cuts over the next five years, he should act now to axe measures that have little impact on output, and recycle the cash into infrastructure investment that can boost GDP directly, creating jobs and increasing the long-term potential of the economy. That capital spending could then be phased out over the five years, leaving the public finances where they need to be.
Ian Mulheirn is director of the Social Market Foundation
Implementing the plan will require political courage – it will mean that Osborne will have to make some of his own voters squeal in the process, but economically it is a win–win solution. Here are five reasons why:
It allows the chancellor to stick to his deficit reduction plan, on which so much of the government’s credibility is staked. In the context of the growing cries from the right of his party to meet the debt reduction target by cutting faster than planned – and from Labour to delay the cuts and adopt a ‘Plan B’ – it is hard to see how the government could survive a radical change of course in either direction. It has to make deficit reduction work better.
The plan has the potential to create an immediate and sizeable stimulus. Bringing forward £15bn of the necessary cuts and recycling the saved money into infrastructure could boost output by £10bn, or 0.7 per cent of GDP per year for three years. That’s a much bigger stimulus than we’d get from a 2.5 percentage-point VAT cut.
It would get the government out of an economic hole (just) in time for the next election. There is still plenty of time for the effects of a capital investment programme to show through by polling day, allowing Cameron’s confederates to take credit for fiscal action without borrowing more.
It chimes with the IMF’s advice to the government to re-engineer the cuts to be more ‘growth friendly’. The plan would also fit with the IMF’s observation that fiscal measures will be needed if the many monetary interventions to date do not yield a big improvement. Since the governor of the Bank of England’s recent comments about the limitations of quantitative easing, that advice seems more relevant than ever.
Given the scale of further cuts to come, the coalition badly needs to show that the economic pain will be shared out fairly. In the context of speculation about deep benefit cuts to come, and the symbolic effect of the 50p tax-rate cut, the coalition needs to set out a vision for a balanced package of cuts if the electorate is to believe that we really are all in this together.