Monday, 1 August 2011

Radical action needed for the UK economy: Why cant government get it right?

The recently announced economic growth figures have produced much comment in the media and several comments in this blog. The current economic performance of the UK economy is said to be the slowest economic recovery after recession for over seventy years.
The first thing to ask is why we are surprised at this. Many of us were never taken in by the myth of the New Labour economic miracle and we were roundly derided (at the time) for saying so. After an orgy of spending (public and governmental) fuelled by asset price inflation and borrowing it was inevitable that we would come crashing down hard and so we have. The growing economic power of the BRIC countries has exacerbated this.
Much of the speculation now is around the so-called plan B for the economy which may or may not exist. It is inconceivable that the Government would give up on its deficit reduction plan not least because it is essential to reassure the financial markets that the deficit is being addressed. The government is often exhorted to slow down the pace of deficit reduction by a combination of lower taxes and a slower pace of spending cuts and some sleight of hand to achieve this may be on the cards. However, to really kick-start the economy some radical action is needed and a few suggestions are as follows.
• Infrastructure - One thing which is often mentioned is infrastructure. Extra investment in roads, buildings, telecommunications etc will, firstly, provide an improved infrastructure which would be of benefit to businesses but secondly, would generate jobs in the construction industry and other industries. However, for this to be effective we need a large shift from current spending into capital spending and this will require the government to make hard choices about where to cut current spending yet further. If the additional cuts in current spending involved a loss of higher paid jobs (involving people with a lower propensity to spend) and were replaced by many more lower paid construction jobs (involving people with a higher propensity to spend) then this would provide an added impetus to the economy.
• Job security – the government’s own figures suggested that its programme of spending cuts would result in a loss of some 400,000 public sector jobs. Unfortunately, the way in which the Government has approached cutting public expenditure has created such uncertainty that there must be about 4 million people (I exaggerate for effect) in the public sector who are in fear of losing their jobs and are cutting back their spending. This uncertainty feeds through into the private sector where employees also fear for their jobs and cut back on their spending. The Government failed to set out early in where the cuts would fall and they also sub-contracted much of the cutting process to local government which created yet further uncertainty. This uncertainty about public sector jobs cannot be allowed to continue for years to come and must be removed by quick and early confirmation about which services will close and which will be retained. This would improve consumer confidence dramatically.
• UK Procurement Focus - public expenditure which increases the demand for UK produced goods and services will have a positive effect on UK economic activity while expenditure on imported goods will not have such a positive effect and will also contribute towards the UK’s large balance of payments deficit. Thus when procurement decisions are being made it would be beneficial to focus on giving precedence to UK produced goods and services even if the cost of the UK goods is higher and value for money is lower. The most obvious recent example of this is the loss of a major rail procurement contract by the UK-based firm Bombardier in preference to a German firm. Apparently the Transport Secretary was presented with the options “blind” and forced to make a decision without any consideration of the social and economic implications of sourcing this contract to an overseas firm. Given that the Transport Secretary, Philip Hammond, is a successful businessman we must ask what sort of advice he is being given by Whitehall mandarins that allow this to happen. Such an approach might be declared illegal by one of the many supra-national bodies such as the EU, GATT etc but it could also be the case that the UK is a “soft touch” in relation to these matters compared to other countries. The eighteenth century US politician Alexander Hamilton opposed British ideas of free trade in favour of temporary protectionism for the US economy which he believed was essential to develop the fledgling nation's emerging economy. Fortunately for the USA, Hamilton’s views prevailed. We should not be taken in by right wing ideology on free trade. The UK economy needs a bit of temporary protection if it is to get out of the hole it is in and preferential procurement is one route towards this.
So will any of this happen – probably not? There are three main barriers as I see it. Firstly, it is unlikely the politicians will have the “bottle” to take some of the decisions that need to be taken. Secondly, our mechanisms for planning and controlling public spending are anachronistic and simplistic and are not up to the job. Thirdly, the civil service seems to have its usual reactive and risk averse methods of working and is unlikely to put forward radical options to Ministers.
It has been reported that the Prime Minister is unhappy with the progress being made on the UK economic front and is giving the Treasury and the Chancellor a hard time. Whether this is true or not I have no idea. However, somebody does need to give economic policy a kick of radicalism. Tinkering just isn’t working.