Only radical reform can pull us out of a growing economic quagmire (City AM)

Head of Economic Research Ryan Bourne writes for City AM on what the Coalition’s economic priorities should be as it faces an uncertain future in the second half of this parliament. 

To view the full article, visit the City AM website.

“OLYMPIC mania seems unable to prevent the coalition from entering a new crisis phase. The latest nail in the coffin was the Bank of England revising down its UK growth forecast for 2012 to zero, which heaped more pressure on a government already beset by political problems.

The abandonment of House of Lords reform has angered the Lib Dems. Nick Clegg has vowed to vote against the changes to constituency boundaries considered crucial to the Conservatives winning a majority in 2015. For those who warned of the dangers of coalition government, this transactional, tit-for-tat approach to policy is unsurprising. But the key point is that it will leave huge resentment between the two parties unless they can agree on a new agenda.

For the Prime Minister, these woes were compounded by the resignation of Louise Mensch, the Conservative MP for Corby. Her departure will result in a by-election and an almost inevitable loss of the seat to Labour. This may not seem significant, but Toby Fenwick of Fleishman Hillard has pointed out that it will make a centre-left coalition mathematically possible for the first time. A Labour-Lib Dem coalition, supported by their Northern Irish spin-offs, Plaid Cymru and the Green party, would not require the support of the Scottish National Party or Democratic Unionist Party. The Lib Dems might just have a potential escape route from the coalition after all, meaning David Cameron can’t take their continued support for granted.

The preservation of the coalition requires a new, unifying agenda. Rhetorically, at least, all agree that the economy is the top priority, and the government plans to use legislative time, freed up by the abandonment of Lords reform, for a grandly-named Economic Regeneration Bill.

This makes sense. Our economy is 4.5 per cent smaller than its peak at the start of 2008, and the government’s watered-down deficit reduction strategy is predicated on optimistic growth forecasts. Meanwhile, the two parties’ only hope of electoral success is a significantly growing economy by 2015. Ronald Reagan once opined that voters will ask whether they are better off than at the last election. The answer at the moment is a resounding “no”.

What, then, should this bill for the economy contain?

So far, public current expenditure has continued to rise, as capital spending has been slashed and a range of taxes hiked. You don’t need to be a Keynesian to realise that this combination is likely to hurt growth, both in the short and medium term. The coalition should instead scale back on the functions of the state, and merge some current government departments to encourage more joined-up thinking and to save money. Any savings, and deeper cuts to current expenditure, should be used for targeted tax cuts on business and increased infrastructure investment in projects like new airport capacity – where limited government funds can unlock huge private sector investment.

More important, however, is the need for dramatic supply-side reform. Planning laws should be liberalised, not just to fast-track new infrastructure, but to encourage home building. This is desperately needed, and yet planning laws exclude vast amounts of green belt land and put existing homeowners in a strong position to block new development. A scrapping of the “sustainable development” requirement should form part of a deregulatory component of the bill. This would also exempt smaller businesses from a raft of job-destroying regulations and employment legislation.

Energy policy should also be re-examined and focused towards growth. Last week, a US economist compared the UK’s decision to ignore shale gas with deciding to ignore a cure for cancer. It’s unforgivable that we are neglecting a domestic source of cheap fuel. It also highlights a lack of clarity of thought on energy policy. The government wants more gas (largely imported), but next year is set to make gas more expensive by introducing a carbon price floor. This must be abandoned – it will make us uncompetitive, and merely exports carbon emissions elsewhere. Cheaper energy is essential to a rebalancing away from credit-based industries, and the UK is well-placed to expand advanced, high-tech manufacturing if these conditions are realised.

Will the desire for self-preservation prove enough for the two parties to undertake the radical economic action necessary? We can only hope.”

To view the full article, visit the City AM website.

Date Added: Thursday 9th August 2012