Saturday 6 October 2012

The hunt for growth

The lack of growth in the UK economy is worrying for all sorts of reasons; it hurts at an individual level for those who cannot get work and it hurts at a macro level: the deficit is increased because tax revenues are less and welfare payments are more and potentially this harms our credit rating and therefore the value of sterling and the interest we have to pay to fund the deficit.

The trouble is that there is very little the Government can actually do to increase growth. In economic terms, I think it has done one big thing well: it has sent a message on getting public sector spending under control. It hasn’t quite achieved getting it under control but it’s made more progress than most previous governments. This has had a positive impact of keeping interest rates low; had the steps not been taken the negative impact on the economy would have been horrific. But the trouble is that it has reduced confidence, it has made people nervous and that makes consumers and companies unwilling to spend money or invest.

In fact things aren’t too bad; I was in S Devon last month. Most pubs and shops were advertising for staff. There were almost as many cranes and skips as London in London. If you talk to small business owners generally about how things are going, the answer is usually “OK”. Not great – but OK. Businesses have adapted. But if they can, they are hoarding cash, they are not taking risks, and they are not investing. And if don’t have cash but want to invest then credit has dried up largely because regulatory policy limits bank lending.

So what should the Government do? It should recognise it can’t do too much. It needs to get credit flowing by reducing some of the constraints on banks. It should introduce no-fault redundancies to help employment. It should sound more positive. It should ensure there’s no more quantitative easing. It should develop small scale infrastructure projects. But the implication that it sees a third runway at Heathrow as helping is worrying: that would be irrelevant to growth now. The reduction of planning constraints on residential development could help but also conflict with the localism agenda many of us thought was an important policy.
But serious growth will only come from improved confidence. That will take time and will only come from working through the debt problems in the UK and abroad – especially Europe. In the meantime the Government needs to keep its nerve and not seem panicked.

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