Analysis: CSR proposes little to make up for cuts

The Comprehensive Spending Review (CSR) has proposed few measures to help the private sector and compensate for its public sector cuts, to judge by the chancellor’s initial announcements.

The Comprehensive Spending Review (CSR) has proposed few measures to help the private sector and compensate for its public sector cuts, to judge by the chancellor’s initial announcements.

George Osborne proposed half a million job cuts in his speech, but did little to propose how the private sector could replace those jobs and support economic growth.

Osborne proposed minimal cuts to education spending, aside from his overhaul of Labour’s schools rebuilding programme, and announced extra funding for science in certain areas.

But support for education and research and development tends to have only a long-term effect on a country’s economy, as pupils take years to pass through education and scientific breakthroughs even longer in some cases. (article continues below)

In addition, science-friendly measures may not even compensate in the short term for the loss of spending in parts of the private sector.

As a shorter-term initiative, Osborne announced a £500m fund for regional growth, but the coalition has also proposed to abolish regional development agencies, which also aimed to support local economies outside London.

Osborne’s 75,000-strong apprentice scheme may also have a shorter-term effect on employability, but will be of little use if companies are uninterested in hiring in the first place.

“Neither Alexander nor Osborne suggested ways to persuade companies to invest in British growth and jobs or spend huge corporate cash piles”

The same principle holds true of a point made by Danny Alexander, the chief economic secretary to the Treasury, in a post-CSR interview with the BBC.

Responding to criticisms that the lowest tenth of earners would be hardest hit by cuts, Alexander said that tenth would include students or workers who were between jobs.

Although Alexander did not mention this explicitly, this implies that the cuts would incentivise the bottom tenth to find work faster – that is, if the private sector were to remain in net hiring mode.

Neither Alexander nor Osborne suggested ways to persuade companies to invest in British growth and jobs or spend huge corporate cash piles, in the case of many of the larger multinationals.

As heavily regulated investment houses and advisers know all too well, one of the biggest barriers to investing in Britain is burdensome taxation and red tape.

On the tax front, the government could declare a tax holiday on profits from new investments in Britain, as long as those investments created more than a certain number of British jobs.

If such investments were not made and the money sat in cash, the government would barely collect any tax on it in any case, as companies would either be holding it overseas or at minimal interest rates onshore.

After difficulties with regulation during the financial crisis, deregulation may prove a more thorny topic, but one which the government might do well to approach with an open mind, focusing on stable, politically acceptable reforms.

The alternative, as the shadow chancellor Alan Johnson points out in his speech, is Ireland’s experience after its cuts, a world in which government produces cuts and job losses but no compensatory factors to stimulate economic growth – not that Johnson proposed any measures for the private sector himself.

Given the current political consensus in Britain, companies could do worse to follow the example of the American non-financial corporates, who have lobbied for private sector growth policies in the face of government-led stimulus.

The issue is now key to the upcoming mid-term elections in November and may see some company-friendly changes to president Barack Obama’s economic team, which is currently undergoing some turnover.

Companies may be reluctant to aggravate what is typically seen as a more business-friendly, Conservative-led government. But the Conservatives are focusing intently on managing public sector cuts to avoid being dubbed “neo-Thatcherites”. Despite talk before the election of unleashing the private sector, they have proposed few concrete ways of doing so.

As controversy over monetary policy as a private sector stimulus continues, the coalition may have to turn to companies for advice on matters like tax and regulation to replace lost ground from the cuts announced today.