The coalition’s spending cuts strategy, led by Prime Minister David Cameron and Chancellor George Osborne, has generated publicity worthy of two budgets in one - the emergency budget and the comprehensive spending review (CSR), to be precise.
Its growth strategy to replace the cuts, however, has generated little. Until this morning, it consisted of a few announcements in the CSR, which were small financial beer compared with £80 billion in government savings.
Today, however, has brought a number of key announcements on growth. Cameron’s speech this morning to the annual conference of the Confederation of British Industry (CBI) consisted of just 17 pages and, although honest in intent, was short on details.
However, the announcement was followed shortly afterwards by a National Infrastructure Plan from the Treasury. This 52-page document acknowledged for the first time at the highest level the extent to which poor infrastructure is holding back British growth. It came as part of the launch of Infrastructure UK, a new public body to advise on the country’s transport, communications and energy needs.
“It underlined the extent to which Britain cannot rely on exports to faster-growing areas of the world to stimulate economic growth”
Cameron’s CBI speech spoke honestly of the scale of the problem. Most crucially, it underlined the extent to which Britain cannot rely on exports to faster-growing areas of the world to stimulate economic growth. Amid ferocious competition in the export markets, including currency wars, Cameron reminded his audience that Britain exports more to financially troubled Ireland than it does to the fast-growing Bric nations – Brazil, Russia, India and China – combined.
But although Cameron stressed “banging on the drum for trade” was important, he also acknowledged growth could not be delivered by exports alone. This had been clear since July, when Britain’s trade deficit widened massively despite the dip in sterling making its exports more competitive.
What Cameron termed “the three parts to our strategy” were:-
“First, using all available policy levers to create the right framework for enterprise and business investment.
Second, using our resources to get behind those industries where Britain enjoys competitive advantages.
Third, using our power and muscle to make it easier for new companies and innovations to flourish and create a new economic dynamism.”
At the heart of the first point was the National Infrastructure Plan which, for the first time, admits the full scale of the problem. Cameron estimates congestion on Britain’s roads alone costs the economy £20 billion a year – the value of the CSR spending cuts over each full calendar year left of this Parliament. (article continues below)
The second point, Cameron said, aimed to support areas of the economy outside of London-based financial services where Britain already has a competitive advantage, such as key areas of the industrials and pharmaceuticals sectors. This would revive industrial policy, but not in the sense of promoting specific companies.
The third point extended the “strategic industries” tag to cover fast-growing small and medium-sized enterprises, for which Cameron said extra funding was needed.
The fact Cameron addressed the problem of growth, and many facets of it at that, is to be welcomed. However, to take the points in turn, Cameron’s proposals contained potential conflicts and, in some respects, lacked enough clout to be taken seriously at this stage.
Cameron lists the three ways in which the government is involved in the private sector. “It taxes. It regulates. It invests,” he says. His speech lists ways of reforming each of these involvements in ways which could encourage private sector growth. In each case, however, the measures are incommensurate with the scale of the problem, particularly in investment, for which, as Cameron acknowledges, the government has little money at its disposal.
In terms of tax, the only direct incentive Cameron mentioned was cuts to corporation tax, of one percentage point for every full year of the life of the Parliament. Corporation tax helps balance private sector books, but it merely encourages firms to domicile in a country, not to invest in it.
Cameron is understandably nervous about proposing extra tax cuts for companies given Britain’s precarious fiscal position. But he acknowledges the large financial surplus currently being generated by Britain’s companies is not being deployed in the productive interests of the country.
According to Invesco Perpetual, Britain’s largest asset manager, much of the money is currently either sitting in cash, bolstering financial balance sheets or flowing into new projects in faster-growing markets. Little of it is being deployed to create new jobs or growth in Britain – understandably, given nervousness over the outlook for the country. The ultra-loose monetary policy Cameron advocates – namely, quantitative easing – will simply create more cash, not make it more attractive to invest it the real economy.
Cameron could recognise this and propose a tax break on the returns from job-creating investments in Britain. The government would earn little tax on the money used for such investments in any case as the vast majority of it is not being deployed directly into the British economy. Given recent headwinds, it would create the kind of financial advantage Britain needs. James Dowey, the chief economist at Neptune Investment Management, which compares economies on a global basis, has already described such a policy as sensible.
Such a tax policy would also be universal and would avoid governments’ habitual inability to back winners in the private sector. As Cameron acknowledges: “Successful, high growth economies are like ecosystems – they are organic, evolve through trial and error and depend on millions, billion of individual preferences, choices and relationships. Governments can expect to intelligently design all this as much as they can expect to intelligently design the Great Barrier Reef.”
However, Cameron’s second and third points focus on an industrial policy which aims to “intelligently” back private sector winners, in direct contradiction to his previous point.
When handled badly, deregulation can prove as dangerously intoxicating as loose monetary policy – witness the repeal of Glass-Steagall during the Clinton era
Even when discussing industrial policy, Cameron fails to address a key reason why such policy has failed in Britain – mountainous red tape, caused by the triple whammy of local government, Westminster and Brussels. His main ambition (on page six of his speech) is to stop the rise in red tape, not cut it.
However, this does not address the fact that one of the chief drivers of economic growth is deregulation, which Cameron can control most effectively outside Brussels, although he devotes as much time to discussing lobbying in Brussels as he does to deregulation in Britain.
When handled badly, deregulation can prove as dangerously intoxicating as loose monetary policy – witness the repeal of Glass-Steagall during the Clinton era.
However, sensible deregulation is possible in certain areas and helps cut down the limits on corporate investment. It is also desperately needed to compensate for the necessary but potentially costly reregulation of the financial sector.
As Fund Strategy’s readership has experienced with the retail distribution review (RDR), parts of the British economy, even financial services, have struggled for years with inefficient regulatory consultations.
Cameron hinted at this type of phenomenon in his own speech when he talked about the need to diversify Britain’s energy supply, but in particular to build offshore wind turbines, which, as he mentions, are extremely expensive.
What this fails to address is the fact that wind turbines would be cheaper to build onshore in large numbers and in fact might have been built in vast numbers already, were it not for lack of government support, including massive regulation of onshore developments.
Cameron’s mention of energy touches at his most concrete plan – the National Infrastructure Plan. The plan calls for £200 billion of funding, but the government’s contribution was already announced in the CSR. The plan is therefore only of significance if it creates a convincing case for new private sector funds to flow into the sector, and if it reduces the huge costs of building new infrastructure in Britain.
On both points, the plan is disappointing. Points 3.12 to 3.25 address the challenge of attracting private sector investors from a regulatory perspective. There are no concrete proposals for regulatory or tax relief. The document mentions the attractions of reducing costs of capital and introducing an attractive tariff regime, but acknowledges making this politically acceptable is difficult as some costs will be passed on to consumers.
The government says it will report again in the spring on how to square this circle. But if the government is hoping to reemploy workers in new infrastructure projects, the process will be too long to compensate for the first round of job cuts next year. Like much of the coalition’s industrial policy, Cameron’s infrastructure plans are hazy and focus solely on the long term, rather than short-term pain.
Judging by Peter Mandelson’s pre-election stance on private sector growth, however, the opposition’s plans would have been pretty much identical. Leaving aside proposals for a bank for small and medium-sized enterprises, the speech by Ed Miliband, the opposition leader, at the CBI conference today did little to change this. Labour argues for a slower pace of deficit reduction, but deficit reduction nonetheless. Without a radical growth plan, neither Labour nor the coalition may compensate for their cuts.