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17 September 2011

Where Will the Growth Come From?

Tag(s): Politics & Economics

Last week I had lunch with Neil O'Brien of Policy Exchange, one of the foremost policy think tanks in the UK. Neil formerly ran Open Europe where he successfully campaigned to keep Britain out of the Euro and forecast the current crisis. Neil has broadcast on the radio, written for the Financial Times, The Guardian and The Times and writes a regular blog for the Daily Telegraph. He was ranked No.14 in Total Politics' poll of the top political influencers in Britain.

Neil reminded us of the appalling deficit and the well understood programme to bring it under control. It is familiar territory for most of us but the media still report cuts in public expenditure when they mean slow down in the growth in public expenditure. There is no plan to reduce expenditure year on year at any stage of the life of this Parliament. By the end of the Parliament despite the actions taken and planned we will each be paying 10p in every pound of tax to pay interest on the debt. Most people do not understand the difference between the deficit and debt. But like me Neil is less impressed with the plans to generate growth. It can be argued, and is, that we have to cut the deficit to be able to grow, but that is not enough. We have seen little of a coherent plan for growth so what does Neil, as an influential policy wonk, offer? He has three suggestions for growth which I lay out here but I have reservations about some of them. Perhaps this just shows how difficult it will be in an economy laid waste by the twin calamities of the banking crisis and the dead hand of the Brown abolition of boom and bust.

His first suggestion is welfare reform. While unemployment is measured at one level, and is now 2.5 million, in fact 5.5 million people are on some form of benefits. One seventh of public expenditure goes on such benefits, about £100million. If we could eliminate this we could abolish the basic rate of tax for all taxpayers. Linked to this are the inequitable housing benefits. Social housing was introduced in the 1920s and 1930s for those who deserved it. They had worked hard and a council house was seen as a reward. They would have to accept a strict regime of discipline on hygiene, alcohol and other factors to qualify. George Orwell wrote in The Road to Wigan Pier of families being deloused before being admitted to social housing. They would be expected to keep up the appearance of the house. Under John Prescott's reform this was turned on its head. Social housing was allocated according to so-called need, so typically single mothers whose partners had abandoned them went to the top of the queue. Such perverse incentives led to a generation of young women adopting this as a lifestyle choice. Have a baby - get a council flat. Neil quotes examples of social housing in Central London costing as much as £1600 per week. You might have to earn £250,000 pa to afford such housing privately.

Ian Duncan Smith who has earned a lot of respect for the way in which he has re-invented himself and diligently studied the impact of the benefit culture on many people in society is proposing more conditional benefits which are typical in many other countries. It should be necessary to show that one is looking for work before qualifying for the dole; in Australia working on the dole is common.

 Neil's second suggestion is deregulation. This is a huge subject and again I am doubtful of the work done so far. The Coalition Government has indicated its intention to deregulate but first has increased the burden of regulation in a host of ways.Neil's choice of target is the vast array of regulations relating to environmental policy and climate change. This has become very complicated and expensive and will lead to an increase in cost of energy of £300 per household according to recent calculations. He cites the rules on carbon trading as particularly perverse. The rules are arcane and the effect has been for energy companies to negotiate their way through the minefield and finish up with credits they don't need while NHS trusts who do need them find themselves in deficit. He correctly observes that politicians are economical with the truth and claim strong progress in reducing carbon emissions in developed economies like the UK when in fact they have just exported their manufacturing and therefore their consequent emissions to China. I debated this issue long and hard with Neil because as regular readers of these blogs will know I strongly believe that climate change is a fact, that humankind has largely caused it is a fact, that carbon fuel resources are finite and that we owe the world a lead in this as we started off the process with the Industrial Revolution and the burning of all the coal that lay beneath our lands, coal that had taken billions of years to develop and took us 200 years to burn. I also want to see growth in the economy but in a sustainable way and believe that countries that seek to find this model first will be well rewarded as other nations come to learn from.us. Neil believes that by taking the lead in this we are condemning ourselves to higher energy costs and thus lower growth. Where we agreed was in that the remedies so far have become too complicated and create perverse results.

Neil believes that there should be limits to subsidies and tax breaks in free economies and that direct spending on science and technology may have a more beneficial effect. I would like him to have explored this theme more because in some of my activities I observe the complex ways in which research is funded by the state with labyrinthine processes of competition and so-called peer review, impenetrable rules of state aid and arcane procedures for funding particularly at EU level. When there were fewer universities much of the funding was direct and wonderful inventions and discoveries followed. Now with myriad universities competing for such funds competitions are held, decisions are made by peer review and one is left wondering if we would have ever discovered nuclear energy, computers, lasers, or liquid crystal displays by such methods.

 

Neil's third target is the Planning regime and he greatly favours the new regime which intends to simplify the planning regulations from over 1000 pages to just 50 with a presumption in favour of the developer unless the local authority can show through its locally developed plan that the development is not sustainable. Neil believes that this reform will free up significant chunks of land for building all the affordable housing we need in a sensible way.

Here I, and others in the room, are firmly in the opposite camp. Some of us have read the 50 pages and find them vague and thoroughly biased. In these 50 pages there are 350 references to business development and only four to the countryside. In recent newspaper reports it was revealed that the authors of these new regulations were individuals borrowed from the large construction firms which have lobbied for these changes. In my recent blog, Planning Blight (13th August, 2011) I outlined my objections to this plan.

 

So in accepting less than half of what Policy Exchange is putting forward what would I propose in its place?

 1. One of the biggest restraints on growth in the UK is inadequate infrastructure. A well-argued paper in 2009 was produced by the LSE[i] and I happen to know went to Lord Mandelson's desk when he was Secretary of State for Business. It argued that relatively modest investment in three new strategic industries: Broadband, Smart Grid and Intelligent Transport Systems would not only pay back many times by giving the nation a more competitive infrastructure but would also enable it to compete more aggressively on the world's stage. The advice was ignored but still remains relevant today.

 2. Deregulation

Deregulation is an issue but the biggest problems are the enormous reels of red tape that bind small businesses. The engine of growth is much more likely to be the small and medium size enterprises that become the big firms of tomorrow rather than today's big firms. Today's big firms can just about cope with the red tape but smaller firms can't. Particularly onerous are employment laws which often put off anyone hiring anyone else and so the start-up business never gets off the ground. Lack of credit from the banks is also an issue here despite official denials but of course the banks are in Catch-22 as they are under strict instructions to rebuild their capital ratios and cannot do both.

 3. Sustainability

The drive for more sustainable business should be seen as an opportunity rather than a threat. Taking the lead in this area will give the UK a massive advantage over those who delay and demur. I have seen the impressive way in which the motor industry has responded to legislation threatening it with severe fines if it fails to reduce carbon emissions from the tailpipe by 2020. The UK has taken a lead here by some well-judged interventions and at the recent Low Carbon event organised by Cenex, a sister company to innovITS which I chair, the display and exhibition of vehicles with electric and other low carbon sources of propulsion was impressive. I wrote on this in my blog The Age of the Electric Car 12 September, 2009, and progress has been remarkable since then.

 So, Neil, if you’re reading this I am happy to Exchange these Polices with you. No charge. It was a pleasure to meet you.



[i]The UK's Digital Road to Recovery




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