The coalition has set out its spending plans – in corporate terms, what it plans to do on expenditure. Now ministers must focus on economic growth – to grow the economy's ‘top line’ or revenue. This challenge needs to occupy hearts and minds up and down Whitehall.
Even today, the CBI used the publication of its economic forecast to call on the government to deliver a clear strategy for growth with the next Budget, at the same time as downgrading its estimate to a meagre 1.8% expansion in 2011.
The dreadful GDP figures from the last quarter certainly shook up the political landscape. Shadow Chancellor Ed Balls, at yesterday's Treasury questions, appears to be one of the few people asking why Britain is so acutely vulnerable to snow and heavy winter weather pointing out that blizzards didn’t appear to have the same affect in the US.
Notwithstanding the weather, the GDP figures underlined just how far we have got to go to achieve significant and sustainable growth. And this matters. The bond markets will only take comfort in spending cuts for so long. They want to see economic growth driving down the deficit.
For the coalition, and in particular the chancellor, the data would have been deeply unwelcome. Admittedly, he will have taken solace in subsequent surveys that appear to show a strong bounce-back in January, but much depends on the Q1 numbers, to be announced by the Office for National Statistics on 27 April.
Growth, after all, does not just represent some positive headlines or reports in our 24-hour news media for the coalition. Out there in the real world, it represents jobs, higher consumer spending and, in time, a sharply reduced deficit.
It also means that in the global and interconnected economy, one where competition is intense and borders have never counted for less, the UK risks falling further behind those economies that have adapted better to changing demographics and the shift of capital from developed to emerging markets. To modify the political cliche ‘it's about comparative advantage, stupid’.
The coalition’s task, then, is to figure out a way to create the conditions for business to prosper. Their task is made all the harder by the fact that, unlike other governments, they have no longstanding ideology to underpin their approach. Although ministers of both Tory and LibDem stripe have happily blamed all our economic woes on the inheritance bequeathed by their Labour predecessors, one would assume that the free market ideas beloved by Tories, and the more interventionist style favoured by LibDems, must make for some interesting discussions behind closed doors.
But putting aside their differing instincts – after all, it’s unrealistic to expect two parties, or even two politicians, to agree on everything – there’s no doubt that to promote growth, the coalition needs to zero-in on some key policy areas.
For starters, ministers would be well advised create the conditions for some key sectors of the economy – such as cleantech for example – to create comparative advantage thereby delivering sustainable jobs, cutting-edge competitiveness and a basis for long-term growth.
Government has some significant levers in its control including tax policy, R&D support and, most importantly, creating a home market that can stimulate innovation and competitiveness. They can make a virtue of the cuts here too. For example, better defence procurement can create a more competitive UK supply chain that can compete more effectively internationally.
Second, the coalition needs to redouble its efforts to support the UK’s entrepreneurial community. The best and brightest of the Treasury and BIS should develop a clear policy to support those companies that are developing new products and services or revamping organisational processes. This might be laissez faire or dirigiste but it can't be both and it needs to be clearly communicated.
And third, ministers should seek to break down regulatory barriers for UK exporters, improve skill levels and provide incentives to invest. As the Ernst & Young Item Club recently explained, British exporters are set to enjoy robust growth over the next few years, driven by demand from emerging economies such as Brazil, Russia, India and China and propelled by improved competitiveness brought about by a weak pound.
Item has calculated that the value of UK goods and services exports will increase by 8.5% a year over the next 10 years, with the total value of UK goods and services into the BRIC countries increasing by 11.7% a year to 2020.
Only time will tell whether our economy is well placed for sustainable growth or is headed towards a double-dip. Let’s hope the recent GDP figures act as a catalyst for a period of consistent government policy. With a clearly defined strategy and narrative, the coalition – even in these straitened economic times – has a crucial enabling role to play.
James Close is a partner in Ernst & Young’s Government Services practice
