George Osborne made growth one of the three principles in today's Spending Review, but it may never return to 'normal' levels. We need to bring back Regional Development Agencies and move away from London-based policy-making
This was a day George Osborne never expected to have to face. At the start of the Coalition Government’s term of office, the Chancellor was confident that his austerity policies would do the trick of eliminating the budget deficit and getting the UK economy 'back to normal' meaning an annual growth in GDP of between 2.5-3%. The age of austerity, and associated public expenditure cuts, was expected to end before the next election and the government would be returned to power with a balanced set of books and a gleaming new economic situation.
However, it hasn’t worked out like that at all. The failure of the economy to grow hardly at all, let alone return to 'normal' has forced Osborne to announce a new round of public expenditure cuts, to begin just a month before the next election in 2015. As expected, local government takes a big hit, but there are also real-terms reductions in other departments such as defence, justice and police. It's not the most desirable backdrop for seeking re-election although we did get the usual about health, schools and international development being 'protected'.
Economic growth was identified as being one of the three key themes of his Spending Review. Over the last three years the government has flailed around to find ways to promote higher levels of growth. There has been plenty of advice available from opposition parties, think tanks and academics, but nothing seems to be working. In the past, every time the Chancellor made a speech he would say:
• My economic growth forecasts for the current year have had to be downgraded
• In about two years’ time, economic growth will be back to 'normal'
I didn’t hear much about future prospects for economic growth in today's speech. Clearly promoting growth is important but there were no promises along the lines that we would be 'back to normal' in two years. It seemed more a case of taking measures to promote growth and hoping for the best.
Indeed it isn’t even clear to me where the government expects this additional economic growth to come from. Is it from exports or domestic consumers, from services, manufacturing or construction, from small business or large businesses or all of them?
In the Spending Review, the Chancellor made a number of investment expenditure announcements clearly designed to boost economic growth. These include:
• A big investment in transport infrastructure
• An increase in business capital investment
• An increase in capital investment for science research but not running costs
However, there will still be many doubts and questions about such investment and, particularly, whether it is enough, whether it is the right sort of investment, who will decide how it should be used and if it was a good idea to make such investments why didn’t we do it three years ago. Indeed even Shadow Chancellor Ed Balls pointed out that what is proposed doesn’t look like a Plan B on IMF lines.
Maybe the problem is that economics just isn’t like the hard sciences like physics and chemistry. In the physical sciences we can be absolutely certain, for example, that if we apply a stimulus (eg a lighted match) to a situation (a pile of dry gunpowder) then we will get a response (a big explosion). We know what will happen, how big it will be and we understand why it happens because we understand the laws of physics and chemistry.
This just isn’t the case with economics. What happened in the past or what happened in other countries just may not work in the UK in current circumstances. Consider the policy of Quantitative Easing by boosting the money supply. It was expected that this would boost the economy but a large amount of this new money is just sitting in banks that are too risk averse to lend to industry, especially small businesses.
Perhaps we need to consider the following thoughts:
• Maybe we are never going to get 'back to normal' in terms of economic growth. If that is the case and we are stuck with low levels of growth for the foreseeable future then maybe we ought to get used to it and plan accordingly, not wait endlessly for the growth train that isn’t going to arrive
• The late Robin Cook was once quoted as saying that the UK was the most centralised country in the EU and others such as the Economist have suggested it is the second most centralised country in the developed world after New Zealand, which is a very small country. Maybe the approach of making detailed decisions about public spending by people in offices in Whitehall just won’t do the job in the modern world.
Recent work I did with small and medium-sized companies showed me that small businessmen don’t even read the details about the latest government scheme for supporting SMEs – they just know it won’t do what they want.
We need policies and funding to promote economic growth to be developed regionally by people in touch with what is really happening on the ground, not in London. Bring back the Regional Development Agencies.
