Sir Richard is right, when it comes to growth the government has some policy gimmicks but no actual strategy. Back in October last year a 'Local Growth' White Paper came out, awkwardly titled 'Realising Every Place's Potential'. Although the paper wanders erratically across planning, housing, sustainability, and region-bashing, the main message is summed up by this quote:
A further feature of earlier approaches was the belief that planning could both determine where growth should happen and stimulate that growth. This approach failed as it went against the grain of markets. Regional and other strategies stifled natural and healthy competition between places and inhibited growth as a consequence.
This makes it pretty evident that the new plan is to have no plan. The government doesn't think it needs a growth strategy. It considers the encouragement of economic growth not really any of its business; all it needs to do is destroy as much of the public sector as it can, and the economy will grow like Japanese knotweed. This is a very simplistic form of neoclassical economics, based on the lovely myth of perfect free markets. So as to ensure that the Department of Business Innovation and Skills doesn't look like a waste of space, though, a couple of policies have been announced.
Technology and Innovation centres are to be established, the first of which will allegedly open in less than two months. Next to nothing is known about what these are or what they'll do, other than the fact that they got £200 million funding in the Spending Review.
The other policy trotted out as supporting the economy is the Regional Growth Fund. This consists of £1.4 billion over 3 years, scraped together from various government departments (BIS, CLG, DEFRA, DfT, and the Treasury) for projects to 'rebalance' the economy away from the public sector. Regional Growth Fund is caught in something of a Catch-22. Public sector bodies categorically cannot apply for it. Private sector organisations can, but must ensure that they aren't breaking the rules on state aid, which try to prohibit the government from propping up certain companies at the expense of others. State aid rules are complex, hard to understand, and greatly restrict the monetary support that businesses can get. As you can imagine, this presents problems. Nonetheless, the first round of the fund (a maximum of £300 million) attracted nearly 450 bids totalling well over £2 billion.
£1.4 billion may sound like an awful lot of money, but it is trying to replace multifarious infrastructure and transport funds, on top of the £6 billion spent in the last few years alone by Regional Development Agencies. For all their faults, RDAs provided business support and economic strategy. They are being wound up at the moment and their functions centralised or simply stopped. They will not be replaced, unless you count the completely unfunded Local Enterprise Partnerships, which I am not inclined to.
How successful is the No Plan economic plan likely to be? To date the signs aren't encouraging. The government is ignoring the fact that the public sector used to spend a lot of money in the private sector. And the fact that the private sector relies on public services and infrastructure to operate. And the fact that business confidence is heavily linked to government policy. And the overall state of the world economy in relation to the UK. The economy is shrinking, and the cuts have barely started yet. VAT hadn't risen yet in the last quarter, either.
The UK is vulnerable to economic forces far beyond its control. Rises in petrol prices, which the press have been up in arms about recently. Rises in food prices, as we import so much of what we eat. Rises in cotton prices, as we import almost everything that we wear. Inflation is therefore rising whilst the economy contracts. Stagflation, as it is charmingly known, was a feature of the 1980s. Inflation now is nowhere near what it was then (4.8% compared to over 20%), but give it time. Peak Oil is on its way.
The government wants private sector growth, which would require internal demand and/or exports to pick up. Demand for products and services within the UK is unlikely to grow given high and rising unemployment, limited credit availability, and higher VAT. Faced with reduced government support for the young and elderly, people will tend to save more. The disaster that is housing policy will increase costs in that sector, too. House prices will continue to rise as new supply gets scarcer.
Demand for UK exports has grown as the value of the pound falls, but is limited by the economic troubles of our main export partners (the US, Ireland, and the rest of Europe). Moreover, our major exports are cars, weapons, and financial services. Car demand is influenced by the likelihood of unemployment and wider economic climate (alarming), credit availability (poor), and petrol costs (rising). Weapons demand is influenced by government defense spending (being cut). Financial services got us into this mess in the first place.
Despite all this negativity, I am aware that I live in one of the few places to be prospering economically. The high-tech cluster around Cambridge is one of the few bits of the UK to be a net contributor to the Treasury. But at the moment the government isn't interested in what's holding this area back; overloaded transport infrastructure, unaffordable housing, and loss of public sector co-ordination and expertise. These are market failures which cannot be fixed by the private sector.
The government has lost sight of the basic fact that you have to invest money to make more money. That's practically the only policy lever it has left, in any case. National interest rates have little influence on levels of inflation or the cost of new borrowing nowadays. Regulation and tax incentives for business aren't popular with our neoliberal coalition. Their No Plan is to spend less to make more, probably based on a hunch.
This is not to say that no economic growth equals economic doom, far from it. Growth is pointless unless it improves wellbeing, and in any event cannot carry on indefinitely. At the moment government policy seems to be shrinking the economy and reducing wellbeing, although as ever I console myself with the fact that greenhouse gas emissions fall during downturns. Ultimately the UK and the rest of the world will have to reshape our economies to operate within environmental limits. Perhaps a coalition-assisted double-dip recession might set the scene for a lower carbon, less oil-dependent economy? It's a long shot, but hope for a green revolution springs eternal. Even when government economic policy seems entirely misconceived.
No comments:
Post a Comment