It can’t possibly get much tougher for Chancellor George Osborne. He inherited a shipwreck of an economy, weighed down by debt domestically, a collapsing financial system and increasingly strong international headwinds. For two years he has pursued consistently policies designed to restore order to the public finances and kick start growth in the economy. Plan A relies on fiscal policy, the so-called ‘austerity’ measures, to reduce the annual deficit and national debt (which now tops £1 trillion, equivalent to two thirds of GDP), while looking to the Bank of England to support economic activity through monetary policy (historically low interest rates, QE, credit easing, etc.).
The policies are of course inter-dependent. If growth comes up short, tax revenues will be less, spending higher and borrowing more than the Chancellor planned. Mr Osborne needs growth to achieve his fiscal objectives but now, after two quarters of negative growth (a technical recession), forecasts for this year are already being scaled back. And much of this is outside the government’s control since the export escape route is now blocked off by the on-going turbulence in Europe. With domestic growth sagging, this is proving to be the slowest recovery from recession since 1945.
Even admirers of the Chancellor’s stance, such as the IMF, are calling for some revisions to Plan A, a loosening of the tough fiscal stance which has enabled the UK (unlike France and the US) to retain its AAA credit status. This rating means the government can currently borrow at the lowest rates in our history, and at rates comparable with Germany (despite the fact that our annual deficit is, Ireland apart, the largest in Europe). This is worth preserving.
The problem with amending Plan A is that while reducing VAT or adjusting income tax might increase spending, they will worsen the deficit and much of the spending will probably be on imports. Lower tax rates, moreover, might even increase save rather than spending. So perhaps investment rather than consumption should be the way forward, with construction at the heart of a recovery programme. The industry is labour intensive, the raw materials have a low import content and spending can be directed to where the need is greatest. And the end of it, the country has something worthwhile, such as roads, schools, hospitals, etc. rather than some more imported cars or hi-fi equipment.
It might not be necessary to raise taxes or divert spending from elsewhere to fund it. Perhaps the Chancellor could tap into the many private savers looking for a safe and profitable home for their money. National Savings issues, generally over-subscribed, could be the model. Breaking away from the practice in this country of not hypothecating taxes, the government could issue Education Bonds, Hospital Bonds, Road Bonds, etc., with the funds allocated specifically for capital spending, not salaries or pensions. Call it Plan A+ rather than Plan B and it might just fly politically.