By this stage in a normal recovery there would be rapid growth. The hesitant and much spun recovery so far is symptomatic of serious problems remaining with monetary and banking policy.
Whilst the media and political parties talk about the odd few billions, I have been trying to draw the debate onto the big numbers that matter – the £800 billion reductions in the RBS and Lloyds balance sheets last year, and the £170 billion public deficit. Yesterday the Telegraph picked up the bank contraction and gave me space to restate the case I have often made over the last year.
The main reason we have such a poor recovery is the impact of our banking regulations on lending to the private sector. This is allied to the huge imbalance between public and private sectors, where so much of the available money is pre-empted by tax and loans for the public sector, leaving the private sector short of cash and confidence. The Banking Regulator has made two big errors. The first is now well known – the failure to rein in bank exuberance in 2005-7, allowing an inflationary bubble. The second, tighening the capital and cash requirements too much near the bottom of the cycle, still goes largely unacknowledged, but is the origin of our present discontents. This is the time to allow banks to lend more without demanding more cash and capital. Those demands for more prudence should come as the cycle lifts. The first requisite for a decent recovery is sensible banking regulations that allow bank balance sheet expansion now, instead of forcing the mega contractions we are witnessing at RBS, and the lesser ones elsewhere.
The second requirement for a better recovery is recognised in the Conservative approach. We need more enterprise friendly policies to allow expansion of the private sector and the creation of many more private sector jobs. That will require lower Corporation Tax, lower small business tax, fewer expensive regulations, more tax incentive to create jobs and take risks. This needs to be balanced by measures to cut out wasteful and less desirable spending in the public sector, as we have often analysed on this site – with many examples of the cuts we need. We need to get the deficit down to ensure poor public finances do not force up interest rates as they did for Greece, and to prevent the public sector pre-empting all the available loans.
The only way out of this crisis is for us all to work harder, to earn our living at home and abroad, to make and sell more here. Government needs to help that. Present policy stifles it.
Promoted by Christine Hill on behalf of John Redwood, both of 30 Rose Street Wokingham Berks RG40 1XU