Towards a growth strategy

Yesterday the Prime Minister talked about the right thing at the CBI – how does the UK sustain its current recovery and speed its growth. Readers of this website will know that the government’s whole economic policy is based on achieving and sustaining above trend growth for four years, starting next year. It is the growth that brings in the massive extra tax revenue, which in turn brings down the deficit. No growth, no extra taxes. No extra taxes, much extra borrowing.

The main point in the Prime Minister’s address which offered the prospect of better performamce was his wish to see a £200 billion infrastructure investment programme over the four years, largely financed by private capital. We do need more and better broadband, more rail and road capacity, and more energy generation. Putting this in boosts  the economy of itself, and provides better conditions for other businesses to expand. If you want a manufacturing revival you need good transport for raw materials, components and finished goods, and plenty of reasonably priced energy.

Some others  have mentioned the Green Investment Bank as crucial to accelerating growth. This is costed at just £1 billion.If they spent the £1 billion over a four year period, it needs to be compared in scale to the £6 trillion of economic output we can look forward to over the four years. The Green Investment Bank would account for just 0.02% of output. If they gear the bank, lending ten times as much as the £1 billion of starting capita. it still only amounts to 0.17%. Of course if it had a way of backing winners it could make a welcome contribution, but we need to remember the significant figures.

The truth is the economy needs to mobilise large sums for investment and for exports to achieve the sustainable growth the government seeks.To do this we need the large banks with trillion pound balance sheets, not just those with billion pound balance sheets, to have money to lend to worthwhile projects. It might be possible to exceed the PM’s sensible wish for an extra £200 billion of infrastruture investment. To raise such sums we need to allow the banks to lend on that scale.

The good news is the money is available from past quantitative easing and from recent profits for the banks to lend the extra needed each year for a good programme of infrastructure investment. We do not need any more QE, or any more public spending to bnring it about. We do need a change of regulation for the banks to allow them to place more sensbile risk on their balance sheets so they can lend the money needed for the new projects.

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28 Comments

  1. Tim Yates
    Posted October 26, 2010 at 9:02 am | Permalink

    It will be interesting to see if there are any unemployed that are available to take up any new jobs given the housing benefit cuts that will force them out of the very areas where jobs will be created.

  2. Nick
    Posted October 26, 2010 at 9:26 am | Permalink

    No. You need private and investment and private spending to justify the investment.

    So what are you doing taxing those who will invest?

    For example, the pensions cap coming down?

    For example, increasing the taxes on the private sector?

    All because you won’t cut the bloated state, and want to carry on increasing state spending.

    Take one example of ‘investment’. Cross rail. Who is going to pay the 20 pound a day ticket cost? Very few. End result, its going to suck the cash out of other projects, in particular maintainance.

  3. Nick
    Posted October 26, 2010 at 9:29 am | Permalink

    Green Investment Bank

    All that will happen is this. Tim Yeo or his ilk propose some green project. It’s finances don’t stack up, so they say we need some subsidy. ie. We have to force the taxpayer to pay for people to use the system, because given the choice they wouldn’t.

    ie. It’s sole use will be extracting tax money funded by the tax payer.

    That’s sick

  4. lifelogic
    Posted October 26, 2010 at 9:32 am | Permalink

    Forget the green bank, which will, I suspect, prove to be very good at picking losers. We just need some bank regulations that encourage banks to lend to solid UK businesses – so that the investments and developments put on hold can be resumed.

    That and the usual business needs (still no sign of) – a bonfire of regulations, easy cheap hire and fire, get out of the EU (just free trade), improvements to the litigation system, and sensible levels of taxes, and a huge reduction in the size state sector, much of which serves no purpose or often even a negative one.

    And a real sense of direction is still lacking too as Cameron and Clegg clearly have no compass.

  5. Bill
    Posted October 26, 2010 at 9:33 am | Permalink

    The government should have been bold enough to reduce 50% rate and reduce CGT from 28%

    The best businesses and individuals may re locate the exact opposite of what we need – industry to locate onto this island.

  6. Iain Gill
    Posted October 26, 2010 at 9:56 am | Permalink

    Re “Yesterday the Prime Minister talked about the right thing at the CBI ” did he now?

    http://www.dailymail.co.uk/news/article-1323773/Is-David-Cameron-diluting-pledge-cap-immigrants.html

    http://www.telegraph.co.uk/news/uknews/immigration/8086001/David-Cameron-hints-at-relaxing-immigration-cap.html

    seems like the supposed visa cap, which hasnt been put in place on the most abused visa category ICT visas, is dead in the water

    this is the end of the british workforce

    really we need some clarity on what the government are up to

    ive been speaking to some recruitment consultants this week, and even they are indian nationals here on ICT visas! since when was the uk short of recruitment consultant skills? same time as we were short of IT or telco skills – never

    as ever the PM failed to mention the widespread loss of british IP which is going abroad in uncontrolled ways destroying our ability to compete

    so far from all good news

  7. Stuart Fairney
    Posted October 26, 2010 at 10:06 am | Permalink

    Puh—lease… If someone believes they can make money from building windmills or any other green boondoggles then let ’em, but kindly do not extract money from me, by force, on threat of imprisonment, to pay for it.

    It is well established every “green job” costs between 2.2 and 5 actual jobs to fund it.

    And whilst I am in a rant, do you know how much offshore electricity costs? About four/five times the price of predictable, always on, coal fired power stations.

    Can we also be told why the growth targets are so pitifully low? China is achieving close on 10% pa, we are targetting 2% from what I can see of it, why is the aspiration so modest? Why do we continue to slip backwards even on the most optimistic projections?

    Cameron offered nothing but ill-thought wish-thinking which is, relative to successful countries, a counsel of despair.

  8. lifelogic
    Posted October 26, 2010 at 10:24 am | Permalink

    Interestingly Vince Cable in his speech to the CBI was listing “negative real interest rates” as one of the positive features of the UK economy.

    Roll up roll up invest in the UK – get negative real interest on your investment and a 50% tax on it too.

    I bet they can all hardly wait.

  9. David Langley
    Posted October 26, 2010 at 11:29 am | Permalink

    If SME,s cannot get cheap and easy finance to grow their business,s then they will have to obtain the capital some other way.
    I started my business from my own savings and because I was an experienced business Manager grew my business without recourse to borrowing thank goodness.
    In a four year period I had at least five “Business Managers” nominated by my main bankers who came and went without ever visiting or calling.
    My point is banks will not ditch their lending criteria, and I would not borrow without really knowing I could repay in at least a year.
    The government will have to think a lot harder about how they are going to fund SME,s when it is likely that a lot of the seed corn will fall on stony ground. Governments will not risk cash unless it is going to their mates or own pockets and will be so huge as avoid the comprehension of the general public.

  10. norman
    Posted October 26, 2010 at 11:39 am | Permalink

    Why do we need a green bank? (It’s a rhetorical question)

    Another PR stunt, like the dramatic increase in foreign ‘aid’ to try and make the nasty Party more palatable to the Guardianistas / Beeboids (here’s some free advice, it never will be palatable to them).

    Go to any banks website. Any one. Search for ‘climate change’ ‘carbon offset’ ‘green investment’ etc. Any hits? Banks are already falling over themselves to invest in green projects. Let them pick the winners. Although in this case winner = projects that attract the highest government subsidy, nothing at all to do with economic viability.

  11. THE ESSEX GIRLS
    Posted October 26, 2010 at 12:24 pm | Permalink

    Admittedly we are the girls who sing ‘Simplification – that’s the name of the game’ whenever we hear Bobby Darin’s ‘Multiplication’ come on the radio but…
    in trying to understand yesterday’s No 1 news story – the £140pw pension – our direction of thought went as follows:

    1. Why announce or leak this now when no decision is made and it’s a minimum of 5 years away anyway?
    2. Is this a return to the New Labour days of manufacturing a stream of ‘eye-catching initiatives’?
    3. Have they thought of the public’s confusion in suggesting a universal benefit when they’ve just announced the withdrawal of one on child benefits?
    4. Have the details been thought through anyway?

    We concluded that the vast army of Downing Street spinning Jennys and Johns simply have to be given something to do to fill their days. Worryingly it also enhanced our impression of further signs that an inexperienced front bench team is rather losing its way

  12. lola
    Posted October 26, 2010 at 12:35 pm | Permalink

    The problem now is more intractable than it was in 1979, but the cause is the same – a long period of incompetent leftish government.

    What the Dave and Georgie has to realise, and realise soon, is that this time they need to not only massively reduce the state but also, and at the same time massively cut taxes. They’ve started on the first bit and now they have to bite the bullet and start on the next bit.

    If the state loses 400,000 employees each year through natural wastage, as it does, it should not be beyond the government to cut the overdraft.

    In re the banks, a huge number of businesses, mine included, do not trust banks as far as we can spit a rat. It looks to me like the banks are no longer the best intermediaries between savers and borrowers. And in any event the sort of finance required by entrepreneurs is beyond the capability of the current crop of bankers.

  13. A.Sedgwick
    Posted October 26, 2010 at 12:35 pm | Permalink

    I am with the comments of lifelogic. On the assumption that the growth of jobs and SMEs are directly linked I see little in the six months of this government that will encourage more people to set up or invest in business. Bureaucracy and this of course largely means the EU can kill off ventures before they start. I have heard and read countless times how small business owners bemoan the days per month they have to spend on daft regulation. VAT is a classical example of how to complicate a simple sales tax. Employers’ N.I. tax was the non sequitur or the Jenkins ear of the last election. As previously pointed out how can an increase in this tax damage the growth in jobs whilst the existence of the tax in the first place doesn’t. Tax profits not employees.

  14. Robert K
    Posted October 26, 2010 at 1:13 pm | Permalink

    Interesting how the government’s route to a growth strategy focuses on… what the government can do. Why can’t the government see the need for it to do less: to tax less, spend less and regulate less. As a start, remove the 50% tax band and remove CGT.
    Oh, an less EU would be good too.

  15. PayDirt
    Posted October 26, 2010 at 1:14 pm | Permalink

    John_
    You mention the need for banks with trillions of pounds. Have our banks really sorted out their balance sheets? I mean I seem to remember in the dark days of the 2008 crash that lots of financial derivatives the banks were holding were of unknown value. Where have these gone to? Are the banks pretending these “assets” have some value? Perhaps the banks are still not lending because they are still not really solvent… I think we should be told the truth about the value risks. What of all that insurance the Govt sold? If the banks have losses insured by Govt, then how is the Govt covering the potential liabilities…..?

    Reply: RBS balance sheet peaked at £2.2 trillion and is on course to be £1.2 trillion end 2010.

  16. S Matthews
    Posted October 26, 2010 at 2:46 pm | Permalink

    Hmmm. 1 billion wasted in the Green bank, but no 80 million loan to Sheffield Forgemasters. I know which I would have gambled on.

  17. JimF
    Posted October 26, 2010 at 2:47 pm | Permalink

    Did anyone else hear this?

    Dear Mr Johnson

    I just listened to your interview on the World at One programme. This was truly an act of desperation at having to defend the actions of the Labour Party in government.

    How can you on the one hand say that Labour’s heroic and rapid rescue of the economy is still shining through in good GDP figures whilst on the other hand you say the housing market is weakening due to a poor economic outlook and the Conservatives’ reckless gamble?

    The fact that the economy is strong is a GOOD thing and the fact that the housing market is weakening is a GOOD thing. The fact that both can happen at once is a VERY GOOD THING. It means that your grandchildren will be able to afford to buy or rent property, whose prices were previously propped up by Labour’s reckless gamble with QE.

  18. JimF
    Posted October 26, 2010 at 2:48 pm | Permalink

    Your old format is back and long may it stay. 🙂

  19. THE ESSEX GIRLS
    Posted October 26, 2010 at 2:51 pm | Permalink

    Hey John – is this some good news that your old-style format is back?
    We’ve always liked the fact that our blog is left on our screens as we post it pending approval.
    Seems we’re not the only ones who had recent problems with the firm you moved to. We noticed a low response to some of your recent stuff so maybe some contributors gave up?

    Thanks anyway as we always considered your blog among the best technically (as well as content-wise of course!)

    Reply: Thanks – I asked for the switch back as I was also unable to access all I needed.

  20. forthurst
    Posted October 26, 2010 at 3:57 pm | Permalink

    Those believing in the crucial role of the Green Investment bank demonstrate what many will have observed from their schooldays, that those who are rubbish at Physics are also rubbish at Maths.

    London has an excellent public transport system with access to highly paid work and some of the best entertainment venues anywhere, yet there are many people who are subsisting at unnecessarily high public expense in the capital, not availing themselves of the immediate facilities, and on the other hand, people driven out of the capital by high prices, poor public education and crime and many who live in London itself who make less of the available facilities because of crime. The concept that each borough should have equivalent responsibility for public housing is nonsensical even if it made sense when the Poor laws were first introduced. Further, the concept of mandatory ‘affordable’ housing in each developement is equally nonsensical. The problem, very simply is that people pay for location and there is no earthly reason why people should be obliged to pay through their taxes for locations for others that they themselves cannot afford. Consequently, a highly cash generative investment would be the relocation of large numbers of people who should not be living in the capital because they are not benefiting either from it or specifically to it and their relocation to purpose built public housing and infrastructure elsewhere, and the redevelopement of locations in London away from public toward private mixed use developements. This would increase economic activity, reduce commuting, and reduce crime, mostly at private expense because for London, value, mainly, is in location and land.

  21. APL
    Posted October 26, 2010 at 4:25 pm | Permalink

    JR: “It is the growth that brings in the massive extra tax revenue, which in turn brings down the deficit. No growth, no extra taxes. No extra taxes, much extra borrowing”

    Well, Whadaya know?!!

    No mention of reducing the governments role in the economy.
    No mention of cuts!

    Stuart Fairney: “then let ‘em, but kindly do not extract money from me, by force, on threat of imprisonment, to pay for it.”

    Stuart, they have been a lot more devious than that, you are already paying a tarif which it levied on your electricity and gas bill to subsidise the stupid, reckless windmillery!

    PS. to JR, really your comment system has more changes than a peal of bells, would you ask your provided to settle on one system (preferably the better one) and stick with it?
    Reply: it all had to be changed when the site was attacked. Then I was unable to reply to comments so it had to be changed again!

  22. ferdinand
    Posted October 26, 2010 at 4:54 pm | Permalink

    Might I suggest that earnings growth for individuals is proportional to the willingness to re-locate?

  23. Mark
    Posted October 26, 2010 at 7:51 pm | Permalink

    I also prefer the old format, now returned. The only missing item is the ability to reply to comments for the rest of us, so now replies will appear divorced from the comment they refer to.

    Many of the comments have already highlighted the deficiencies in the announced growth plans: they fail to tackle the need for deregulation and some lower tax rates, while promoting uneconomic energy and transport investments that will leave the country in a poor competitive position. Not all of this is the result of EU diktats. Speaking of which, I suspect Carswell is right that we will be sold down the river on the EU budget and the New Lisbon Treaty.

  24. alan jutson
    Posted October 26, 2010 at 9:12 pm | Permalink

    Old style blog easier to use with comments still on screen when posted, now all we need is the reply system and automatic “e” mail response so we are back to having a debate ability.

    What goes around, comes around.

    Reply: I will suggest that as well to the provider. I can now post and edit more easily again which is a relief for me.

  25. alan jutson
    Posted October 26, 2010 at 9:23 pm | Permalink

    Essex Girls

    Ref: New Pensions

    Agree with your comments, hence my post yesterday on the same subject.

    John. Your response was perhaps that someone was kite flying. If they were, it flew very high.

    I certainly agree that the Maths needs to be worked.

    When that is done I think the Coalition may have a very, very different proposal.

    BUT WHY RAISE EXPECTATIONS.

    No one is going to get £140 per week just for being resident in the UK. Because we would be absolutely flooded with immigrants. (EU and Non EU)

    Those who have worked and contributed all their life with Graduated, Serps and the second Pension, look like they will lose out.

    Doing the right thing, wrong again !.

    Where do these Politicians get their ideas from.

    Reply: I can’t see how the maths work. They certainly have not budgetted for such changes in the next few years and were I believe talking about the end of this Parliament. I suggest we wait and see what they really have in mind. There has been no Statement or Green or White Paper announcing anything.

  26. Johnny Zero
    Posted October 27, 2010 at 12:19 am | Permalink

    John,

    I am encouraged by the growth figures of 0.8% announced today for the last quarter, but as yet so no movement to encourage new business entrepreneurs or SME’s

    After moving my business to the North East in 2000 I sold out in 2008, but saw little growth in my Sector during that decade only vaste swathes of Public spending and more articulate, smooth Public Servants brandishing blackberries and wearing expensive suits. I gave up even agreeing to meet with these people after a few years of growth. They had no understanding or comprehension of what made an Entreprenuer tick and be successful.

    Now living in the Scottish Borders I would like to know what initiatives the Coalition are planning to encourage the New Private Sector and SMEs in Areas such as Scotland or the N East where the Pubic Sector has accounted for over 50% of GDP for years. The North South Divide beckons loud if you do not move quickly, and simply let Public Sectors atrophy in these areas of the UK. Private Investment is needed now in Scotland, the NE and NW of England and also most of Wales..

    Reply: Indeed – I have been making the point about entrepreneurs on strike. I am initiating a main debate on growth and the UK economy on 11 November in the House to tease out more of the government’s plans.

  27. Fox in sox
    Posted October 27, 2010 at 6:59 am | Permalink

    Dear John,

    Several of your correspondents have questioned the economics of wind energy both onshore and offshore. There may be some advantage in not being reliant on foreign oil, gas, coal and uranium in the future, as energy independence is surely a good thing.

    My concern is the carbon economics of windpower. Windmill production requires large quanities of concrete for foundations and construction. Concrete production accounts for 5% of world CO2 production, similar to all motor vehicles. While the carbon running costs of a windmill are fairly low, the construction costs are major carbon dioxide producers. By my own rough calculations there is a CO2 debt until a windmill has been generating for 60 years, possibly longer depending on maintenence costs.

    Has anyone in the government done these sums? Quite apart from the Sterling cost, these projects may add rather than subtract to our difficulties meeting CO2 targets. Coal may be better for the environment!

    Reply: You are right that they need to carbon count the full cost, including the cost of the back up needed for when the wind does not blow.

  28. THE ESSEX GIRLS
    Posted October 27, 2010 at 11:27 am | Permalink

    Good to see more of your own responses and debate within your flock again! Yes, the reply mechanism and the email alert would be good further steps back to the future.

    Our blog on the confusion of £140 pw pensions yesterday is echoed here and elsewhere and it seems that those amongst us already drawing a state pension would be condemned to stay in Division 2. This in itself would cause dissent.

    We said here yesterday that “Worryingly it also enhanced our impression of further signs that an inexperienced front bench team is rather losing its way”
    On reflection that’s a little harsh and we amend – at this stage – ‘losing it’s way’ to ‘making heavy weather’.
    Clearly we must all continue to help these chaps who’ve never spent a day running a business as many of your contributors obviously have!

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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