This site has drawn attention to fundamental problems with the UK economy as a result of the Credit Crunch and the huge increases in state borrowing in recent years.
The first is the broken banks. The authorities are relying on huge money printing operations. This money can only subsidise the public sector. The failure to sort out the state owned banks, and the decision to shift to much tougher bank capital requirements at the wrong point in the cycle mean the private sector is starved of cash for recovery.
The second is the squeeze was placed for the first two years of the Coalition government on the private sector rather than the public sector. The government decided to bring the deficit down by large tax increases. It carried on with most of the big tax rises of the outgoing government on incomes and employment, and imposed new ones of its own on capital gains, energy and consumption. Energy prices also shot up as the full effects of the previous government’s devaluation hit consumers. This resulted in a fall in living standards, cutting private sector demand when extra demand was needed to boost growth.
So what should the government do now? To fuel its much needed private sector led recovery it needs to change both these approaches. I have set out in detail how it can revamp the banks in its ownership, creating several strongly financed competitive domestic banks that could start to finance recovery. They could provide the money for new roads, broadband, water supply schemes, homes and all the other items the economy needs.
The Budget also needs to tackle the squeeze on incomes. That requires income tax cuts at all levels of income. It requires putting capital gains tax to a lower level which will stimulate more business activity and increase the revenue it raises. It means having a policy of affordable energy. Some of the tax changes wikll be self financing as they boost the growth rate. Some will need to be offset by spending reductions. Let’s start by cutting overseas aid to countries like India, and by demanding a better financial deal with the EU.
Meanwhile, we still need our productivity revolution in the public sector. Where are the new approaches to public service delivery? We do not need cuts to teachers or nurses. We do need new employee led service provision, more contracting out, more concentration on providing better value. And we still need to stop doing some things the government cannot resist doing.