Voters are fed up with austerity. The government is worried about the lack of growth.
The government’s original plan was to cut public spending whilst expanding the private sector. The acceleration of growth would produce a large increase in tax revenues, which in turn would limit the need to cut public spending to bring the deficit down.
As readers of this site will know, the fine words of the government ‘s strategy were never reflected in the subsequent figures. Over the last two years the government has had to scale down its estimates of private sector growth. It has also revealed that it has increased, not cut overall public spending. Despite or because of this, the economy has slipped back into a second mild recession.
So what does the goverment need to do to trigger the private sector led growth they promised? Why isn’t the private sector in general, and manufacturing in particular, accelerating as planned?
The private sector has been hit by three main forces. The first is an absence of bank credit for worthwhile projects and businesses. The second is the high rate of inflation the Bank has presided over, squeezing real incomes and so cutting consumption or demand. The third is a series of tax rises which have harmed enterprise and actually cut rather than increased revenues.
So what should be done to change this?
First, the bank regulators should be told they have done quite enough to give the banks stronger balance sheets. The regulatory controls on cash and capital, which were far too lax in 2004-7, are now far too tight. They should be temporarily relaxed to allow more lending.
Second, the Bank of England should announce no more quantitative easing, and should start to move interest rates up to closer to the private sector rates already working in the marketplace to normalise monetary policy. The Bank should make clear it will in future be more hawkish about inflation.
Third, the government should revise tax rates to set optimum rates for raising revenue. Several rates are now above the level to maximise income to the state and need to be cut.
It would also be helpful if the government did more to cut the costs of regulation on business. They could also stimulate much more private sector infrastructure investment through their licensing and planning decisions on energy, transport and housing.