Is the “long-term economic plan” working?
The Chancellor of the Exchequer was extremely prescient in his speech in early January warning of the economic risks faced by the UK:
“Last year was the worst for global growth since the crash and this year opens with a dangerous cocktail of new threats.”
In the General Election campaign, the Chancellor continually referred to the “long-term economic plan” To take the UK economy from post-crisis recovery mode to one of growth and prosperity. The U.K. Economy has recovered from its post-crisis lows but GDP has performed much better than GDP per head as productivity growth has lagged our peers
The independent forecasts of the Office of Budget Responsibility(OBR) at the time of the Autumn Statement suggest the UK economy will continue to be relatively stable economically but that there is little prospect of any significant acceleration in growth. as his speech reconfirmed, the Chancellor has consistently claimed that the difficult global environment is a major contributor to the UK’s current disappointing performance.
It is true that there are significant challenges in the global economy, the IMF and OECD have both recently reduced their economic forecasts for the world and the OECD member countries respectively. However it is primarily the emerging markets which are finding the going difficult but the UK is less exposed to these markets. At the same time, the UK economy is benefiting from lower energy and import prices which are boosting consumer incomes and hence spending. It seems reasonable to suggest that e upcoming Budget offers the opportunity to review the long-term economic plan and consider possible Alternative courses of action.
Option A: Carry on and do more of the same.
The chancellor in is January speech made his view on the implications of the disappointing economic news very clear:
“For Britain, the only antidote to that is confronting complacency and sticking to the course we’ve charted.”
And at the recent G20 meeting, he went further suggesting more action may be required:
” “storm clouds” over the global economy were holding Britain back and “our own economy is not as big as we had hoped” “.
Option B: A plan for growth
As many commentators including the EY Item Club have said, it is hard to see how the appropriate UK policy response to a slowing in external demand and increased risk is to reduce domestic spending. Seven years on from the financial crisis, with little sign of success in the “long-term economic plan” it seems reasonable to suggest that now is the time to consider an alternative course of action for the UK economy.
The desire to reform public finances and to move to a surplus has been at the heart of recent Budgets and the Autumn Statement. Underlying this drive is a belief that the market will deliver better economic outcomes than public sector intervention. The evidence in terms of economic performance suggests that the case has yet to be proven. The clues to an alternative course of action may lie in one of the government’s own policy initiatives.
The Government has set great store by its plans to rebalance the economy geographically by granting more power to cities and regions across the UK. These plans envisage public and private sector working together to develop local solutions in a way that seems absent at a national level. This process includes the ability to raise finance and to invest this to support the delivery of the local plans. These region and city plans highlight the areas which are seen as important in creating the platform for economic growth. In the 38 bids for funding submitted on September 4th last year for the latest round of funding, skills, transport and housing were three of the largest categories of policy requests. All of these are areas which will typically require public investment and funding alongside private sector involvement and an integrated plan designed to align , for example, skills with investment so as to ensure the benefits can be realised.
Time for Government to take the lead, set direction and pick some winners.
The message is clear: if we are to move the economy to a stronger footing then change is required. There is a need to articulate a vision of what the UK economy is aiming to become. This cannot be left to markets which are struggling to understand the new economic environment.
More direction and integration is required. For example, current policy is seeking to boost spending on transport infrastructure and housing. However there are signs that UK has a skills shortage in the construction sector. It is unlikely therefore that the volume of construction required to meet these plans can be delivered. This is just one example of a lack of integration.
A new plan is required modeled on best corporate planning practices, which is based around:
- a stronger role for government both in setting an economic and industrial strategy by working alongside the private sector; and
- in developing a more active fiscal policy based on robust analysis of the resource allocation choices available, objectively assessing their potential contribution to delivering the plan.
The plan should set a clear direction make explicit choices on areas to prioritise and facilitate the measurement of success, rather than the looser collection of initiatives that are currently in place.