Budget Review March 2013

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The Chancellor is sticking to Plan A, despite fearsome evidence that it is not working.

What do we know?

We know confidence is low. We know that the economy is flatlining. Businesses are 'buying contracts', bidding at low margins just to win work, which will work through to lower tax receipts and further deficit problems. Businesses aren't investing either, preferring to hunker down and reduce debt. There are many jobless and many more in fear for their jobs.  Much disposable income is eaten up by the heavy cost of having a roof over your head.  Sterling is cheap but exports are weak.

The Chancellor's solutions:

Cheap money to encourage borrowing; policies to stimulate housebuying; knocking a penny off corporation tax; cheap beer. And austerity - cuts, cuts and more cuts.  Will these work?

Low rates are protecting those who have overburdened themselves with debt and are hurting savers. They are not bringing a stimulus because the banks, even the ones we think are good banks, are weighed down with bad assets and can't lend, even if they weren't afraid to do so. They fear adding to their bad portfolios (which inevitable rate rises wil expose) and they are still rebuilding weak balance sheets.

Policies to stimulate housebuying are not the same as policies to stimulate housebuilding. They maintain the house price bubble.  They do not resolve the basic supply problem that results in first time buyers needing a deposit equivalent to 80% of their income (FT 21/03/2013). House prices are already high and we have seen that this does not stimulate demand or supply in the current circumstances. Maintaining house prices also maintains the huge cost of housing to ordinary folk, which has a devastating effect on disposable incomes.

Does the Chancellor really think that knocking a penny off corporation tax is going to stimulate business? What we want to see is money flowing through the economy, giving encouragement to invest in the future. A penny is not going to do that, it has little psychological impact. The phrase for that , in boardrooms up and down the land, is 'pissing into the wind'.

Cheap beer may have won him a percentage point or two in the polls, but the time for crosses on ballots is still a long way off.  The Austerity hangover will wipe out the transitory joy.  He needs to do the kind of things that will win votes when it matters.

Cuts, cuts and more cuts are not going to resolve the deficit. Firstly because governments are notoriously poor at reducing spending and this government is no different from previous ones. Secondly because reduced spending leads to reduced revenues, making it harder to close the gap.  As others have pointed out, austerity is as much about imposing an ideological program to reduce and 'marketise' the state as it is about addressing the deficit.

The problem with this is that ideology is a busted flush. There is no such thing as a 'free' market. There are things best managed by the state and things best managed through a market mechanism.  The market mechanism itself cannot be allowed to run wild, because left to it's own devices it can have extraordinarily sub-optimal results for the people the government is meant to be servicing.  Witness the credit crunch.


What should he do?

When people use the worn phrase, "It's the economy, stupid", they aren't referring to the economy as big business, banks or the rich refer to it. They are talking about ordinary people, the people government is supposed to serve. They are talking about jobs, affordable housing, education, food.  As for government, so for the economy : it is not an abstract system, it is us and it is to be managed to serve us. We are the real wealth creators.

If the chancellor wants to improve confidence the things he needs to be doing are:  investing in the infrastructure, creating jobs, providing work for companies; building lots of houses, making prices come down and adding to disposable incomes; investing in services, creating more jobs; exposing and reconstituting the zombie banks, get the bad assets recognised so we can all move on - in the long run it'll be a lot cheaper and more effective than quantitative easing; and get busy helping us show off our great products in Brazil and China, so we can create jobs to feed export demand and improve the trade balance.  Yes, we have the odd trade mission, but they seem really  small beer.  Where is the roast beef we are famous for? Is Little Britain afraid of selling to people who don't speak English or do we just lack the quality and 'labels' that the newly rich countries want from us?

There are times when austerity is the right medicine. The attempt to excape from recession is not that time. Right now the chancellor's job is instilling confidence by making life good and adding to the 'feel good' factor - jobs and housing, housing and jobs. A building programme to renew and add to the country's housing stock is desperately required.

We are at a moment when we need to reinvent ourself as a country in order to cope with a new world order. It is a critical moment calling for a professional chancellor, not an amateur, and especially not someone with an attachment to an ideology just as dangerous and outdated as centralised state planning.

Last modified on Monday, 25 March 2013 13:09

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1 Comment

  • Comment Link FDPO Wednesday, 30 October 2013 11:24 posted by FDPO

    Over six months on and I still stand by this. The South East has a housing price bubble and I'm uncomfortable that its economy may be dependent on financial services and foreign money seeking a safe haven (hence London property price issues). Great to have the foreign money coming in, daft that it all goes into the same thing - London property. People are going to get hurt.

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