Saturday, 9 March 2013

The Invincible - Vince Cable

Vince Cable our Secretary of State for Business, Innovation and Skills has returned to his grass roots; in a former life he was chief economist at the oil giant Shell and fanatical Ballroom dancer.

In a recent article in the New Statesman he writes seriously and very coherently about the economy and why we are where we are and what we should do next.  Actually, this is a pleasant surprise as he normally restricts himself to popularist sloganeering and thinly veiled criticisms of his coalition partners.  It's quite a turn up for the books to read an article from a member of the government who actually understands the basics of economics.

Full article at -

Predominantly his article responds to and refutes the complaint that “austerity . . . has kept [the economy] from recovering” and he writes eloquently and I have summarised  the gist of his article below.

·         Kicking off with Keynes’s who name is often used to dignify any proposal that involves the government spending more money and any opposition to cuts.  going on to say that there are other important ‘’structural problems, such as damaged banks, skills shortages and a long-standing neglect of vital exporting industries, which our (his) national industrial strategy is now trying to address’’.

·         He also, helpfully points out that the UK was very poorly placed at the point Lehmann  Brothers collapsed having  ‘’There was good reason to worry that the UK, as the country arguably most damaged by the banking crisis and with the largest fiscal deficit in the G20 with a large chunk of this being a “structural” deficit, estimated (in 2010) at roughly 6 per cent of GDP ($145 bn)’’.   Structural because of the unsustainable nature of revenues associated with the Finance sector, now lost for ever!

·         He also touches on the monetary policy has been used to complement to deficit reduction. ‘’Interest rates were cut aggressively; short-term policy rates have been near zero for four years now: negative in real terms.  He recognises that QE or quantitative easing – gilt purchases by the central bank – has been used extensively’’ and that QE may have been useful in the accident and emergency ward but is less useful for long-term rehab. Long-term savers are right to be concerned’’

·         He  also picks up on Mark Carney’s ideas of a  more ‘’aggressive monetary policy by changing the mandate of the central bank to incorporate growth in some form as well as inflation’’ and he acknowledges that the ‘’UK is probably facing years of fiscal consolidation

·         Returning to the central question -  Did austerity kill growth?  And he confirms that ‘’The OBR (what do they know)  has looked at the contributory factors explaining poor growth performance in the past two years. They suggests that the main factor in the weakening the economy has been low private consumption, caused by a squeeze in (private sector) real wages, caused in turn by inflation in global commodity prices as well as higher import prices following devaluation (in 2011 sterling commodity prices rose 6 per cent for food and 15 per cent for oil). The slowdown in the eurozone has played a role latterly, hitting confidence.

So far so good, a much better summary of the position than George Osborne has been able to articulate.  But now the wheels come off!

As the trade minister he sees himself as the owner of the supply side strategy – spending to create jobs and growth and he wonders aloud on whether to ‘’finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for house building".  He argues that ‘’Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth’’ and he believes that the ‘’balance of risks’’ have changed and the more supply side may be needed.  

Essentially what he is saying is that we should use borrowed money (that tax payers will have to pay back) and use an army of Sociology graduates to decide on how to spend it – a rail line here, a water main there and so on.

People like me think this is heresy and that the government’s job in the area of the economy is to regulate and incentivise the market to come up with new innovative solutions to our problems.  And here are some supply side actions we could take now:

1.       Zero rate building work for VAT of brownfield sites and halve the rate of VAT on all other building work.  This would generate immediate jobs and help solve our national crisis in home building

2.       Grant licences for the fracking of gas / oil shale over a much wider area and further improve tax incentives for North Sea oil exploration and production.

3.       Speed up the licencing of the next generation of nuclear power stations – tax incentives for speedy implementation

4.       Privatise the motor way road network so we can move to a more efficient funding of our road network.  Currently overseas hauliers pay nothing for the use of our roads and we need to change this now.

All of these actions would create jobs without having to involve too many government officials.

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