Growth strategy lacks balls

In: Uncategorized

28 Sep 2011

There follows my latest blog post for Fundweb.

There is no chance that Ed Balls, the shadow chancellor, can live up to the hype about promoting economic growth if Labour is ever re-elected. Labour shares with the other main parties a lack of understanding of what achieving growth requires.

Much was made of the “plan for growth” unveiled by Balls in his speech at the Labour party conference on Monday. Relatively few seemed to notice the minimal character of the plans he unveiled – four out of five of which featured minor tinkering to the tax system. The other one involved moving the government’s meagre investment projects forward by an unspecified period.

Even fewer remember that Balls has called for more emphasis on growth before. In April 2010, while Labour was still in government, he launched a “plan for growth” at a Mini plant in Oxford. He returned to the theme in August 2010 in a speech railing against what he called “growth denial” by the new coalition government.

Nor is Balls alone in demanding more growth. The British Chamber of Commerce called for a Plan A+ for growth earlier this week while David Cameron gave a speech on the importance of growth back in May 2010.

To understand why none of these plans can deliver vibrant growth it is necessary to revisit a concept I have discussed before: growth scepticism. The political elite recognises the need for growth in the abstract but is anxious about what it sees as its potentially destabilising consequences.

Essentially it is saying “we are in favour of growth but …”. The “but” can take many forms including “it must not damage the environment”, “it must not create inequality”, “it must not make people unhappy” and “it must not lead to boom and bust”.

All these caveats are an expression of a powerful cultural aversion to prosperity. The elite does not, in Balls’ ugly phrase, “deny” the importance of growth. Instead it is scared of the consequences of trying to achieve it.

That is why successive British governments have preferred to extend credit rather than promote economic restructuring. Even the present government, which is grappling with the aftermath of the credit bubble, is cutting public spending far less than widely assumed.

According to figures from Fraser Nelson of the Spectator, confirmed by Rowena Crawford of the Institute for Fiscal Studies, spending is only likely to be cut by 0.6% in real terms over the coming fiscal year. Over the next four years the cumulative total will only be about 4%.

One reason the level of cuts is overestimated is that the focus of the debate is on departmental spending which only accounts for about half of the total. Although it is true that some departments are suffering sharp cuts, the other half of state spending, annual managed expenditure, is rising sharply. This category includes benefits and interest payments on the national debt.

No party or business organisation is willing to come forward with a genuinely bold plan for restructuring the productive side of the economy. Such an initiative would, first of all, require an assault on the powerful cultural aversion to prosperity that permeates contemporary Britain.