One subject that I will return to regularly and in some depth will be the appropriate macro policy for the UK economy. During the global financial crisis I broadly favoured the government's policy of austerity. Now I think the pendulum has swung. The chancellor took the opportunity to fix the public finances when the economy was not doing too bad. The budget deficit fell from some 11% of GDP in 2010 to around 3.8% of GDP now. As a result we have fiscal space to ease I believe in these uncertain and potentially difficult times, so supplementing monetary easing, both the unplanned devaluation of the sterling pound as well as cutting short-term interest rates to zero (probably very soon) and some further quantitative easing. The cost of borrowing has shrunk. Key 10-year bond yields have fallen to 0.69% (with 1-year bonds at a ridiculously low 0.04%), meaning it costs virtually nothing to service the debt. So this is the time to allow the automatic stabilisers operate, to cut taxes and raise government investment.
What precisely should the government do? Well to boost productivity (a persistent UK weakness) and boost long-term growth prospects, we should spend on better infrastructure including roads, rail and airports, making final decisions on expanding Heathrow, on HS2 and CrossRail 2, and looking at many other lower profile projects. Increasing housebuilding is necessary too, even if eventually there is better control of migration into the country. More vocational training schemes are important too. We must look also at how we can help to heal the wounds of a divided society, clearly exposed by the Brexit vote. The cut in corporation tax to 15% from 20% would seem a good move too as we boost the attractiveness of this country, though one concern remains that doing this may annoy the EU, at a time we are negotiating with them.
agree entrirely about Keynesian stimulus. Its a pity that the Germans, who still live in fear of the hyperinflation of the 1920's do not do the same thing and let the Euro off the leash. Austerity is a Victorian economic policy and failed then and in the 1930's. British productivity is our worst and longest standing waekness. Its becuase of that we have had to let the currency decline in value since 1946. A lower pound offsets low productivity. However, another problem will emerge as our currency declines. Our government takes revenue off the North Sea, measured in dollars, the international currency of the oil industry. Government revenues from upstream oil taxation will therefore fall.
ReplyDeleteAgree entirely about the persistent policy tightness of the German-led Euro. Yes currency devaluation has often been a reflection of the UK's persistent low productivity. But there are times when our currency has become misaligned with fundamentals as in 1992 and I believe now. We can increase net exports without raising inflation. But regarding oil revenues, because they are priced in dollars this will actually boost the sterling value of them and thus improve the public finances. Devaluation will also boost the oil industry and it's exports.
ReplyDeleteI agree with some of your comments about infrastructure, but it has to be the right investment. HS2 is a waste of money, a high speed train to knock minutes of a relatively short trip is ridiculous. The price of traveling on the train will be far too high to recoup the investment. Better to upgrade and improve the currrent service. Heathrow should not be expanded as the air and road network in that area is full to capacity now. Better to invest in a brand new airport to the East of London or in the midlands with a new road rail network. Cross rail is necessary.
ReplyDeleteAgree Rick. The dangers are that increased spending is not used efficiently. I also agree on HS2 and Heathrow. But HS3 would be good and expanding faster broadband.
ReplyDeleteAgree Rick. The dangers are that increased spending is not used efficiently. I also agree on HS2 and Heathrow. But HS3 would be good and expanding faster broadband.
ReplyDelete