With any global crisis comes a shift in rhetoric and economics is no exception. The financial crisis in 2008 led many states to re-evaluate their role within society but more importantly it had facilitated a change in public perception. With a new potential economic crisis looming it is important for us to look at how we want our economy to look and how to make it sustainable for the future.
The direction so far
The coalition government, led by the Prime Minister, David Cameron and the Chancellor, George Osborne, have followed a path which echoes the global feeling. Here the neo-classical approach to economics of balancing the books and ensuring we ‘cut back when we can’t afford’ chimes with the view that it was government profligacy which destabilises the markets and thus the economy.
Therefore, the government has cut back on expenditure for public services, quangos and project funding whilst lowering corporation tax and implementing other supply-side policies to boost the private sector.
Capital-intensive quangos, such as the Regional Development Agencies (RDAs), were scrapped and replaced with a voluntary group of Local Enterprise Partnerships (LEPs) thus showing the markets that this government is ‘fiscally responsible’ whilst encouraging the role of the private sector in local growth.
This, therefore, falls neatly for the government to cite the problems surrounding the eurozone as a cause for concern if we are not seen to be ‘fiscally responsible’. While the crisis in 2008 was a banking problem – banks doubted the ability of other banks to repay loans – today’s crisis within the stock markets stems from the lack of confidence in governments and their ability to service debts.
Has this worked?
The combination of the lack of confidence in the economies of Greece, Portugal, Ireland, Spain (and now possibly Italy) as well as the UK government showing a commitment to austerity has facilitated government bond yields to stay low (implying lower risk) and credit ratings to stay high. This will allow the UK to borrow on the world market at lower rates whilst promoting the UK as a good location for businesses and individuals to invest.
The private sector had started to pick up some of the slack in the jobs market with the Reed job index citing a 19% increase in the demand for jobs from July 2010 to July 2011.
Is this enough?
What is important to understand with the current global financial woe is that the financial markets want both a neo-classical approach to government spending as well as economic growth to service the debts.
It is clear that the markets have fled from some states as they feel the government will be unable to repay its debt as their economy simply is not growing. For example, the political turmoil in agreeing the debt ceiling limit as well as high unemployment and low economic growth in the USA started to cause concern.
In the UK, whilst the unemployment rate is lower than in the US, economic growth is still extremely low with various sources, both domestic and global, downgrading the growth forecast.
If unemployment stays high and economic growth low then it could create this perverse scenario where the austere government will need to borrow more money to fund the benefit expenditure and plug the gap in the loss of tax revenue.
Therefore, there is a fine line to tread. Don’t cut back enough and the markets will punish you. Cut back too much and the economy won’t grow and the markets will punish you.
The future of the UK economy
Politically, an overtly Keynesian policy portfolio will struggle to gain traction. Furthermore, I think it is absolutely necessary for governments of any persuasion to be fiscally responsible and to increase efficiencies before expanding budgets.
This is not to say that some extra investment spending and a little state intervention in the economy can’t be achieved but we need to be creative in how to partner with the private sector.
As a long term goal we need to rebalance the economy both by sector and region. Local economies should not be subsidised by the South East in order to survive.
There needs to be more apprenticeships (hopefully facilitated by the LEP groups), a greater emphasis on vocations (in order to remove this irrational stigma) and an injection of funds or loans as well as expertise into areas.
A creative way to boost funds would the through regional banks which can only invest capital in the area in which they are located. Local people know the local market and the local risk and we would encourage investors to work with regional banks in providing a range of capital needed in the areas outside of London.
We need to create and help rebuild vocation industries which can be learned and re-taught through intergenerational work and give a different outlet to young people when deciding on their careers especially given the latest changes to university funding.
We should also encourage and aid small and medium enterprises (SMEs) that often can’t compete against large multinationals through tax/rates breaks and other incentives. These will be the companies who can drive our export-led recovery through the sectors we are strong on such as research, science, technology etc but they will also be the platform for community longevity. They will create jobs in the short term but will create the community cohesion in the long term.
Furthermore, there should be a review on the commissioning/tendering process for government contracts which has been highlighted by the closing of the Bombardier factory in Derby. Communities are broken and responsibilities are lost when companies, so intrinsic to areas, are shut down – we cannot afford to lose a generation to this as this make no sense, economically.
As a country we also need to save more and borrow less. The most common asset to purchase with a loan is housing as the asset bubble continues to grow. Therefore government investment in building more houses will decrease this price thus driving down loans. It would also have a short term stimulus effect by creating construction jobs and boosting household incomes.
Can we be that change?
Now, more than ever, is an amazing opportunity to be creative in rebalancing the economy and promoting responsibility from top to bottom.
An innovative approach to shaping the economy is needed. There is a huge role for big business as well as SMEs to operate in the economy to create jobs, wealth, opportunities, training, exports etc but they also have a responsibility to the area and population they work with.
The promotion of social enterprises and co-operatives and further representation of workers on boards can entrench these mutual responsibilities. Regional banks will be responsible for their region’s growth and development while workers will have a key stake in their community and business.
If we don’t take this opportunity to make that change then we will continue to move economically back and forth from Keynesian to neo-classical and politically from left to right.
Now is the time to find the economic middle ground.
 Reed Job Index July 2011 http://www.reed.co.uk/cms/start/articles/jobsIndex/archives