On the eve of the autumn budget statement, the Chancellor and his merry Westminster men have done a textbook leaking job of its content. Completely unrelated to the fact that the British Chambers of Commerce and the OECD revised down the UK’s growth forecasts, the Treasury will now embark on some fiscal loosening.
With the announcement of £40bn of investment for the National Loan Guarantee (a credit and therefore supply-side measure to ensure SMEs receive the credit they need by having their loans underwritten by the state) and £30bn earmarked for infrastructure projects (£5bn of which is Treasury money with the aim to boost demand) it begs the question; is there anything worthwhile watching the statement for tomorrow?
Now I would argue that whilst the National Loan Guarantee is sizeable and targets the rhetoric that SMEs are failing to receive the credit they need, I do question the size of this issue when compared to domestic demand. Given the choice, demand would be the preferred choice of SME owners, followed by confidence and sustainability.
The infrastructure focus is a policy I can really get behind. Classic Keynesianism by stimulating demand through government spending with a modern twist being that the state encourages pension funds to invest. This has certainly worked overseas and news that Chinese investors are interested expands the possible scale of the initiative. The 80s and 90s saw infrastructure fall down the list of priorities and the 2000s saw the government focus on other areas of spending. It most certainly is time to upgrade and expand an infrastructure which severely lags behind major competitors.
But let’s be honest, tomorrow will be a bad day for the government. Sustained low growth, high inflation, larger public borrowing, low confidence, low demand, a Eurozone in turmoil, a sluggish American market, flagship policies not taken up by UK businesses and high unemployment to name a few. This is a tough time for any economy; we need more stimulus.
Along with the supported infrastructure initiative I would also look to cut VAT. It would pay for itself whilst boosting the spending power of the lowest incomes. Furthermore, a cut to fuel duty would have much the same effect and give a real boost to struggling families who may feel securer to start to consume once more.
But more importantly, I feel the real golden policy would be to have a large and sustained house-building initiative. Whilst the government has announced a spending plan, it is around a tenth of what was planned under the last government and subsequently needs to go further.
Firstly, there are too few houses, especially in the areas with high demand.
Secondly, the price of housing is continuing to rise – this inflated bubble of an asset needs an increase in supply to bring it back to more normal and sustainable levels.
Thirdly, the new house building would stimulate demand across the supply chain and give a necessary boost to the economy.
Fourthly, the new houses should be available to rent alongside a shift in rhetoric away from house ownership and towards rental. The idea that in order to boost the income and security of the lower-income earners by leveraging themselves by 100%+ to buy an inflated asset in the hope they sell it in the time of boom should seem like madness. Let’s put greater emphasis on rental by using tax breaks for both landlord and tenant.
So tomorrow will be a tough day for the government. With a flurry of poor statistics, the government of over a year is running out of time to simply blame what preceeded them. There is a way to ensure progressive measures whilst boosting the economy.
There needs to be a change of course.
I certainly wouldn’t mind them borrowing Keynes.