Sep 2011 21

The Government isn’t tackling the fundamental obstacles to growth, prosperity and employment12

A day after the Financial Times (FT) published its startling findings showing that the structural, permanent part of the deficit could be £12 billion higher than previously thought, markets have been shaken by the downgrade of Italy’s government debt by credit ratings agency Standard & Poor’s from ‘AA-’ to ‘A’. The agency has highlighted the deteriorating economic outlook and political difficulties which “limit the government’s ability to respond decisively”.

The downgrade has heightened fears that the Eurozone debt crisis which has engulfed Greece and Ireland is spreading. The problem is simple: governments in the West have spent too much money, more than they can raise in taxes, and those lending it to them are steadily losing confidence that their loans will be repaid. The higher cost of borrowing and the knock-on effects on prosperity and public finances due to confidence ebbing away from Eurozone governments shows what could all too easily happen in Britain. The FT’s analysis shows that, far from being savage, the Coalition’s austerity measures are too timid and may soon lead to market turbulence if it becomes clear that the permanent part of the deficit is larger than was previously thought.

The reason for the reassessment of how much of the deficit is cyclical (moves up and down, mirroring the wider economic climate) and how much is structural (the part that is permanent and won’t be wiped out as the economic cycle returns to growth) is that the estimate of how much spare capacity there is in the economy is uncertain. A key economic factor is unemployment. There will always be some workers who quit their jobs out of personal choice while others are fired or made redundant as some companies fail and industries contract. This means, at any one point in time, there will be some unemployment as they look for new jobs, even in a booming economy. But there are various factors which mean that this underlying rate of unemployment, rather than the proportion that is caused by the whole economy being in recession, might be higher or lower, often due to government policies.

The last Government did a lot to increase the underlying rate of unemployment but the Coalition simply isn’t making the politically tough decisions that would improve matters. In fact, despite the rhetoric of a ‘growth agenda’ and a ‘Britain open for business’, it’s actually making things even worse in two important ways.

Firstly, by implementing the agency workers directive such workers will have to be treated as permanent staff. Good news for agency workers who already have contracts, but it’ll mean companies will have to think again before hiring when they want to use an agency worker. Many of those firms will hire anyway, but for some of them it might just tip the balance against making that decision to hire. And that means higher unemployment.

Secondly, the Government’s decision to close the deficit by raising taxes instead of cutting expenditure has means the ‘tax wedge’ between the economic benefit individuals create by working and the economic benefit they receive as a result will continue to grow. As with the previous example, most people will be unaffected by this but there will always be some people whose decisions were not so clear cut in the first place. For those people, higher taxes will mean jobs and projects on the borderline of financial sense will no longer be worth doing. They will wait and hope something better will come along. Again, that means higher unemployment. After all, people are still unemployed if there was a job opportunity that wasn’t worth taking, even if that job would have been worth taking if taxes were lower than they are.

Decisions like these mean there may be less usable spare capacity in the economy that was thought, which means less room for catch-up growth and a lower trend rate of growth overall. Unless the Government tackles the economic fundamentals that are blocking the economy from fully recovering, and that means deregulation, cutting spending and cutting taxes, the economy will remain weak and stunted for a lot longer than the Chancellor would hope.

Related Posts

  • Anonymous

    Structural deficit. Cyclical deficit. Who cares. 

    What matters is deficit. 

    What idiots like the Arch Bishop of Canterbury and his ilk need to realise is that if its morally wrong for children in the third world to inherit the debts of their dictators, its also morally wrong for children in the UK to inherit the debts caused by politicians in the UK. (Or any other first world country).

    No government should be allowed to borrow. That way people know the cost of the services provided. 

    What politicians will find is that people don’t want the services, and moreover they don’t want the services at the cost that the government will provide them. 

    • Blarg1987

      I do agree with your first and second point, however you last point is a slippery slope, granted there could be services that people do not want or need but it is very easy to take services for granted and not realise their wider value to society, such as health and education.

      Such areas we should tread careful, on a side note during the 80′s where there was mass privatisation, overall taxation went up yet service standards did not really improve in some areas some one must ask the question where did all that extra money go? My gut feeling tells me not on the services it was meant to be spent on.

      • Anonymous

        Well there is a reason. Without allowing people to opt out, there is no comparison as to value for money. 

        So if we take education. It is 5-6,000 a year per pupil. Why not allow people to opt out and keep that money, in order to spend on education for their child? If they want, they can top up. Does that affect the spend of people who don’t want to opt out? No, they still get the 5-6,000 a year. 

        On average does that improve the education of the UK? Yes it does. 

        Likewise with rubbish collection. 

        The reason why in the 80s taxation went up is debts. Governments are running up vast debts, almost all pension related, and where do you think the money is coming from?

        It’s going to get worse. So you are right. More taxation, less services, which is inflation. Except the government doesn’t include its services in the inflation bill. Ever wonder why?

        • Blarg1987

          I think allowing people to opt out, although could possibly improve efficency may result in self defeat, lets say there was a road of 50 houses and 10 of them opted out of waste collection and all went to seperate companies, a company may charge more to collect waste for one property then it would say 50 as taking all costs into account, fuel, wages, time etc this in turn would lead to natural monopolies ober time where local suppliers could keep out competition due to geography.

          The example is the privatisation of the water utilites where it is regional monopolies.

          I believe the goverment does not include services in the inflation bill as it would increase the inflation over the BOE base rate, but there again some of the things on there CPI and RPI index can be described as silly.

          • Anonymous

            So you’re against it because it might result in monopolies, but your in favour of the current system because it is a monopoly?

          • Blarg1987

            No
            I am against it as it could result in MORE private monopolies whos primary objective is to make money at tax payers expense.
             
            I believe key sevices such as transprort, education, healthcare and utilities (water, gas and electric) should be maintained and run by the state whos primary objective is to provide a service, this of course will be dependent on funds available etc, and I do accept there are areas where they can improve.
             
            Any new infastrucure which requires specilists, such as building new roads, schools, hospitals etc, should go out to tender to the private sector in competative tendering process providing best value for money for tax payers as well as stimulating the private sector. And if goverments can time this right, over economic cycles then it should reduce any future recession, so as to stimulate private sector growth.

          • Anonymous

            But look at the problem with state provision. What you haven’t considered is the profiteering there.

            Lets take rubbish collection. Currently 20% isn’t going on the service. It’s going on paying local council liabilities. 

            That’s exactly the same effect as any profit. 

            It’s not the best deal for me as a citizen, and I’m not allowed to find a better deal elsewhere.

            Why shouldn’t I be allowed to opt out, keep the cash, and provide a cheaper, or even a more expensive but better quality service. 

            As for the government doing anything, think it through. 

            In order for the government  to do anything it has to take it away from the private sector. That’s isn’t good for any growth.

            Combine that with the government and its fraudulent accounting, and its going tits up.

          • Blarg1987

            One could conter that in the priavate sector 50% of what you pay goes as profit to an offshore bank account which is not spent in the UK ever again and so avoids taxes.

            I accept no system is perfect but as I said in my previous post, if the state timed spending on large projects right, then it would do three things:

            1 – stabalise the economy so as to prevent job loses although not stop them entirely.

            2 – encourage confidence and investment by buisnnesses.

            3 – offer better value for money for tax payers as companies could use such contracts just to break even while looking for more profitable areas to encourage growth.

          • Anonymous

            I’ve started a new reply

  • Anonymous

    Tragic that they think that growth will get us out of this mess, when their policies are actually stifling it. The state should be out of health, education and welfare.

  • Anonymous

    One could conter that in the priavate sector 50% of what you pay goes as profit to an offshore bank account which is not spent in the UK ever again and so avoids taxes.
    ==============

    Really. What’s you evidence that all those in the private sector are secreting 50% of their pay or profits in offshore accounts?

    ================

     stabalise the economy so as to prevent job loses although not stop them entirely.
    ===================

    Notice what happened today? QE or Twisting, its the same thing disguised and made obscure, has made it more unstable. 

    The critical part is to make it clear that 

    a) Taxes will not rise in the future. ie. Borrowing hand over fist to spend (there is no government investment at the moment) means huge tax rises. No wonder people aren’t investing. 

    Job loses? Well give a choice between putting a civil servant on the dole at 5K a year, and employing them at 3 times salary at 100K, the government can save vast amounts by doing this. 

    Getting control over inflation is another. That means rising interest rates. That means savers get money. It means banks can start lending again (they need profit margins on loans)

    Spending doesn’t create demand. Demand creates spending. So lets cut taxes on capital spending. No VAT on machinery. Remove barriers. If I want to buy a CNC machine from anywhere, I shouldn’t be paying any tax. 

    You can’t spend your way to being richer. 

    That is how you encourage confidence and investment by buisnnesses.

    I for one won’t invest a lot of money in a business I have lined up, if it means 50% of the profits disappear into the bottomless pit of government. Likewise when Vince and Clegg get up and abuse  me for doing it. Likewise when the word thank you hasn’t occurred to them or others. 

    So the group we’ve put together, only half a person is British, me, will look elsewhere. We’ve a wide choice of nationalities, and its an IP based business. We can locate anywhere. End result, 50% of nothing bar any wages. 

    =====================

     offer better value for money for tax payers as companies could use such contracts just to break even while looking for more profitable areas to encourage growth.

    ====================

    So allow people to opt out. That creates alternatives. Companies can drive down costs, and people will choose them if they offer better quality, or lower costs. You can then benchmark how expensive the state offering is.  

  • Lawrence

    This is another great article saying what is wrong and someobody should do something about it but sadly short of ideas what that might be.

    The comments and description of the Labour Market is a classic case of thinking inside the box.  What is needed is reform of the labour market and the separation of work from employment by interrmediary agencies.  Everyone is full-time employed by a job agencency but only work if the agency can find work for them.  In this situation thay can supply labour at below cost or assign the “un-deployed” to workshadowing, job share or training. 

    Further details at http://www.clamr.org.uk