An interesting report by the think tank Reform, published today, presents a compelling argument about where the British economy is today, what the Government should not do, and the longer term reforms that are needed for sustained growth in the future. Now, the report argues, is the ideal time to implement necessary reform to the public sector.
On where we are today, the report highlights the country's massive debt problem:
The report then argues that a fiscal stimulus would be the wrong policy option - if too much debt is a key reason why we got into this mess, is more debt really part of the solution:
A fiscal boost is not only likely to see poor results in increased economic activity; it would be damaging in sending the wrong signals. The impact on consumption would be small and transient and likely to be offset by the loss of confidence. Just because it is favoured by the economic and business establishment does not make it right.
The report also says that now is not the time to make "crisis" cuts in public spending, as it will only lead to calls for higher spending in the future, and cites the 1990s as an example of this - the Conservatives implemented deep cuts to public spending after the early 1990s recession, which led to public support for much higher spending under Labour this decade. Rather, the report says that a longer term reform programme is needed:
• The first days of a recession are the best moment to set the public sector on a path of taxpayer value. In his Pre-Budget Report, the Chancellor should announce that his Budget will set out a new Comprehensive Spending Review. This three-year plan would undertake the programme of reform that the Government did not introduce in the good times.
• Private sector productivity should also be boosted. A recovery requires a sustained transfer of resources and investment into the private sector. Supply side reform, the promotion of industrial competition and deregulation in key areas are crucial to stimulate growth. The latent advantages in the economy need to be fostered to raise Britain’s competitive position.
• Individuals will be vital to an economic revival. To create a mobile economy and reduce wasted talent in the recession, individuals need to be empowered to take control of their own lives, spend more of their own money and invest in their skills and careers.
In my view, the question of whether the British economy would benefit from a temporary fiscal stimulus, globally coordinated or not, is one on which there is much reasonable debate. I personally think that the gravity of the economic crisis, the relative impotence of monetary policy at the moment, and the very real threat of deflation means that a temporary fiscal stimulus of tax cuts will make a difference to the length and depth of the recession. But Reform's report provides a powerful argument against this view.