At the start of every new year top quality economic commentators predict which way the economic wind will blow. Some are correct, many are wrong. This Blog will not predict, but it will lay out what has to be done with a must do list, without which, wherever we go, will be in the wrong direction. This is predicated on the verity that to try and rebuild the economy to the old pattern will lead to another crisis. It also reflects on the political stomach needed to carry it through.
The list is circular. It does not matter where you start. Economic recovery, which lasts, requires all.
House Prices. These must not be allowed to rise. They must remain suppressed until earnings catch up to reflect a lower housing cost in the economy. The absolute maximum is: average house price = average wagex3. Greater competitiveness in labour and public service costs will be achieved at a ratio of 2.5.
Borrowing. At a personal level borrowing has to reduce and is already on a downward path. We have to become a country of permanent net savers. Consumer booms financed by borrowing are an absolute no. Equally, government borrowing must be brought back under control. The policies are in place to achieve this, but they will have to be followed through. No U turns.
Taxation. A systemic budget deficit is a consequence of expenditure in excess of revenue. Increasing tax rates may not increase revenue, which is why Labour kept income tax too low for its spending plans. Within the current structure this ratio has to be made fit for purpose. The basic rate should be higher, but so should the personal allowance. More work is needed here, even with the current model. This Blog favours a new single rate model, which would be better, but making the current one mathematically sound would be good. Corporation Tax must be among the most competitive rates in the world to attract and retain inward investment necessary to rebuild our industrial capacity.
Inflation. This has to be tackled now. The wait and see policy of the Bank of England MPC has gone on too long.
Interest Rates. These must now start to edge up. They are too low and are beginning to skew the economy. Low interest rates hit savers and reduce their spending power. Moreover actual interest rates charged are getting out of step with the official rate, to the point where a credibility gap will develop over the Bank’s ability to influence rates at all.
Quantitative Easing. Unless there is some further and major international crisis leaving no alternative to keep cash circulating is the system, the answer is no, no and no again.
Cuts and Public Support. Public support is essential to the survival of the coalition and its policies for reducing the deficit. There have been some howlers. It was crass to cut child benefit for single earning households at half the level of double earners. At a time of record youth unemployment cutting out the EMA was a clear mistake. Although the outcome for tuition fees is a good deal better than it is represented, the implementation and public relations were both shambolic. It is no good talking about fairness with unfair proposals. Much better presentation and attention to detail needed in Whitehall.
Export Drive. The economies of Asia and South America are doing a lot better than Europe and, for the moment, the U.S. We must redouble our efforts to secure all the opportunities these new markets present, especially as the Eurozone has failed to deal with the practicalities of managing its currency, risking a widely predicted crisis in the spring.
Gap Between Rich and Poor. This grows wider. It inflates government expenditure because of social dprivation, unemployment and the excessive cost of housing. There is no effective plan to deal with this. There has to be one. Welfare Reform on its own will have little, if any, effect.
The Banks. This is, politically, the big ticket item, but economically it is critical. We used to have sound banks in this country. This is the case no longer. In the old term, we do not even have banks. We have an arm of the betting industry, which does lending on the side at extortionate rates on plastic cards and mostly on property, if secured. The consequence of this outcome of Big Bang, is an unstable banking system and government and personal borrowing at such levels as to prohibit an orderly economic recovery without inflicting much suffering on those most vulnerable and least well off, none of whom had a hand in the most spectacular economic shambles in all our long history.
This Banking Mess has to be Sorted. Failure will cost the recovery and guarantee another crisis. It will also be the end of the Tory Party in government for years to come. George Osborne will need guts for this. The stakes for all of us are very high. The stakes for George and his Party are very high indeed.