Bill Jamieson: Small is beautiful in desperate times
A STRANGE spectacle presents itself this weekend. Two figures in business suits are bent double, huffing and puffing as they scour the ground with a magnifying glass.
They are engaged in an intense search for that most precious but ever-shrinking item of fabulous jewellery: economic growth.
Biggest bottom in the air is the Confederation of British Industry. It has cut its 2012 growth forecast from an already paltry 0.6 per cent to minus 0.3 per cent. Stooped even closer to the ground is the British Chamber of Commerce. It has cut its growth estimate from a barely perceptible 0.1 per cent to minus 0.4 per cent.
With numbers as small as these, a pair of bottle-bottom spectacles and a microscope would surely have saved time. When economic forecasting gets down to tiny fractions and numbers the other side of a decimal point, we have truly entered the world of the surreal. The outlook for one of the world’s biggest economies is now reduced to grown men dancing on the head of statistical pins. Once you allow for a margin of error – 0.5 per cent either side of a forecast would be prudent – the figures become meaningless.
When I read those forecasts I thought both authors would automatically qualify for a joint award of Pinhead of the Month. However, this trophy was dramatically snatched by a late entrant, whose rightful claim is beyond dispute. I will return to Mr Nick Clegg in due course.
It is less, of course, the precise size and measure of the economy that gives the pronouncements of the CBI and BCC resonance, but the statements that accompanied their precision calculus. I should add that the BCC has also cut its 2013 forecast – from 1.9 per cent to 1.2 per cent. Expect an avalanche of similar depressing downgrades as we move into autumn.
Both organisations are demanding more vigorous action from the coalition to boost the economy. John Cridland, CBI director general, is frustrated by the lack of progress on key projects such as road upgrading. We need, he says, a Churchillian approach: “Action this day.”
The BCC is more blunt. It has told the government to “get some political backbone and show some leadership”. It would like to see a dedicated business bank and Bank of England support for small business lending. According to the Bank’s Trends In Lending report, lending to UK businesses is running 2.6 per cent lower than a year ago.
Disappointment with the pace of supply-side reforms, such as simplification of planning, has been evident for some time. But seldom have senior business spokesmen been so critical of an administration they had reason to expect would do more to encourage growth.
Debate is now polarising on what form stimulus should take. Many believe it is best administered through public works and infrastructure improvement projects. The CBI still has a foot in this camp. However, big questions crowd in on how effective infrastructure spending would be. According to the International Monetary Fund, debt-laden Japan sought to lift its economy out of a prolonged trough by presenting no fewer than 15 separate fiscal stimulus packages between 1992 and 2008, worth in total more than 200 per cent of the country’s GDP.
Without a broader recovery in confidence, it is difficult to see how a road or rail improvement programme could deliver more than a temporary reduction in unemployment and limited uplift in household spending. So how could a UK “fiscal package” avoid the fate of Japan?
A more immediate concern is the time between initial submission of an infrastructure project for approval and the subsequent uptake of shovels and trowels. Planning protocols can stretch the approvals process to three years and more. And after the debacle of the Edinburgh trams, many would be reluctant to rush a project through without exploring all of its implications. So expecting a new school or road improvement programme to fix the immediate problem of a stalled economy is simply not credible.
The alternative approach is to seek stimulus through tax cuts that would boost domestic consumer demand. This could take the form of a direct income tax cut or a lift in personal allowances. However, economists cannot agree on whether households would immediately spend this windfall gain or hoard it. My hunch would be that, if the tax cut was targeted to give maximum benefit to lower income households, the money would be more likely to be spent.
A variant of the tax-cutting approach is to announce a temporary reduction in VAT, say by scrapping the VAT on home improvements and extensions to match new build (zero rated). This would encourage households to undertake improvement work, giving an immediate boost to employment and a later boost to spending on household furnishings.
This would be my favoured option. While research last week from the Bank of Scotland showed Scotland to have the most affordable housing in the UK (mortgage payments here have nearly halved as a proportion of income over the past five years and account for the lowest proportion of disposable earnings – 20 per cent in Scotland compared with the UK average of 26 per cent) that in no way means a more active housing market. Mortgage lending is still depressed and lenders expect borrowers to hold an equity stake of between 20 and 30 per cent in the property. Not many young couples can afford this without substantial assistance from the Bank of Mum and Dad.
But none of this, it seems, has registered with the Deputy Prime Minister Nick Clegg. Last week he advocated a rise in tax for “the wealthy” – this to be in addition to a Mansion Tax levy on the value of expensive homes.
The practicalities present immediate problems. What level of income would be deemed as “wealthy” and in what way could it be guaranteed as temporary? And in an economy where the proportion of those approaching retirement (and building savings) is climbing fast, how is saving to be encouraged?
Arguably most critical of all would be the effect of a further penalty on the hard working and/or talented. When people start to question why they should work to improve their family’s living standards and start to think about moving abroad, the economy is not boosted. On the contrary: a key engine of motivation is switched off.
But these concerns have evidently not surfaced in the thinking of Mr Clegg. Better, it seems, to have a sound bite that keeps his Leftie followers happy at party conference than an economic policy that might give us a fighting chance of recovery. More statements like this and we will be condemned to ever shrinking numbers for economic growth. You see now how the Taxpayers Alliance wasted no time last week in declaring Mr Clegg “Pinhead of the Month”. In an era of shrinking pinheads, that is truly quite an honour.
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Weather for Edinburgh
Saturday 25 May 2013
Temperature: 6 C to 17 C
Wind Speed: 13 mph
Wind direction: West
Temperature: 9 C to 16 C
Wind Speed: 14 mph
Wind direction: South west