What to do when the laddie is not for turning…

ON Wednesday’s BBC “Newsnicht” I had the pleasure of debating with Professor Brian Ashcroft, ermeritus professor at Strathclyde University, on a Plan B for the UK economy. We both agree on the need for such corrective action to stop the UK sinking into a double-dip recession.

So do a growing band of others, including Nick Clegg (though he uses code words), International Monetary Fund boss Christine Lagarde (though she coats her advice in Gallic charm), and even 20 mainly right-of-centre economists in a letter to the Financial Times (though they camouflaged their fiscal U-turn by urging a cut in the 50p top rate of income tax). But Chancellor Osborne remains a gramophone record, urging “austerity, austerity, austerity” as Britain heads towards the economic iceberg of Greece default like the Titanic at full speed.

The real debate is not about the necessity of a course correction but which course to take. Cue a look at the SNP government’s attempts to pursue a growth strategy different from Mr Osborne’s. Brian Ashcroft is courteous and knows his economic onions. But he disagreed with me on two counts.

First, he thinks this week’s staggeringly good employment figures in Scotland are not evidence that the Scottish economy is outperforming the UK, so there is little practical to be learned from the SNP government’s strategy as regards a Plan Mac-B for the UK. Second, that the main problem facing the UK (and Scotland) is a shortage of demand, which can only be rectified by an instant fiscal boost to consumption, probably by cutting VAT.

Start with the Scottish experience. In the three months to July, Scotland created 23,000 (net) new jobs compared to a (net) loss of 69,000 across the UK. Hidden in the data is the fact that the biggest job losses were in London (-22,000) and the English South East (-43,000), suggesting recession already threatens Britain’s economic heartland. Scotland’s jobs are being created in the private sector – two for every one lost in the public sector. But in England, only one private job is being created for every two lost in the public sector.

Prof Ashcroft dismisses this strong labour market performance in Scotland on the grounds that output (what we make in goods and services) is growing slower north of the Border than it is in the UK as a whole. He dismisses the increase in jobs as merely a rebound from the disastrous fall in Scottish employment in 2009 – a fall not seen in England. He’s kinder about what the SNP government is doing to improve Scottish productivity, but implies that will only impact in the long run. Hence the need for short-term tax cuts that raise consumer spending.

But he is wrong about the Scottish labour market. There’s no such thing as an “automatic” rebound in hiring. Part of the jobs growth is coming from inward investment by firms anxious to take advantage of a pool of skilled labour and a pro-business (as opposed to pro-austerity) administration. Part comes from the correct decision by the SNP government to front-load expenditure on capital investment – which Alistair Darling slashed by 40 per cent when chancellor. And part comes from Scots firms – which made themselves leaner at the start of the downturn – having the confidence to grow again.

Unlike Brian Ashcroft (and, indeed, Alex Salmond) I am not a traditional Keynesian – though neither was Keynes. I believe the economy responds as much to expectations (aka confidence) as it does to fiscal stimulus. And such confidence, or lack of it, is transmitted both through political leadership, and the financial markets.

Which brings us to Plan Mac-B. His other point is that there is a general lack of demand in the economy that is slowing growth. That’s true, but the excesses of the mid-Noughties means there is going to be a long period of de-leveraging in which both consumers and banks reduce their debts. Plus the UK has a unique affliction – high domestic inflation caused, in part, by our proclivity to import. Which means that, even if you cut VAT now, the likelihood is folk are going to save, or spend the extra cash on paying their exorbitant gas bills.

I won’t actually hold up a placard saying “no VAT cut”. But I think Plan B requires more sophistication. Especially as you have to keep in mind the behaviour of financial markets. Currently, they are taking a benign view of UK public borrowing and charging low interest rates. But markets have a herd mentality and that could change, especially in the wake of a Greek default. As in any good cowboy movie, when the cattle stampede, the solution is to head them off with some well-placed shots.

First, the UK needs more quantitative easing, otherwise known as the Bank of England printing money. This will pour liquidity into the financial markets and keep them happy. Do it now before the euro crisis makes it inevitable. True, inflation is high but it’s cost inflation rather than the result of excess demand, so the extra money won’t add to prices. Monetary growth will put a damper on interest rates, giving the government room for manoeuvre. It might eventually increase consumption.

Second, increase capital investment in infrastructure and housing, on the Scottish model. Couple this with targeted VAT cuts to boost housing repairs and the purchase of big-ticket household goods. One way to raise capital spending without adding to government borrowing is for the Bank of England to buy the corporate bonds of a new state-sponsored infrastructure bank. This also gets round the fact that the private banks aren’t lending. (Alternatively, just order RBS to lend.)

Third, give Scotland and the English regions more levers to help small firms – the real job creators. Do this by devolving corporation tax. Ashcroft pooh-poohs this, saying it would take too long. But it would promote business confidence – and confidence is the name of the game. As the latest Scottish jobs’ figures prove, Brian.