Response from Gerald Holtham

Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth

It is valuable to step away from the debate about how much deficit or how fast to try and reduce it, and to consider the content of the deficit. Which public expenditures are likely to promote growth in the long and short term and so should be protected or expanded and which others must therefore bear the brunt of necessary economies? While I agree with Ian Mulheirn that this is a good question, I do not agree with all his answers.
In the first place he seems to be concerned about excess saving in the private sector and is concerned to tailor tax or expenditure decisions in order to encourage consumption. It seems clear, however, that British households do not save enough to cover their own retirement requirements and the economy as a whole does not save enough to finance the investment levels observed in the more vigorous of our European neighbours. Effort should not be directed at raising consumption therefore, let households save as much as they like, but on raising investment.
It can be protested that stimulating or organising investment takes time but the pace of deficit reduction can be adjusted accordingly. Mr Mulheirn is right that there must be a credible plan of deficit reduction but the degree of concern he expresses about an imminent revolt by the bond-market vigilantes is excessive. Japan and the United States both have worse debt/deficit situations than the UK and lower long-term interest rates. Moreover I do not believe in any case that macroeconomic management can be precise enough to make a material difference to private consumption in the short term by altering tax expenditures within an unchanged deficit envelop. I would prefer to accept a slower rate of deficit reduction caused by the sluggish economy and focus on raising investment materially over the next one to three years.
This can be done by a massive increase in state-sponsored investment in the provision of marketed services. There are plenty of large projects that the private sector is ready to undertake given an element of state sponsorship. A private consortium would build the Severn barrage, a multi-billion pound scheme to supply 5 per cent of the UK’s total electricity needs if the UK government would guarantee electricity prices. The scheme would be long in gestation but money would be spent immediately on preparations given the go-ahead. The government could increase its own investment spending rapidly on things like toll roads, that produce a revenue stream. And it could enfranchise the fabled green investment bank to start lending to energy producers at the interest rates available to the British government, with or without price guarantees for ‘green’ suppliers. Instead of reducing the subsidy for installation of solar panels why not increase it and put a levy on the suppliers, effectively increasing the business and sharing the proceeds with suppliers in order to defray costs to the taxpayer?
State enterprise of that kind would be facilitated by a change in accounting practice to bring the UK into line with the rest of the civilized world. The fiscal target should be the general government deficit, for it is that which represents a call and a burden on future tax payers. The borrowing of state corporations, like a green bank, which are financed from user charges are no different in principle from the borrowing of private companies which will be financed by the revenues of the business. Certainly the tax payer has a contingent liability if there are no private shareholders but that can be assessed and put on the government’s balance sheet. For infrastructure projects the risk is generally low, a handful of percentage points at most of the capital value, not the 100 per cent implied by targeting the PSBR as at present. It defies comprehension that the Treasury postpones the operation of the Green Bank for several years because its capitalisation would add to public sector borrowing and our archaic and illogical practices make the PSBR the fiscal target rather than the general government deficit.
Finally, a footnote: rather than means testing benefits or abolishing them, why not subject them all to taxation? For example, free bus travel for the elderly is a boon to them but its annual value in any area can be assessed and it should be taxed as income. Poorer pensioners would be unaffected; the well-to-do would pay much of it back. Anyone whose use of the concession was worth less than the tax bill it incurred would not claim it. The same would apply to winter fuel allowance.
Gerald Holtham is visiting professor at Cardiff Business School and Managing Partner of Cadwyn Capital LLP, a fund management boutique. He is a former Chief Investment Officer of Morley Fund Management (now Aviva Investors) and chief economist at Lehman Brothers, London.
He has worked on public policy issues as a former director of IPPR and as head of the General Economics Division in the Economics Department of the OECD. His previous academic positions include Fellow of Magdalen College, Oxford, and Visiting Fellow of the Brookings Institution, Washington DC.


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