Responses to Osborne’s Choice Related publications
Osborne’s Choice: Combining fiscal credibility and growth
Policy Exchange has previously argued for the need to start an evidence-based debate around growth in the UK and consider the long-term future of the UK economy, rather than focusing on short-term politics. The SMF’s paper Osborne’s Choice makes a constructive contribution to that debate.
It doesn’t spend money we do not have and puts across a clear narrative for how taxation and expenditure could be re-profiled to boost growth. These are similar to arguments we have made in the past. It also agrees with our previous report outlining that significant supply-side barriers are limiting our growth potential and that UK productivity growth is sluggish at best. These arguments get to the heart of the debate around growth.
Snappy sounding announcements from Government or proposals from the opposition that shift around small amounts of money from one part of the economy, or country, to another make good headlines. However, unless they increase productivity, boost innovation or labour supply or remove barriers to investment, saving or an efficient allocation of resources they are unlikely to lead to significant impacts on growth.
On the other hand, large-scale spending increases or tax cuts might sound impressive, but if they increase borrowing further and scare the markets there are real risks of an increase in UK borrowing costs at a time when we can least afford it.
For this reason, while Policy Exchange would not necessarily agree with all the suggested savings or spending measures, it is difficult to argue against the spirit of the SMF approach. Re-profiling expenditure away from non-growth related factors and towards growth enhancing activity will increase growth in the long-term and, as other commentators have outlined, also presents an opportunity to tackle some of the structural barriers currently facing the UK economy. A win-win situation. However, I am not without concerns. My worry is that many of the chosen spending cuts may prove hard to deliver (both politically and in terms of timescales since they involve the dreaded HMRC tax credits computer) and that while increased capital expenditure is certainly a good cause, this may also prove hard to deliver, particularly in the context of a restrictive planning system and the need to ensure that we avoid white-elephant projects.
In short, we need other reforms to go hand in hand with any increases in capital expenditure.
Planning reform is key: our report Cities for Growth outlined a plan to allow the development of new Garden Cities and create large new attractive suburbs in growing parts of the country. These combined with SMF’s capital spending to develop critical infrastructure would see a huge boost to the growth potential of these areas. Expanding the New Homes Bonus would help the economy and our housing crisis.
Another key area will be public sector pay negotiation, where national bargaining is leading to huge distortions in local labour markets and, ultimately lower growth and worse public services. We need to move to a system of local bargaining. Finally, we need to make sure that small and mid-sized firms are getting access to finance. An upcoming report will outline proposals for how this could be improved. At the very least we would like to see a small portion of SMF’s savings channelled into creating an element of the ISA allowance that is ring-fenced for the small and med-sized firm bond market. This would open up both supply and demand in this currently under-developed market.
It is clear that the UK economy is in a difficult position. However, if we look to the future of growth and have an evidence-based debate around policy to increase long-term growth we can look forward to a more prosperous future. The SMF’s paper is a vital contribution to this debate and combined with reforms to allow expenditure to really hit home, there is a real chance that the approach could boost growth.
Matthew Oakley is Head of Economics & Social Policy at Policy Exchange. Prior to joining Policy Exchange he was an Economic Advisor at the Treasury, where he worked on a number of tax and welfare issues for the previous eight years.