This article is part of a special series on growth – where will it come from and what can be done to stimulate it?
Tony Dolphin is Senior Economist at the Institute for Public Policy Research (IPPR)
In his second Budget speech, delivered on 23rd March, George Osborne said: “Let it be heard clearly around the world, from Shanghai to Seattle and from Stuttgart to Sao Paolo: Britain is open for Business.” He announced measures – as part of a Plan for Growth – designed to achieve this aim. The main rate of corporation tax was cut from 28 to 26% in April, and it will be cut further to 23% by April 2014; £350 million worth of specific regulations were abolished, with the promise that more would follow; and planning regulations will be reformed to reduce delays and encourage more development. There were also a number of micro measures designed to encourage the establishment and growth of businesses in Britain.
Broadly speaking, these measures were welcomed by British industry. John Cridland, CBI Director-General, said, “This Budget will help businesses grow and create jobs,” while leading venture capitalists described it as “a shot in the arm for enterprise”. However, the evidence from the 1980s, when corporate taxes and regulations were also cut, does not offer conclusive support for these views. And not all parts of industry were happy. The oil and gas and banking sectors were hit with unexpected increases in taxation.
Standing firm
The Chancellor also sees his deficit reduction strategy, which was reiterated in the Budget, as essential for promoting growth in Britain, because he believes it will ensure interest rates remain low. Not everyone agrees, and with Nobel Prize-winning economists lined up on both sides of the debate, this is an argument that will run and run. But what the Chancellor has made clear is that he will not countenance a change of plan. Growth in the UK economy, over the next five years at least, will have to come wholly from the private sector.
It is time, therefore, to spend less energy talking about the demand side of the economy (public spending, consumption, exports) and more time discussing the supply side (productivity and productive potential). How might government promote private sector growth that lifts productivity levels and the potential output of the economy?
The Chancellor’s response is essentially a laissez-faire one. The best thing that government can do is get out the way of companies, stop interfering in markets and let the private sector get on with investing, building new and larger businesses and creating jobs. However, there are signs that he might be prepared to interfere a little. The Chancellor wants more balanced growth, so would presumably be unhappy if the finance sector surged ahead, leaving the rest of the economy lagging behind and manufacturing in decline (as was the case from around 2000 to 2007).
Leaning on previous thinking
This contrasts with the approach of the last Labour government, at least towards its end. In the New Industry, New Jobs paper, published in April 2009, it identified crucial market failures that were holding back growth in Britain. These had led, it argued, to Britain having an inadequate infrastructure, lower spending on innovation than many of our competitors, insufficient finance being available for small- and medium-sized businesses and a workforce with skills that fell short of those in our main competitors. Rectifying these market failures would, it was suggested, improve the supply side of the British economy, thus boosting productivity and potential growth.
There are parts of this agenda that the coalition government seems to agree with. Project Merlin is designed to improve the availability of bank lending to small businesses and the Chancellor announced funding for an extra 40,000 apprenticeships in his Budget, bringing to 250,000 the total number of extra places over the next four years. Such agreement is good for the economy. Above all else, businesses hate uncertainty and changes of direction, something governments of which both main parties have been guilty in the past.
Reducing uncertainty is one aim of the new approach to industrial strategy proposed by economists such as Dani Rodrik. They argue for an evolutionary approach to industrial policy – collaboration between government and private industry to discover the best way forward in areas such as infrastructure, skills and competition policy. Such a ‘trial and error’ approach might not be attractive to government ministers, who like to be seen as taking decisive action to solve the economy’s problems, but it could be the best way of working out how the government can promote growth in Britain.
