To summarise the current UK position, ‘demand management’ is out (no money left and anyway it didn’t work), so growth must come from supply-side measures (excluding subsidies or protectionism), and from ‘natural’ private sector growth (born of financial stability and debt reduction).
With the peculiar separation in the UK which has evolved between the ‘real economy’ and the civil service, media & political elites, this has left the political system scratching its head over how to achieve ‘fiscally sustainable quality growth’. The result has been a series of ad-hoc programmes – some designed to substitute for an ailing banking sector (growth funds, loan guarantees), some tax breaks, and facilitation of a few large infrastructure projects – but without a deeper look at the role of government in the real market economy in an international context. So here’s what to do…
- The government needs to recognise the size of the task, the obstacles to change, and the extent of the long-term policy neglect. This leads to a conclusion that we don’t have the institutional structures necessary for the thousands of ‘growth-orientated’ reforms required across the UK administrative structures. For Conservatives, think of the effort needed to get the big privatisations done in the 1980s. Since the fiscal & macroeconomic changes needed are well underway, now is the time to switch the emphasis to growth.
- The bulk of reforms needed include demonopolisations, removals of ineffective restrictions, more responsiveness to business needs in how the state delivers services and solves problems, and major improvements in the way that international trade & technology are promoted.. These systemic reforms cost little but are resisted by those benefiting from the status quo – often businesspeople that make political contributions. The reforms are hindered by lack of familiarity with the subject matter among civil servants, and bewilderment at how other countries run their ‘real economies’ more effectively. As a start, fiscally sustainable real-sector growth needs a Cabinet Committee of its own, where it is not crowded out by macroeconomics and fiscal policy.
- Unfortunately, most such reforms take time. Decades. These include global trade & technology promotion reforms, how, regionally, education provision is better orientated to needs and shortages, and a wide range of equity finance, governance and competition policy reforms. Some however, have more immediate effects, such as re-casting how state R&D spending is managed, addressing excessive monopoly power and cartelisation in commercial banking, and further ‘planning’ reforms. Unlike macroeconomic & fiscal reforms, real market economy reforms are not ‘one decision’ changes. This means that policy requires pro-growth UK institutions internationally and up and down the country, which recognise the long term campaign nature of the changes needed.
Luckily the debate on this is now less clouded by the old market-versus-intervention ideological battles of the past. Also luckily, the Lib Dems are currently in a stronger position than the Tories in advancing these reforms. But not for long; some Tories are catching on…
* Paul Reynolds is an independent foreign policy & international economics adviser, who has had senior political roles in Afghanistan, Iraq, and Pakistan, among other countries across the globe.