The Independent View: Vince needs to consider his legacy

Plan A is looking shakier than ever. After a slow climb out of recession, growth is now stalling and unemployment rising again, the approach taken thus far – cutting the deficit, and waiting for a spontaneous boom in the private sector – feels ever more risky, both politically and for our pockets. Vince Cable, who has always looked uneasy with a “plan for growth” that involves little except sitting back with fingers crossed, must feel increasingly unnerved.

And he’s right to be worried. His credibility is on the line and his legacy at BIS is yet to be secured. Now is the time for him to develop his Plan B, or Plan A+, or whatever language he needs to use to make an alternative approach politically acceptable. Our recent examination of the UK’s growth potential suggests that without a strategic but vigorous set of policy interventions by Vince’s department, we will struggle to survive, let alone flourish, in ‘the Asian Century’.

The report makes clear that the UK is a serial under-performer compared to our competitors. On investment in business, on skills, on innovation and productivity, and on presence in emerging markets – all key components of a successful, adaptive, innovative economy – we are decidedly mediocre and, in some cases, worse than mediocre when compared to similar OECD and G7 economies. None of this is Vince’s fault but all of it is now his responsibility. With this profile, even if the UK does manage to continue our limp out of recession, we will be truly challenged by the confident new players from the East striding into global markets, and by the revolution in business practices being ushered in by web 2.0 technologies.

So how can we remedy these key weaknesses? Not by sitting back and assuming that all will be well if Government stays out of the way. While this may have ideological appeal to some members of the Cabinet, the evidence is – as Lib Dems well know – that some of the fundamentals underpinning growth don’t arise automatically, but need Government to step in and provide them, or at least provoke them out of an otherwise reluctant private sector.

Number one on the list of potential solutions is a state investment bank. Germany, Japan, the Scandinavian economies and, yes, even the USA use the state to provoke the business investment and innovation that the private sector – for a range of reasons, from slower returns to higher risk – tend to avoid. And most do this through a state investment bank.

Intervention of this kind has been a non-starter in the UK for a long time, but that shouldn’t hold Vince back from taking this agenda forwards. Privatising banks was beyond the pale, as was a separation of investment and commercial finance, but he pushed both into the spotlight while others kept their heads firmly in the sand. Indeed this is an issue which the Business Secretary and the Secretary of State for Energy and Climate Change – Chris Huhne – should work together on. An ambitious Green Investment Bank focused on climate change could be the first incarnation in the development of a ‘British Investment Bank,’ which would also have a strong climate change portfolio but focus too on other areas of strategic interest (such as infrastructure, or SMEs in emerging sectors). At present, though, even the Green Investment Bank in its original formulation is threatened by the Treasury’s deficit focus.

Another example of the challenge posed by the deficit agenda comes in the form of Enterprise Zones. While these are encouraging in that they are a concrete response by Government to stymied growth, the 38,000 rise in unemployment that we have seen over the past three months has more than wiped out the 30,000 jobs that Enterprise Zones are meant to deliver. They are built on the same model as the wider plan for growth – less Government (in this case though tax rebates) equals more private sector.

Our research suggests that this simply won’t work. It isn’t the recipe that has been followed by any of our more successful G7 or OECD counterparts, it is too small scale, and too ideologically rigid. I have a strong suspicion Vince knows this, but our report should give him an extra incentive to act.

The Asian Century will seriously challenge Britain. Cutting the deficit is not an adequate response.

Laura Chappell is Associate Director at the Institute for Public Policy Research.

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21 Comments

  • I’m struggling to understand what Laura is suggesting the plan A+ or B should be.

    The ‘Green Investment Bank’ is something that Chris Huhne has spearheaded and is being created already.

    She talks about an more general investment bank on the model of Germany and the US, which both with quarterly growth even worse than the UK, and Japan. Just walk into any consumer electronics shop in the high street and you’ll see traditional Japanese brands such as Sony and Panasonic being eclipsed by the new Asian brands such as Samsung and LG from Korea.

    World growth is slowing, its not just a UK problem, and as for the Asia Century then I don’t think any of the traditional economies in the G7 having yet found an effective response.

  • Spending more money that we havent yet earned does not seem like a logical reaction to the likelihood of earning less money in the future. Arguably adjusting government priorities and spending to match much lower levels of household disposable income is a much more sensible approach to long term challenges.

    Structural reforms to unlock private sector investment may well be merited but like Mark I am struggling to see what specifics are being proposed here. And an economic masterplan to cope with 100 years of Chinese dominance doesnt look to be set on firm foundations if it is a reaction one quarter’s growth stats (or even one year’s).

    This post would have more credibility if it didnt descend into lame cliches about spontaneous booms from the private sector etc.

  • Simon McGrath 25th Aug '11 - 1:11pm

    A couple of points.
    Firstly all previous attempts at government directed investment in the UK have been disasters, losing large amounts of public money. Why would this be different now?
    Secondly are you for or against Enterprse zones? If as you say they are “encouraging” is that not an argument for moe of them?

  • I’m afraid I have to agree with Mark Inskip when he says:
    ‘World growth is slowing, it’s not just a UK problem, and as for the Asia Century then I don’t think any of the traditional economies in the G7 having yet found an effective response.’

    Indeed I would go further. There can be no growth with oil (averaging), $100 per barrel.

    The kind of growth we have enjoyed in the past 70 years was based on cheap oil. Now we are sucking on the straw of the expensive oil, in the ‘bitumen goo’, of the tar sands, and three miles deep in the Gulf of Mexico. The oil is there (it always will be), but it will come at a price. A price not all economies can thrive on.

    That price will be too much for growth. If we manage to stagnate like Japan has done for the best part of two decades, we should consider ourselves very lucky. My hunch is that the financial system will choke on its un-payable debt, long before then
    .
    Sorry, I know I’m giving a bleak picture, but that’s how it is.

    Please, don’t give me the alternative energy thing. Nothing, ….. No energy source has the energy density as oil, or is as embedded in everything we do.

  • Laura is right – Plan A is not working. The government is thrashing around blaming the lack of growth on planners, unions, “red tape”, health and safety laws, the EU – indeed, everyone but themselves.

    Simon ridicules the idea of government-directed investment but, at present, the banks aren’t lending despite constant exhortations from Vince Cable and other ministers. Meanwhile consumers aren’t spending and government investment has dried up due to the austerity programme. I fear we are in the middle of a perfect storm despite George Osborne’s “safe haven” rhetoric.

  • Plan A is not working and the reason is simple, a lack of political will. The Lib Dems went into the election promising (rightly in my opinion) to react to the situation as it unfolded rather than blindly stick to a failing policy because it was felt to be the right one when it was defined. The pace of cuts would be defined by the state of the economy. Good common sense stuff that helped get my vote.

    For the Tories though this is ideological and there is the root of Vince’s problem, in fact the problem of the whole Lib Dem Cabinet contingent. Osbourne in best “Lady’s not for Turning” style will never allow the approach to the deficit to change, he has as good as said so. Labour will cry “U-Turn” if he does and that makes them part of the problem.

    In the real world, the one that so few of our politicians have ever inhabited for very long, people change the direction of a policy all the time. I expect those managers that report to me to identify failing policies and practices and come up with alternatives. To do so isn’t failing it’s managing.

    Is state itervention the answer ? I want neither ideolistically obese state (Labour) or painfully thin (Tory), I want a state with a nice healthy waiste line that performs the functions needed of it. Sometimes that means state intervention, but only where appropriate. Too much means the state disables instead of enabling.

    I think we are in a time that needs pragmatism, I just don’t hold out much hope for it…

  • The Coalitions current policies are not ideologically pleasing for Tories, the cuts are too weak, we’ve always wanted to see spending cuts made quickly that will allow tax cuts to make us attractive for foreign (and home) investment that would get our economy moving again. Instead we’re seeing something more like a spending cap, coupled with tax rises. To our eyes, this is crazy compromise since nothing short of the whole package will do anything but condemn our economy to a slow death.

    It’s no surprise the private sector hasn’t worked miracles because it’s still taxed and regulated to the hilt and deprived of anything approaching a world class workforce. The free-market won’t save us unless we create a free market.

  • Andrew Duffield 25th Aug '11 - 11:50pm

    Enterprise Zones are utter folly and always have been. Reducing business rates simply facilitates a rise in rents and effectively transfers public money straight into landlords’ pockets. Liberals used to understand things like that.

  • Ed Maxfield 26th Aug '11 - 2:20am

    Isnt that rather the point, though, Andrew?

    It’s very unlikely that it will feed through 100% into higher property rentals but arent you trying to create some form of economic rent in the short term that would lead through to a growth in the volume of production in that area in the longer term? You cant (realistically) stop the rent leaving the area but you can, in tandem, lower the barriers to a transfer of production factors into the area which would reduce the rents being taken. By liberalising planning regulations for example.

    (The libertarians will be along in a minute to question your valuing of ‘public money’ more highly than private profit and point out how it got to be public money in the first place but I’ll leave that to them.)

  • Andrew Duffield 26th Aug '11 - 8:36am

    @ Ed

    “It’s very unlikely that it will feed through 100% into higher property rentals…”

    Unfortunately, that’s precisely the consequence. Rents rise to the level of overhead previously paid.

    “You cant (realistically) stop the rent leaving the area…”

    Au contraire. Re-localising business rates on the basis of SVR achieves excatly this – as per existing LD policy.

    “…a transfer of production factors into the area… would reduce the rents being taken.”

    Labour and capital inflows will certainly grow productivity – as will reduced regulation of any kind, including planning constraints – but cutting the capacity of the community/society to recoup economic rent (albeit imperfectly via UBR) will ultimately consign 100% of that surplus wealth to the pockets of the privileged.

    As a paid-up member of the libertarian left, I value all private profit that results from productive endeavour. It’s the unearned profit the state allows private appropriation of – which could instead reduce deadweight taxes on jobs and investment – that I object to. For all their short-term, short-sighted and superficial appeal, Enterprise Zones simply exacerbate the long-term transfer of wealth from asset poor to asset rich.

  • Ed Maxfield 26th Aug '11 - 9:51am

    Very few human endeavours result 100% in the same outcome. I recall one study that said about 60% of the subsidy was consumed by property rent increases.

    As I am not a member of the libertarian left I dont adhere to the view that its the role of the state to make value judgements between different forms of legally acquired profit and to socialise certain types. It also doesnt make much sense to stand Cnut like against the existence of highly mobile capital in a liberalised global economy and see higher taxes as the solution to every ill.

    On the other hand it’s very difficult to identify any form of regional economic policy that works as well in practice as it does on the pages of a manifesto. I’m keen to be convinced!

  • Laura Chappell 26th Aug '11 - 1:19pm

    Thanks to everyone for your comments. A few of the comments raised by some have been adddressed by others but I just thought I’d tackle a few of the remaining:
    – We agree that adjusting to the rise of the asian nations is a very serious challenge, and one that requires a whole set of policies – the state investment bank is just one of the ones that we discuss in our report. Doing that successfully won’t mean defending and reclaiming ‘traditional’ products and sectors (so Japan might not be able to continue making the same electronics as always), but moving into emergeing sectors (green technologies, creative industries, a whole range of high-end services). But doing so will be hard – no doubt about it
    – Enterprise zones – we like the fact that the Government is trying something to strengthen the economy that isn’t reducing spending. However our reading of the evidence says that policies like Enterporize Zones that are based primarily on tax cuts tend to shift economic activity from one place to another while reducing tax take, rather than increasingly entrepreneurialism. We’d prefer to see more tailored support, focused on the needs of the businesses and sectors located in each place, and aimed specifically at helping them to innovate – as innovation is a crucial source of long term growth
    – I really agree with Steve’s comment that what we need is pragmatism, and his comment that ‘change isn’t failing, it’s managing’. We suggest Government do a lot more listening to business and communities, and actually feeds that learning into policy change. We also say that a ‘pro state’ or ‘anti state’ approach is just misguided – it’s what the state does, and the evidence about what works that matters. Sounds simple but british economic history suggests it’s hard to get away from ideology

  • To Laura Chappell
    You say, “Vince needs to consider his legacy”

    I think Vince already realises he’s not the economic ‘Obi-Wan Kenobi’ that he thought (and we thought! ) he was.
    Let’s cut to the chase, and talk specifics.

    Expand please, on the (green technologies, creative industries, a whole range of high-end services).

    What are they specifically?
    How will they improve the UK economy with employment and growth?
    How can we ‘shoe horn’ a quarter of a million disillusioned 16 – 24 year olds, who have done everything asked of them, including improvements of A level and graduate results, into that employment and growth from the previous question?

    I’d love to get some serious intelligent discussion here, but I fear I’m missing the point.

    Does being Liberal Democrat mean academic, abstract discussion, a bit like a civilized dinner party conversation over a glass or two of rijoa?

  • John Faulkner 26th Aug '11 - 2:31pm

    DavidB hits the nail on the head. It’s not business as usual. The world is changing and the debates on Plan A and Plan B rather miss the point. We need to plan for the post carbon world and not just try to find a way to make the consumerist society stagger on for a few short years more. I advise people to read articles and books issued by the Post Carbon Institute(amongst others) and see whether they think we are addressing the right problem.

  • Thank you John Faulkner.

    For a brief moment there, I thought I’d have to ‘up’ my Prozac

    David

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