LibLink: Vince Cable – Private recovery can create growth potion

Today’s Financial Times carries a piece by Secretary of State for Business, Vince Cable, on the coalition’s strategy for economic growth. However, as Vince points out,  a government ‘strategy’ can only do so much. The main weapon in the government’s armoury is – perhaps counter-intuitively to some – to actually do less, particularly, for example, in terms of burdensome regulation, which is often a particular problem for small businesses. The best thing the government can do is create a situation in which it is more likely that businesses will invest and grow; this will be the route to sustainable, lasting economic growth.

Here’s an excerpt from Vince’s piece:

Critics of the UK government calling for new growth strategies miss the point. Growth is not something concocted by the state, like a health potion at the chemist. Our job is important but modest: to create an environment for business to expand, invest and innovate; reviving what John Maynard Keynes called “animal spirits”.

Some commentaries assume that achieving financial stability through fiscal discipline is a simple problem. It is not, but tackling it in an orderly way is far better than being dragged kicking and screaming by the bond markets, like some of our European neighbours. Even the critique by Richard Lambert, departing head of the Confederation of British Industry, starts with a strong statement of business support for our deficit reduction commitment (and criticism of our predecessors).

Beyond this, growth must be driven by private investment, not government or private consumption. It must also be led by traded activities, notably manufacturing. Again this is not easy, though data suggest the picture is improving, in significant part due to rebalancing through devaluation. The last government only paid lip-service to this model. An asset boom delivered seemingly endless consumption-based growth, but did not make Britain a great place for business. The strong exchange rate suited the City of London, but not manufacturers. When they turned to this issue, after the recession wrecked their model, it was too late.

We are determined to do better. Part of our growth strategy is to get out of the way of private sector recovery. Both parties in the coalition are committed to a liberal economic policy. The agenda I set out six years ago in the Orange Book, a Liberal Democrat pamphlet, still applies: deregulation; competition; free trade; and inward investment. We are putting flesh on these bones: reducing the regulatory burden caused by the industrial tribunal system; implementing “one in one out” rules; opening up public procurement; private sector disciplines for Royal Mail; and a more liberal single market.

This is not “laisser-faire”; our approach is pragmatic, not ideological. There are market failures to correct and public goods in which state investment is vital. Skills are one. Britain has a skills deficit including a shortage of engineers. We are investing in apprenticeships and an increase is taking place, with more to come. Higher education reforms will sharpen the incentives to promote marketable skills.

A second area for intervention is science and technology. Governments will not produce the next Google or Microsoft but can help promote the foundation technology. The science budget has been shielded from cuts, while we are now deciding how best to cultivate next-generation technologies through innovation centres that link theory to commercial application.

You can read the piece in full on the FT website here (registration required).

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5 Comments

  • I think Vincent makes some really valid points and I think that private health care is the way forward as the gap in the market comes to fruition.

    It’s already started in London with St Georges and Kingston hosipitals closing wards and reducing services such as midwifery to reduce budgets due to the coalition cuts; surely the private sector can pick up as the public will not want a poor service and may be willing to pay for a good health service.

  • During the last government, the unending credit boom and “light touch” financial regulation had multiple different negative effects on manufacturing:

    1) The structural bias towards consumer credit expansion forced the authorities to raise interest rates higher than they would have been otherwise and made the pound appreciate, hitting manufactured exports.
    2) Short term financial engineering that made for big fees for the banks destabilised businesses, loaded them with debt and made their management think in the short term. All of this is pure poison for manufacturers trying to build brands over long periods of 10-15 years and was a big factor in the downgrading of the UK to a mere assembly hub.
    3) Most available talent in terms of engineering and science was attracted to the high rewards in financial services, leaving industry short of the very best minds it needs to compete in tough global markets.

    Fine words from Vince, but unless he tackles core basic problems like these, the same imbalanced economy will be there in ten years’ time. There is no point in rebuilding our industrial base, only to see foreign companies come in and cherry pick the best of our home grown businesses. Where is the “Cadbury Law” to stop this happening?

  • Depressed Ex 19th Feb '11 - 10:46am

    Dr Cable’s Growth Potion?

    Communications like that normally go straight into “Deleted Items.”

  • gramscis eyes 19th Feb '11 - 10:06pm

    A “growth potion”. What next, spells, positive outcomes through wishing the world was somehow different (magical private sector jobs staffed by Brits – sounded like that the other night).

    Magic wont work in the big stuff like the economy (with all the demon talk of Greece, look at Ireland -What?) so I suggest he starts small. A voodoo doll of Mr Murdoch perhaps? It might not work but it will be no less effective than his other tactic

    Magic for the big stuff requires something big to trade, and you can only sell your soul once.

  • I agree with much of Vince Cable’s article, but you missed out the bit that mentions land reform, to which I responded in the FT’s comments. Here the Libdems are living in a glass house. Your manifesto at the last general election proposed to abolish the council tax, which is the nearest thing we have in the UK to a tax on property value, and replace it with a local income tax. Such a policy would, other things equal, have made the last decade’s housing boom – the major part of the asset boom to which Vince Cable refers – worse, as well as marginally discouraging work of course. I was once a member of the Libdems, but I let my membership lapse when that pyromaniac policy was introduced. In my view, the single structural reform that could contribute the most to improving Britain’s economic efficiency would be to adopt a site value or land tax. Naturally, a land tax would be a difficult sale politically, but if Vince Cable is genuine about wanting to promote long term economic growth, I would urge him to at least consider it.

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