The Independent View: Cutting the deficit, growing the economy

When the Coalition announces its Emergency Budget next week, attention will rightly focus on the Government’s plans to cut the deficit. But the Budget will also be a chance to set out an agenda for a more competitive economy and more productive private sector. With the Office of Budget Responsibility’s revised projections suggesting the UK’s trend rate of growth will be slower than was hoped for this Parliament, it is now more important than ever before to improve the UK’s business environment.

Even while running up huge debts, the last Government felt it necessary to set out an ambitious active industrial strategy. Under Lord Mandelson, the government launched a stream of measures to support new industries, such as low carbon manufacturing. Even before the recession there was increasing spending on government support for businesses, estimated at £2.5 billion in 2008. Yet paying for industry programmes out of debt only makes sense if these programmes generate real economic returns. The problem is that too many didn’t.

Much of this state support did not represent value for money. Too often government assistance and support was undermined by a lack of rationale and confused motives. These interventions were too influenced by political, social and environmental objectives, rather than an overriding commitment to growth and competitiveness. Government support was poorly managed, compounded by complexity, duplication, failure of coordination and inconsistency. Schemes designed to help SMEs suffer from low uptake, with businesses still relying on private sector professional services.

The Department for Business has already been targeted for £836 million of the Government’s £6.2 billion in savings, but it is possible to go much further. Vince Cable himself has said the challenge for his new Department is “to redefine growth policy for an age of constrained public spending”. Reform’s alternative budget, Taking the tough choices, argues that the Regional Development Agencies could be scaled back by 75 per cent to save £1,300 million and reducing industrial assistance could save £135 million. Instead of spending, emphasis must be put on focusing on improving foundational policies, such as infrastructure and skills, and creating a better business environment.

The UK economy has strong foundations, but has been falling behind competitors in recent years. Over the last decade the business environment has been weakened by poor government administration, burdensome regulation, weak economic infrastructure and frequent and ad hoc changes in tax policy. This has deterred investment and stifled enterprise. A stable business environment can no longer be taken for granted.

What is needed is a new “supply side” revolution. But the Coalition has been sending mixed signals to business, pledging to cut red tape, while raising Capital Gains Tax. Rather than focusing on creating a competitive business environment, the Government still appears keen to try and micromanage the economy. However strong economic foundations must be the priority. Curbing the industrial ambitions of the state would both save money and encourage economic growth.

* Thomas Cawston is a Researcher at the independent thinktank Reform.

The Reform Budget 2010: Taking the tough choices is published today

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14 Comments

  • Geoffrey,
    Get NEF to submit some articles? I am sure that the editors tend to publish much of what they receive for the The Independent View. If the NEF are not getting enough love on the site, it is probably their own fault. Would be great to see some more stuff from them on here, though, so do encourage them along.

  • I agree with the comments. The article is pretending to attack the idea of an ‘active industrial policy’ by attacking things like Regional Development Agencies but really its the fact that they targeted multiple outcomes like increasing skills for certain groups, regenerated certain areas for social as much as economic reasons or tackled the low carbon agenda that really winds them up. Never mind that so much of these ‘active industrial policies’ like the car scrappage scheme have a measurable impact and the money and development plowed into offshore wind has left us in a great position to push it forward in government.

    Obviously some things have to be pulled back because of tighter budgets and I have to admit that I’ve only read the article and not the report so there could be a more balanced view there but this isn’t a great trailer.

  • Simon Radford 17th Jun '10 - 9:08am

    Geoffrey- let’s hope that they read this, then.

  • And Danny Alexander today announces the cancellation of an £80 million subsidy to manufacturing in Sheffield, plus withdrawl of a £13 nillion project to develop a new industrial plant and a £12 million subsidy rowards redevelopment of the Sheffield Retail Quarter – now I don’t go in for “pork barrell politics” but I would imagine that local voters could feel pretty peaved at the DPM’s inability to defend industrial growth investment in his own back yard! With £125 million being taken out of the local economy, there’s likley to be an impact on local employment etc and a big electoral backlash (perhaps back to ‘Red Sheffield’ of the ’80s)…. are the coalition setting Nick up as a martry to the budget deficit hawks’ cause?

  • I am surprised at how little comment there appears to be on LD Voice about the cuts to projects announced by Danny Alexander today. I’m not sure whether Danny actually believes what he was saying or where he was just trying to sound tougher and more credible than he has appeared to date. The Forgemasters decision was astonishing. It felt political not economic. It also felt like something wholly Conservative, something from the past. From a bit of local knowledge I know that the project has been years in gestation, not the simple pre election gimmick Danny seems to want to believe it to be. It looks like the sort of growth related initiative a sensible Govt should take. It looks like something we should welcome. A bit like the earlier Osborne/Laws package this looks rushed and only partly thought through.

  • Andrea Gill 18th Jun '10 - 1:09am

    Oh goody, good old Labourite OSTRICH POLICY in action on the comments above.

    Forgemaster grant was canned, because it is not a cut but a government funded NUCLEAR project expansion. What Lib Dem genuinely wants tax payers’ money to fund the nuclear industry???

    The other Sheffield projects are up for review during the full spending review, so claims they were canned are outright good old cheap Labour lies. As usual, hooray.

    If Labour can ever, ever come up with suggestions as to where their own 40%+ cuts would actually fall, we can talk. Until then, frankly, they have no right to complain and protest on this matter.

  • @Andrea
    Why do you dismiss those of us concerned about cutting industrial projects as ‘Labourite’. Yes, there may be a nuclear supply chain element in the Forgemasters project but it is not solely about that. It is possible for Lib Dems to be opposed to some cuts without being dismissed as ‘Labourite’. Some of us in Northern constituencies have fought Labour for years. You may be underestimating the collective memory of the Thatcher era in some parts of the country and the worry that many have that we are seeing a repeat.

    Like many I am concerned about the rushed nature of some of the plans. Some decisions appear to be more about political point scoring than economics and Forgemasters, for example, seems a serious project potentially worth more than hurried consideration. I have been disappointed with the tone set by Nick, Danny and earlier by David Laws. It may be gaining them admirers from Govt colleagues but it is damaging us locally. We have lost members and activists and will lose more. There is a difference between thought through planned cuts, mixed with legitimate efficiencies and some tax rises than the unpleasant grandstanding we are seeing at present. We are looking like opportunists, over eager to sing a Tory tune.

  • Questioning where the cuts fall does not make one Labourite(!) any more supporting deficit reduction policies make one a Thacherite; my observations on the Sheffield concerned whether there might be local political consequences – I don’t really know enough to make any judgement on whether these particular cuts are appopriate, the decisions taken by the Treasury may well have a sound basis but I do hope than assessments are being made on economic impact.

    I think a general concern of many observers, regardless of political affiliation is that there is one law that that cannot be repealed by the coalition – it is the law of unintended consequences. So the Coalition’s ‘cutting with care’ mantra needs to be taken seriously. There is a consensus that substantial public expenditure reductions are needed, but if too much publc sector money is taken out of the economy there could be negative consequences also for growth and employment.

    And lets not forget that for every public sector redundancy, there are consequences for the individual involved as someone’s parent, partner or breadwinner.

  • I don’t understand why a government that has rejected taxpayer subsidy for the nuclear industry should have to lend £80 million to a big corporation that has offices worldwide, so it can expand its nuclear reactor parts production.

    Had they kept this up in favour of the hospital projects that did get the go-ahead, how many whingers would have pointed fingers and said “Aha! Nick Clegg is trying to curry favours in Sheffield!”?

  • Matthew Huntbach 18th Jun '10 - 12:54pm

    Thomas, if you are going to write things like this:

    But the Coalition has been sending mixed signals to business, pledging to cut red tape, while raising Capital Gains Tax.

    could you give us some HONEST figures on what proportion of Capital Gains Tax is really a tax on people doing useful entrepreneurial things as opposed to people merely passively sitting on assets and selling them? It seems to me that there is a huge amount of very dishonest material coming from wealthy people on this issue who are really just defending their own income from doing nothing more than being wealthy in the first place, and so are greatly exaggerating the amount of CGT that is a tax on what might legitimately be held as reward for effort. The aim of the Liberal Democrats was that the rise in CGT would balance a reduction in income tax at lower levels. The Conservatives and right-wing press were full of talk about “job tax” before the election and how bad that was for stopping enterprise, yet here we are with the LibDems pushing this shift in taxation away from jobs tax and we find their tune is changed.

    To me, most of what I have seen in defence of low CGT is very much like the bad old days when Trade Unionists tried to defend little tricks that were really just fiddles to give them more income. I find the principle that all income, however gained, should be taxed at the same level to be a good one, and that’s what harmonising CGT with income tax is.

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