This is the CBI’s recommendation for the British public finances:
The CBI is calling on the Chancellor to ensure his Pre-Budget Report delivers a credible plan for balancing the public finances by 2015-16, two years earlier than planned, in order to boost investor confidence and get the UK on the path to recovery. But it is warning that the government will need to take an extra £120bn out of current spending plans to balance the books.
Don’t you love that bit “in order to boost investor confidence and get the UK on the path to recovery”? Work through the logic:
You run a medium sized business, and currently borrow at about 5-6% long term, a pretty fair rate. Interbank rates are less than 1%, and credit availability is improving. If you are a large company, you involved in the rush to more corporate bond issuance, perhaps benefiting from the policy of quantitative easing.
Does this mean you then invest more? No – why should you? After all, in America (according to the Economist):
“companies are also seeking fewer loans, as they think twice before hiring or investing in equipment. Demand for “commercial and industrial” loans has fallen in every quarter since mid-2006, according to the loan-officer survey. A similar synchronised decline in supply and demand is visible in consumer credit . . . the decline would have been steeper but for the cash-for-clunkers car-sales programme.”
So IT DOESN’T MATTER HOW CHEAP THE FINANCING IS. If you don’t expect there to be demand for your products, you don’t invest, you don’t hire, you don’t build, innovate, experiment, gamble, venture. This is a DEMAND recession. More credit for the credit constrained would be nice. Particulary for the poor who normally lack the ability to smooth consumption, and therefore cut back the msot. But it is not the only problem.
And what have the CBI proposed? Cutting demand. However it is done – largely through public sector salaries, one might guess – £120 bn less spending by government is £120bn less income for someone else.
What about their argument about confidence? After all, no-one feels confident if HMG is about to go bust, surely? But people should look at the example of Japan. Their deficits stayed high for, well, ever, without borrowing rates shooting up too far. OK, they are different in quite a few ways (see previous post), including their high household savings rates. But, still, it is crazy to act as if the biggest confidence problem in the current economic crisis is the government’s leverage levels. If this is so, just go out into the market and buy puts on Gilts, you’ll make a low-risk killing (or buy index-linked gilts to hedge). The Government is one of the few entities we have that can be confident about it’s ability to repay. Servicing costs will be comparable with those Maggie T had to pay. As I write in a soon-to-be-published piece:
Public debts have risen largely to allow private indebtedness to fall without catastrophic consequences for the economy. With a few noble exceptions, the prior rise in private indebtedness passed unnoticed by the same Conservative opposition (for which read the CBI) that is now almost hysterically worried about a similar increase in public debt.
What is the CBI’s positive verdict on how growth will be achieved? In their helpful letter to Alistair Darling, they say:
Beyond the recession, the drivers of economic growth will almost certainly be different to the recent past, with consumer and government spending expected to be more constrained. So business investment, exports and import-substitution will need to make a much greater contribution to economic growth. With activity in the financial and housing sectors unlikely to return to previous levels, there will need to be structural change in the economy to fill the gap.
So the same advice as G Osborne is willing to give, extrapolating with irresponsible enthusiasm the lessons of the early 1980s onto the deflationary situation of today. But as I argued on Friday, this ignores our historic inability to eke more than a percentage point at a time from such sources of growth. Even then, we have only managed it in much sunnier times, with a growing world economy and rates falling from high levels, rather than scraping along the bottom and sustained by a programme of QE that looks unlikely to work as advertised.
Plus every nation and his dog is trying to grow through exports, even those like Germany that could do with less.
I advertise this blog as impartial between the parties, and I mean it. I don’t hold back from criticising Lib Dem policies when I feel the need to. But the Conservatives and their close associates in the business community have got this one badly wrong. This economic slump needs more than just unblocked finance to fix it: it needs demand, from a world suffering a terrible synchronised recession. Putting out a paper calling for the government to pull 2% of annual demand out of the economy and then labelling it “confidence boosting” is nuts.
If people like this get into power, we’re all in a lot of trouble.
[What seems even crazier is that the CBI think this should be done while:
- Making equity raising tax deductible for SMEs
- demanding ‘all genuine business expenses, including the costs of raising equity, should be tax deductible’
- delaying the reduction in pensions tax relief on those over £150k
- questioning the rise in Air passenger Duty
This is all meant to be achievable because ‘If public sector productivity had been as high as the private sector in the recent past, then the same volume of output could have been produced with 14% lower input volumes.’. If you find a piece of analysis more simple-minded than that, let me know. ]