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At face value there are three schools of thoughts. One school says the government needs to cut taxes, and let market forces charge the economy. I looked at that idea yesterday. Another school of thought says the government can do nothing because it has no money. The third school says borrow, or use QE to create money and stimulate the economy that way. Today I am taking a look at this third school.


There’s economic stimulus and then there is economic stimulus. Just throwing money at the UK economy is not a fix. But the UK government has an ability to borrow money in a way that does not apply to most people and businesses – except the very largest companies. If the government can spend the money it can borrow in ways that will inject life into the economy, create growth, make total debt to GDP fall, then shouldn’t it do so? There is another, quite subtle, reason why it may make sense for the government to borrow money and invest it certain types of businesses.

I don’t buy the argument that the government can’t do this; that the fiscal cupboard is bare. If it had a plan to boost the economy, and sold it to the markets, then the markets would provide the funds – and at a very low rate of interest.

But there are certain underlying problems in the UK which any stimulus has to overcome. The key problem is poor productivity. The UK is simply not productive enough. Solve that issue, and exports would rise eventually and employers would be willing to pay workers higher salaries. So how can this be done, and why can’t the markets do it?

The first problem that needs fixing is education. A new report published by the Social Market Foundation claims that the UK suffers from a mismatch between the future employment requirements and the supply of home-grown skills in the science, technology, engineering and maths sector. It says that we are heading for a human capital crunch unless we can rapidly increase the numbers of young people taking science-related subjects at school. I am sure it is right, but it is a familiar cry. When is it not the case that the UK doesn’t have enough science graduates? It’s a problem, but I see no easy fix for the simple reason that every government I can remember has claimed it will create more science graduates. The university system has become ridiculous. You need a degree for everything these days. Graduates are even applying and failing to get jobs at Costa Coffee. There is nothing wrong with working in a coffee shop, but I remain unconvinced that you need to go to university in order to be able to do the job. So of course we probably need fewer university places, and focus more resources on science, but I think that is pretty obvious.

Construction is one way to get the jobs market moving, and for households we need more housing. But I don’t think the answer to this lies in improved access to funding. The UK has to get rid of the belief that rising house prices is a good thing – it isn’t. We don’t celebrate when TVs go up in price, neither should we when houses do. House prices are easily high enough to justify the construction costs of building new homes, but the problem here is the price and supply of land. The government can help by reviewing planning laws, and also by taxing land that is not being employed in a way that helps the economy. I am not against the idea of a mansion tax, but we need something far more imaginative, such as a land tax. Ironically, if such a tax is focused on land lying idle, it can push down on the price of land, and building new homes will become more profitable. There is a zombie problem here – banks and house builders do not want to see the land that sits on their balance sheets, or being used as security, fall in value. But that is what we need to see happen.

It is common to call for the government to fund investment into infrastructure. As far I can see it is a no brainer. Better transport links, schools and hospitals can only benefit the economy, and help improve productivity, but again, this is not new.

But for me the key thing that the government can do, as I have said here many times, is to promote a more entrepreneurial culture; promote a closer relationship between venture capital firms and entrepreneurs, and indeed graduates.  And finally it should fund entrepreneurial businesses.

The government needs to act because the markets are not doing so. The UK and indeed Europe need nudging into adopting a US style entrepreneurial culture. The markets have failed to do this up to now. They didn’t do it during the boom years. They never will.  Markets don’t create a culture, history does, and sometimes it needs a nudge.

But there is a more subtle point. If the UK became more entrepreneurial, the economy would become more dynamic. I am convinced that the productivity problem would be fixed. In fact, I have enormous faith in the UK. With a nudge it can become the most vibrant economy in the world. There is a snag, and this is why the markets can never provide the funding, but looking at the economy as a whole this snag should not matter. Small businesses fail. In fact, they fail rather a lot. In the US this is understood. Check out a list of former US bankrupts and it reads like a who’s who of business success stories. You need failure. This is the inevitable consequence of experimentation. In the US this is understood; not so in the UK. In creating an entrepreneurial culture, the UK government needs to support entrepreneurs in a way that the markets over here, afraid of failure, won’t do.

As I have said many times before, QE should be used to buy bonds in venture capital firms and business angel networks. We need to see a student loan type of scheme, but for budding entrepreneurs.

Any government that implemented these ideas would go down in history as the government that saved the UK economy.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 3 comments

  1. Lets Face Reality.
    Welfare and the NHS will bring the county to its knees!
    More people taking out or using than is being put in.

  2. Garry Hawkins

    Michael,

    For land taxes, perhaps we should investigate some of the US States that have zero per cent (local) sales tax, but raise most of their funding via land taxes.

    Montana is one such example.

    On education, there was an interesting programme on the BBC World Service early this morning – which touched on a number of themes you’ve discussed on this blog:-

    http://www.bbc.co.uk/programmes/p015m7f9

    What I found to be particularly profound was that the pass rate at the US Stamford University at 92%, was about the same as the drop-out rate of solely online based courses.

    Garry.

  3. Michael Wongsam

    The first thing that needs to happen is that we have to loose this hang up about public spending. Every recent reassessment of the public spending multiplier has produced a higher figure, which means it benefits the wider economy by more than the last assessment. Conversely, cuts in public spending have a negative effect on the wider economy.

    What the economy needs more than anything else is investment, and private sector investment will only come as the economy turns upwards. As the current situation is a decline in GDP of 0.3% in the three months to the end of December, only public sector investment can kick start the process.

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