The Office for National Statistics (ONS) revealed yesterday that the UK economy shrank by 0.2% in the first quarter of 2012. This puts us back in a technical recession, (defined as two consecutive quarters of economic contraction) and it’s the first time the UK has experienced a so-called “double-dip recession” since 1975.
How long will Britain be in recession?
The reality however is that Britain will remain in recession (or as near as makes no difference) for a great deal longer than that, perhaps as long as a decade. Certainly nothing will change unless our leaders begin implementing much needed, radical policy reforms.
What should Britain’s policy makers be doing to put us on a path to true sustainability?
Back in 2011 I wrote a series of articles in my newsletter, entitled “The Path To Prosperity” which examined what it takes for an economy to grow and what policies our leaders should be implementing in order to put Britain on the path to true sustainable prosperity.
In the final part of the series I listed the measures I would implement were I tasked with returning Britain to prosperity. Here are some of those measures:
- Start Telling The Truth: The first thing I would do is level with the British people about just how big a hole we are in. For some reason a lot of people I speak to seem to think that sooner or later the economy will stage a miraculous recovery all by itself. This is a dangerous and deluded view especially since we appear to be heading in the wrong direction as far as policy reform is concerned. I would make sure that this view is quickly corrected. Further, I would lay out exactly how we got to where we are, including what mistakes were made and why they were made. This would prepare people for the fact that what’s needed is radical reform.
- Embrace True Free-Market Capitalism: It is a commonly held view that it was capitalism that got the country into this mess, and that capitalism has failed, and hence what’s needed is socialism. In other words, despite the fact that it was government that caused the credit bubble that led to the bust, we should look to government to provide the solution. I would adopt true free-market ‘Laissez-faire’ capitalism, at the heart of which lies bankruptcy. Put simply the only type of regulation that always works is failure. Therefore I would make sure that there were no more bailouts.
- 3. Slash The Size Of The State: To quote President Reagan: “In this present crisis government is not the solution to our problem government IS the problem.” Today the state accounts for around 47% of GDP, which is a situation that is simply ludicrous. The Office for Budget Responsibility predicts that 710,000 public sector jobs will disappear in the years ahead, however this is only the same number of posts created by Gordon Brown during his years of profligacy. I would reduce the size of government to around 25% of GDP.
- 4. Slash Taxes & Regulation: Rather than the token measures being implemented by the current government, such as gradually reducing corporation tax from 26% to 23%, I would slash it immediately to 12.5%, just as Ireland did. The result in Ireland was an increase in tax revenues by 24.3% a year. I would pay special attention to helping entrepreneurs create and develop forward-thinking businesses that will generate jobs. To that end I would slash the cost of starting a new business through measures such as reduced or deferred national insurance contributions. British businesses are burdened by huge quantities of bureaucratic red tape, and by ludicrously excessive regulation. Planning restrictions need to be relaxed, labour laws need to be pared back and, above all, bureaucratic interference needs to be slashed. According to a report produced by the highly respected World Economic Forum (WEF) covering 139 countries, Britain ranks 89th in terms of the regulatory burden imposed on businesses, which is worse than Egypt, Paraguay, Zambia and Saudi Arabia. According to the Forum of Private Business (FPB) complying with regulation costs small businesses in Britain £16.8 billion every year. Tax regulation, employment law and health and safety rules were rated as the most costly burdens on business. I would slash all of this regulation and ensure that what remains is simplified.
- 5. Take An Axe To Waste: In terms of the effectiveness of government and its agencies, the WEF ranks Britain 72nd out of the 139 countries, behind such models of efficiency as Ghana, Pakistan, Malawi and Egypt. The wastefulness of government spending is an issue that needs urgent attention and should come near the top of the list since big progress can be achieved without spending more money. Areas in which the report highlights particular weaknesses include our education system and the quality of our infrastructure. Despite an increase in education spending of 60% in real-terms between 1999-2000 and 2009-2010 Britain ranks 28th for the overall quality of its education system, behind Costa Rica, Lebanon and Malta. And in terms of the quality of maths and science education Britain ranks just 55th, behind Romania and Cyprus. Overall Britain’s infrastructure ranks just 33rd which is worse than that of Barbados, Namibia and Slovenia, and the quality of the UK’s roads ranked 35th below Portugal, Namibia or Croatia. The fact is, massive increases in public spending have failed to deliver the kinds of public services that should be expected from a nation that is still the world’s eighth-largest economy in terms of GDP.
- 6. Return To Sound Money: There are two parts to solving the global debt crisis. The first part involves urgently reducing our levels of public, private and corporate debt, while the second is concerned with preventing destructive credit bubbles forming in future. With this in mind I would take the necessary steps to once again back the British Pound with gold or possibly a basket of commodities including gold. Sound money would prevent governments from expanding the money supply in order to fund their electoral promises and it would quickly make the Pound a strong and desirable currency. Yes this would hurt exports, but it would attract huge investment in to the country, eliminate inflation and dramatically reduce the cost of imported goods.
- Correctly Price Money: Interest rates are the price of money and when money is too cheap, (as it is today) people have a tendency to use it recklessly rather than with prudence, and since it was recklessness with money that got us into this mess, no recovery would be complete without correctly pricing money. I would therefore, as soon as possible, begin raising interest rates to their historic 4-6% range.
- Prepare For Peak Oil With Massive Infrastructure Investment: Peak oil will necessitate the development of an entirely new energy regime – one which is far less dependent on oil. There will be a need to develop and build everything from energy storage solutions to new supplies of rare metals, and from efficient mass-transit systems to more energy efficient buildings – all of which will create a great many investment opportunities and jobs. Right now the world is focused on economic concerns which has diverted attention away from energy policy, however failure to develop this new energy regime quickly enough will have a significant negative effect on the UK (and global) economy. With this in mind I would provide both huge incentives, and government funding for private sector projects that aim to tackle the issue of peak oil. Projects that would likely be given highest priority would be those engaged in developing renewable energy sources, such as Algae, Thorium, Tidal Energy and Clean Coal – Britain has a limitless tidal energy supply right on its doorstep and by some estimates has enough coal to last 900 years. Other areas in which Britain needs urgent infrastructure investment include: roads, the rail network, canals and airports.
Other measures I would implement include:
- I would make balancing the budget a legal requirement. Only under circumstances such as an economic downturn, or a war, could the government go into debt, and not without a vote in parliament.
- Hold a referendum on Europe to decide Britain’s EU membership once and for all.
- Opt out of the Common Agricultural Policy and the Common Fisheries Policy.
- Ring fence the banks.
- Adopt (and teach) Austrian economics in favour of the tried and failed Keynesian approach.
- Record and report more realistic statistics and produce an accurate dashboard for the economy.
In summary what I would do is combine massive public sector cuts with radical measures to unleash the productive private sector. The fact is, Britain doesn’t have a revenue problem, it has a spending problem, and the best way out of a debt hole is to stop digging.
Real sustainable economic growth is also a massive help in reducing public debt – which would be core to the measures I would take, since a sharp rise in interest rates would be seriously damaging to our economy and especially the 11 million British households with mortgages.