What does the Chancellor need to do?

Professor Colin Hay

Britain’s crisis continues. As we see-saw seemingly incessantly between failed recovery and recession (double-dip, triple-drip, quadruple-dip …) it is time for the Chancellor to think again.

It is not so much Plan B that we need so much as an entirely different way of thinking about the crisis we face.

This is, as even the IMF can see, a crisis now of growth and not of debt. Debt is a symptom and treating the symptom without attending to the cause has, as in so many cases, merely exacerbated the problem – by reducing the capacity of the economy to generate stable growth and by making it more difficult to make the transition towards a new and different growth model.

So what should the Chancellor be doing?

In the first of a series of SPERI Papers,  Colin Hay, Director of SPERI, argues that Britain is trapped in a crisis of and for growth and not debt. He calls for key policy changes which could help turn the UK’s ailing economy around.

“In basic terms we are calling for channelling the supply of credit from housing and consumption into longer term growth-generating strategic investment in new technologies, education and infrastructure.”

In the paper, titled The British Growth Crisis: a Crisis of and for Growth, Professor Hay picks out key policy implications which could result in a more sustainable model of growth for Britain including:

• To politicise the actual cost of borrowing in Britain – by preventing the banks from effectively recapitalising themselves by charging commercial borrowers, mortgage holders and those servicing consumer debt a sizeable interest-rate premium on their borrowing. This is suppressing consumer demand as well as preventing the investment required to take the transition to a new more sustainable model of growth.

• More public investment in infrastructure projects in particular which, especially at a time of high private sector borrowing costs, could prove to be a highly price efficient way of providing the public goods on which the transition to a new model of growth relies.

• Development of a series of regional investment institutions charged with channelling the supply of credit towards growth and employment enhancing sectors of the economy – as identified within the region. These might be funded through government issued regional investment or growth bonds.

• Announcing that deficit reduction must be made conditional on growth.

• It is imperative that steps are taken at an international, and, ideally global, level to agree a coordinated strategy for managing debt and growth.

He adds: “My hope is that in this paper I have made a compelling case that we need first to get right what went wrong in order to put it right and to suggest at least some of what getting it right and putting it right might entail.

“That is a key part of the ongoing research agenda of SPERI – to develop the kind of political economy we need in Britain (and indeed beyond) if we are to build a sustainable recovery. We very much hope that these ideas and the analysis on which they draw will be taken up in government policy.”

The paper draws on a substantial body of empirical research, starting with the recession in 2008 and the economic changes throughout that year in an international context, as well as a close analysis of the housing market, supply of credit, and welfare and public policy trajectories across Europe before, during and since the crisis.

SPERI Paper No.2 will be published on the website soon.