Saturday, 19 July 2008

Being Truthful with the Economy

Everyone is worried about the economy whether it's the housing market, the job market or the price of petrol. When I canvassed at Henley concern bordering on panic about the economy was the main concern and in spite of the considerable coverage devoted to knife crime, the state of the economy remains the number one prevailing concern for Middle Britain.

Both David Cameron and Nick Clegg have been talking about the economy this week and it's interesting to see how these two Party leaders are already looking to the post-Brown post-Labour political and economic landscape.

David Cameron wrote an interesting article which I read in Thursday's Daily Telegraph hidden away in the Business section. After the usual sniping at Brown and his record, Cameron offered a solution for struggling small (and presumably) large businesses - a British equivalent of the American Chapter 11 (its place in the US Bankruptcy code) which allows businesses to continue trading even if they can no longer manage their debts or pay their creditors.

This attracted a deal of positive reaction, primarily from business, but I'm puzzled. In Britain, a company can go into Administration whereby an external Administrator seeks to re-organise the company's management, debts and assets with a view to returning it to normal operation. We see this with football clubs for example.

As with Administration, Chapter 11 isn't or wouldn't be without its problems of which I note just two. In my view, a numner of small business failures occure because the businesses are being poorly run, often by people who have no idea of how to run a business. Giving a form of protection to incompetent or negligent management doesn't sound like a good idea to me.

The second issue is the extent to which allowing companies to trade normally while under the "protection" of Chapter 11 is a form of market distortion as "protected" companies aren't having to meet the debt service and creditor management obligations of unprotected businesses. All in all, then, like much else from the Conservatives, a superficially good and attractive idea that falls apart under a modicum of analysis.

David Cameron then bangs the drum for the Osborne policy of abolishing stamp duty. Well, I'm sure at a time of declining revenue, any Government will be delighted to cut off a useful income stream. In addition, is there any real evidence that abolishing stamp duty would suddenly re-energise the housing market ? I've not seen any.

Then Cameron gets onto the "fair fuel stabliser". I'm not sure, given the recent volatility in world oil prices, whether anyone knows what the impact of this policy would be. Yes, oil prices have twice approached $147 a barrel but have currently eased back to just $130 a barrel. Again, the income impact on the Government of reducing duty just as the Government is getting less for each barrel is something on which I've seen no analysis.

Finally, we get to the nub of the gist - what will the Conservatives do about spending if and when they are in Government ? Well, I'll quote Cameron's words "Our overall method is to ensure that government grows more slowly than the economy over the cycle".

Well, that's clear enough. Cameron hopes, based on what I don't know, that the economy will grow by say 3-5% per year allowing a spending increase of say 1-2% per year to gradually bring the share of GDP taken up by that spending back from the near 44% it is currently to 40%.

Fine, and the Tory activists may well believe it, but I'm less convinced. We are moving into a period of considerable economic uncertainty and previous assumptions about economic growth and cyclical recoveries from downturns may not be valid any longer. I believe the events of the last six months are or will be seen to be the biggest challenge to the economy since the 1973-74 oil shock from which Britain needed nearly a decade to recover.

I still don't see where the recovery is going to come from though I appreciate the banking sector may already be through the worst. What seems much less certain is the forecast for world energy and resource prices, demand for which will, I think, stifle any meaningful recovery. IF growth in the British economy in the 2010s is nearer 1-2% per annum, Cameron and Osborne will have to instigate REAL cuts in spending to achieve their objective of bringing the public finances under control.

Nick Clegg has taken a more honest and practical approach in his latest speech on the economy. Some in the Tory blogsphere claim Clegg is somehow alienating his activists by an approach emphasising tax and spending cuts but (and I don't expect Conservatives to understand this) all Nick Clegg (as an orange booker) is doing is taking Liberals back to our roots. Reading Nick Clegg this week reminds me of the speeches of Jo Grimond in the 1950s and early 60s. Liberals have traditionally stood for small Government and decentralisation and it's good to see Clegg stressing this.

There are those who say that it is wrong to tax the rich as it acts as an economic disincentive and that the wealthy work harder when they are taxed less.

Maybe but at the same time it cannot be right to blithely accept a society in whcih there is such a large inequality between rich and poor as "acceptable" or "the natural order of things". I earn a good wage, I would pay more in tax if that would alleviate the situation of the less fortunate. A generation of neo-Thatcherism might have created a narrative in which the wealthy need to be protected but there is great poverty in this country and it is a damning indictment of a Labour Government that such poverty still exists and is evident.

There's little doubt that Nick Clegg's approach is intellectually coherent while David Cameron sees power and is anxious not to offend. Whether either man truly understands what has happened or will happen to economy in the next decade is doubtful and both need to improve their thinking but it's a start and they are light-years ahead of the hapless Alastair Darling.


Anita Zimmern said...

Interesting article. I want to run a business, and the current sad state of the economy can be a little discouraging. I know it'll be tough, but I'm ready for it. I'm interested in buying a business instead of starting one from scratch, but I haven't had much luck looking for one. Do you have any suggestions? Thanks

Anonymous said...

@Anita -- Yeah, the economy has been taking some serious hits. Just have to ride it out, I guess... Have you checked out your local Chamber of Commerce? They might be able to help you.

I also suggest checking out It's an online global marketplace where you can buy, sell, and invest in small business. There's a wide selection, making it a great place to find a small business on the Internet. Check it out and good luck!