Ten ways to promote sustainable and inclusive growth in the UK

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business and industry, economy, trade, training and skills

Author(s):  Tony Dolphin
Published date:  23 Nov 2011
Source:  IPPR

The UK economy has not delivered the growth hoped for by the Coalition government. Real GDP increased by just 0.5 per cent over the year to the third quarter of 2011 and it remains 4 per cent below its peak level of Q1 2008. Forecasts for 2011 and 2012 have been revised down significantly and the Office for Budget Responsibility (OBR) is likely to follow suit on 29 November, when the chancellor is also due to deliver his autumn statement.

The reason for this underperformance is hotly disputed. But the cause of the slowdown is less important than the fact of it. If there is a role for policymakers to play in responding to fluctuations in growth – and we think there is – then action is needed now. This is true whether the slowdown is the direct result of government policy or due to factors and events completely outside its control.

In the short-term, the priority is simply more growth to reverse the recent rise in unemployment and set the economy back on the path to full employment. In the medium-term, the need is to ensure that any growth is sustainable and that the benefits of increased prosperity are broadly shared. First, put out the fire; then rebuild the house.

In this spirit, we have published a briefing paper setting out 10 ways in which policymakers could act now to promote growth in the UK. Some are concerned with the lack of demand in the economy right now; other focus on what needs to be done to address the long-term structural weaknesses in the UK economy and to enable it to adapt to a low-carbon future.

  1. Make the pace of fiscal tightening responsive to growth in the economy: When growth is strong, tightening can be speeded up but when growth is weak, as now, then tightening should be slowed down.
  2. Guarantee the long-term young unemployed a job by injecting up to £2 billion into the Green Deal: Extra funds for the Green Deal could used to take the scheme to scale by subsidising charges for installing energy efficiency measures and to subsidise the employment of young, long-term unemployed people. The government should also introduce a job guarantee scheme for anyone who has been out of work for more than 12 consecutive months, matched by an obligation to take up the offer.
  3. Introduce tax reforms to promote private sector growth and employment creation: The chancellor should follow the CBI’s advice and introduce capital allowances for future spending on infrastructure projects and extend the R&D tax credit to all non-profitable companies. He should also reverse his plans to cut capital allowance rates.
  4. Announce an immediate £5 billion increase in infrastructure spending, rising to £10 billion in 2012/13: There is scope for the chancellor to announce an immediate increase in infrastructure spending – in areas such as social housing and transport – of £5 billion for 2011/12. This should be increased to £10 billion in 2012/13 and subsequent years.
  5. Move quickly to implement ‘credit easing’ and to establish a National Investment Bank: The Treasury should encourage banks to securitise (bundle up) small company loans and overdrafts that could then be bought as part of the credit easing programme. It should also aim to have a National Investment Bank operational by April 2013.
  6. Create sector-specific ‘innovation zones’: The government should create ‘innovation zones’ that would offer greater government support for R&D and start-ups in key, high value-added sectors. Within the zones, businesses, private stakeholders, researchers, local community groups and councils would work together to identify barriers to growth and to break them down.
  7. Expand the Export Credit Guarantee Scheme: The government should expand the Export Credit Guarantee Scheme. Efforts should focus in particular on encouraging small and medium-sized businesses across a range of industries to make use of the scheme. The ECGD’s mandate should be broadened to include advising businesses on the credit-worthiness of overseas buyers and assisting exporters to recover bad debts.
  8. Ensure industries can recruit the skilled workers they need to expand and to lift productivity levels: The Growth and Innovation Fund should take centre-stage in the government’s skills policy. A much-expanded fund – £200 million a year – should be backed up by an ambitious programme of research, pilot projects and learning networks to inspire innovative ideas and practice across the economy.
  9. Expand free childcare places to make it easier for parents to return to work: The government should reverse its decision to reduce support through the childcare element of the working tax credit and, as a first step towards introducing a system of universal childcare to increase maternal employment rates, it should expand the number of free childcare places.
  10. Back universities’ attempts to attract overseas students and businesses’ need for skilled migrants: The government should reverse its clampdown on students and skilled migrants from outside the EU. The economy cannot be ‘open for business’ but closed to those who want to study and do business here.

Some of these policies will require additional spending in the short-term. Eventually, this will require offsetting action to make the deficit-elimination arithmetic add up. Options for additional revenues include: abolition of the winter fuel allowance and free bus passes, replacing inheritance tax with a capital receipts tax and restricting tax relief on pension contributions to the basic rate of income tax.

A plan for growth should not be based on a set of miscellaneous policies agreed in coalition negotiations. It should be based on an honest assessment of the state of the economy. It should identify what is needed for the economy to grow – additional demand in the short-term and increasing supplies of capital, labour and land, together with better ways of utilising them, in the medium-term. And then it should work out how the government can help deliver them.

 
 

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Tony Dolphin, Senior Economist and Associate Director for Economic Policy

 

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10 ways to promote growth

Author(s) : Tony Dolphin - 23 Nov 2011