Building roads back to prosperity. The thinktank IPPR reveals its plan to rejuvenate the economy
With the chancellor’s autumn statement looming like an unpleasant guest moving in to ruin Christmas dinner, the thinktank IPPR has swooped in and suggested ten ways in which we can save the UK economy.
The Office for Budget Responsibility will revise its estimates for growth in 2011 and 2012 significantly when it publishes its latest forecasts alongside Osborne’s speech on 30 November and with that in mind, Tony Dolphin, senior economist at IPPR has come up with a ten point plan to promote growth.
Here’s our summary of his masterplan:
1. Adjust the pace of fiscal tightening in response to growth in the economy.
The chancellor should alter his deficit reduction plan to match the recovery of the economy believing that bond investors would not take fright as long as the plans were adjusted in the short term with credible medium term strategies in place.
“He should set out rules that allow him to reduce the pace of deficit reduction when the economy is growing slowly and constrain him to increase the pace when growth is stronger.”
This, he believes, frees the government to announce temporary increases in public spending or tax cuts designed to boost demand in the economy.
2. Guarantee the young long-term unemployed a job by injecting up to £2 billion into the Green Deal
Flexibility provided by changing the deficit reduction plan could be used to announce an injection of extra funds into the Green Deal.
The Green Deal is a coalition initiative which aims to make it easier for homeowners and residents to have energy efficiency measures installed in their properties. Dolphin suggests that this could be linked to a job guarantee scheme for young people.
“Around half the extra funds could be used to help take the scheme to scale by subsidising charges for installing energy efficiency measures and to help tackle fuel poverty,” he explains.
“The other half could be allocated to subsidising the employment of young, long-term unemployed people to work on installation and other work opportunities that could be created through the scheme.”
3. Introduce tax reforms to promote private sector growth and employment creation
According to Dolphin there is little evidence that the chancellor’s cuts to corporation tax will lead to higher employment growth. He suggests that other measures would be more suitable.
The CBI has called for the introduction of capital allowances for future spending on infrastructure projects to cover the 28 per cent of private sector infrastructure spending not eligible for tax relief. It also called for an extension to the research and development tax credit to all non-profitable companies and widen the definition of the scheme to include design.
“Together, these measures would cost about £450 million a year,” says Dolphin.
“As well as offering support for growth in the short term, they would also bolster long-term growth by increasing spending on innovation and infrastructure.”
He also suggests that the chancellor reverse his plans to cut capital allowance rates and the maximum annual investment allowance as these measures will hit manufacturers particularly hard.
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4. Announce an immediate £5 billion increase in infrastructure spending, rising to £10 billion in 2012/13
Whilst spending more money on infrastructure projects might not be the speediest way to lift the economy Dolphin believes that it is one of the more effective.
“The government is currently able to borrow at rates that are the lowest it has ever been able to borrow at,” he says.
“Rather than cutting investment spending, it should be taking advantage of these low rates.”
Announcing £10bn of spending may be a drop in the ocean for our economy but the confidence exuded by announcing the addition spends, may boost business and household confidence.
5. Move quickly to implement ‘credit easing’ and to establish a National Investment Bank
The report suggests that Osborne should move a lot quicker and act on his exploration of “credit easing” to help companies that are unable to raise finance through traditional routes.
Dolphin suggests that to increase the flow of finance to these companies the Treasury should encourage banks to securitise small company loans and overdrafts. These could then be bought as part of the credit easing programme.
In addition to this “credit easing” the report welcomes the setting up of a Green Investment Bank but suggests going one step further and creating a National Investment Bank.
“This bank would be able to borrow funds, not just use capital injected into it by the government,” says Dolphin.
“If the UK adopted the same public sector accounting rules as most of the rest of Europe, this borrowing would not count against the government’s deficit target.”
6. Create sector-specific ‘innovation zones’
The sixth step calls for the government to develop a more strategic approach centred on the idea of “innovation zones”, which would offer greater government support for R&D and start-ups in key high-value sectors.
“Better-targeted tax incentives such as higher R&D tax credits to spur innovation and lighter regulation for high-growth firms working within innovation zones should also be introduced.”
Groups such as the Technology Strategy Board’s Small Business Research (SBRI) which help innovative companies develop and commercialise new ideas, should be scaled up.
7. Expand the Export Credit Guarantee Scheme
With more than half of the UK’s exports going to European countries the short term outlook for our export sector is not looking good given the eurozone crises. Dolphin suggests helping exporters shift away from Europe, reorienting our exports towards emerging economies such as China, India and Brazil.
Dolphin believes that the government could do more to facilitate this by expanding the Export Credit Guarantee Scheme which ensures exporters against non-payment, guarantees bank loans for overseas purchasers of British goods and insures UK investors in overseas markets.
Whilst the scheme has been in place for some time more needs to be done to encourage take-up with greater presence at trade fairs and through targeted information campaigns.
“The fall in sterling’s exchange rate in 2008 and 2009 has probably been supporting the UK’s exports in the last few years but the experience of the mid-1990s suggests such support is likely to prove short-lived,” explains Dolphin.
“Before its stimulus runs out, the government needs to promote the development of a more innovative and productive export sector.”
8. Ensure industries can recruit the skilled workers they need to expand and to lift productivity levels
The Growth and Innovation Fund was established by the coalition to boost investment in training and help businesses to grow. But at a mere £50m a year, Dolphin feels the impact of the fund will be minimal:
“For real impact on growth and productivity in the UK, a much-expanded fund – £200 million a year – shoul
d be backed up by an ambitious programme of research, pilot projects and learning networks to inspire innovative ideas and practise across the economy.”
9. Expand free childcare places to make it easier for parents to return to work
The cost of childcare has been rising faster than wages and the general rate of inflation in recent years and this can be a significant disincentive to returning to work.
As a result, new parents find it increasingly hard to make the move back to work.
Dolphin suggests that expanding the number of free childcare places is a good first step to counteract this but states that ultimately the government should be working towards providing 15 hours a week free childcare for disadvantaged two-year olds by introducing universal childcare.
“Research from Canada also suggests that spending on childcare outside the home has a very high output effect, because of its low import content,” says Dolphin.
“And is the most effective means of increasing spending to lift employment levels, because it is labour-intensive.”
10. Back universities’ attempts to attract overseas students and businesses’ need for skilled migrants
According to the report the government is struggling to control some of the big drivers of net migration such as emigration from the UK and immigration from the EU it is clamping down on the most economically valuable categories of migration.
Higher education and business service industries need highly skilled migrants.
“The government should concentrate on more targeted action against visa scams and bogus colleges, which undeniably exist,” says Dolphin.
“This would enable them to take overseas students out of the immigration numbers game, and move back to a policy that supports rather than penalises one of our most important industries and sources of growth and global influence.”
Convinced by any of these? Let us know below…