IoD chief economist: Cut public sector to become a "rocket ball" economy

The UK economy risks losing out if it does not drastically curb the size of the public sector, IoD chief economist and policy director Graeme Leach warned today.

Leach also said that London could end up looking more like bankrupt Detroit than fast-growing, dynamic capitals in emerging economies if we didn’t act fast to readdress the public and private sector balance.

“Austerity is not that austere,” Leache said. “(State) spending is falling by 1% a year.”

According to IoD research, reducing the size of the state by around 10% will help the economy to grow an additional 1% a year.

The difference between growing at 1% a year, in contrast to pre-recession long-term outlooks of 3% a year will mean that the economy doubles in size only every seven daces. This is almost three times the doubling rate we would see with a 3% rate that Leache deems necessary for his “rocket ball” economy.

“Debate is concentrating far too much on the short-term,” said Leache.

“We are missing the fundamental issue. What is the impact of the state on the incentives to save, spend and invest.

“We can’t just think about borrowing and spending our way out of this – we have to compete out,” he added.

The IoD chief economist also slammed talk over Heathrow expansion, saying that instead or three runways we should be talking about building four. However, he was fiercely dismissive about plans for the HS2 high-speed railway, designed to connect London to the north of the country.

The project has come under fire for its rising price tag, now thought to be somewhere around £50bn, with Leache joking it would be cheaper to knock Birmingham and rebuild it closer to existing rail routes than it would be to send extend HS2 as currently planned.