How Osborne's Budget can increase confidence

The state must have more faith in its own power to tame recession.

The state must have more faith in its own power to tame recession.

This week's Budget will reflect whether George Osborne's team has learned some economics over the last few months. If not, here is a last minute crash course, focusing on the need to increase "confidence" (the government's buzz word). But whose confidence?

1. Market confidence

Low interest rates in the UK aren't a reflection of "market" confidence, but of the fact that the economy is not growing. As in most stagnant economies, interest rates remain low - as does also inflation, which is only rising due to international commodity prices. The fact that the UK has its own currency, with an active central bank, partly explains why the bond markets are not fearful of a default and why Britain's AAA credit rating has not been downgraded, yet.

But the increasingly low growth forecasts for the UK, and the recent warnings by ratings agencies (including Fitch last week), show that the markets know that one of the world's most "austere" nations is in trouble because austerity does not generate growth.

Lesson: In your speech, don't use the "market'"and low interest rates as the reason that you need to continue austerity. Remember that savers are punished by low interest rates and life insurers - an important UK industry and a source of finance for recovery - could be seriously undermined by them. And if you think that the fixed rate on 100 year bonds is the solution, this will only make markets less confident. It demonstrates that you think rates of return will remain very low for an extended period. If not, it's unclear why anyone would invest in these.

2. Business confidence

Private business investment is not driven by tweaks in taxes, but by expectations about future technological and market opportunities. This is what Keynes meant by investment being driven by "animal spirits" and is the reason why there is too little investment in downturns and too much in booms.. It is also the reason why even in booms, there is little investment in countries, or particular regions, with low future growth opportunities. Weak private business investment in the UK and the fact that various companies are picking up and leaving (Pfizer, GSK, Sanofi) , is not due to their high taxes, but the lack of positive expectations about future growth in the UK.

Lesson: Don't try to increase investment by decreasing corporate taxes. Evidence is that these "savings" will not be reinvested back into production. Likewise reduction of the 50p rate will not "trickle down" to the rest of the economy, it will only increase inequality as all such measures, especially in the USA and the UK, have in the last decades. To increase investment, government must invest in those areas that create high expectations about technological and market growth: education, research in emerging technologies, modern infrastructure, and constructing a financial system that can nurture long-run, innovative investments.

3. Confidence in competition

When competition is strong, businesses feel the need to differentiate themselves to increase market share, whether via advertising or innovation. This is why there is rarely dynamism in sectors where competition is lacking. Competition policy should nurture those types of businesses that are most interested in growing via new products, processes, or new markets for existing products -- and in so doing create jobs. One way to invest in such opportunities is to properly fund the whole 'eco-system' of innovation, promoting broad technological areas rather than trying to pick winners within them.

In doing so it is important not to mythologise some of the actors, especially those with strong lobbies (e.g. small/medium enterprises, venture capital). It is not true, for example, that the SME sector as a whole is being starved of funds. Indeed UK SMEs get somewhere between £7-8 billion pounds a year in direct and indirect government support - more than either universities or the police. It is the high-growth, innovative SMEs (about 6 per cent of the total) that need support, which must be tailored towards their precise needs. And it is not true that the problem in the UK is commercialisation, the target of the new Catapult Centres. The lower amount of market relevant research is the UK's the problem; so setting up Catapult Centres, without investing in public R&D and stimulating business to do the same, is like pushing on a string. The UK's R&D/GDP ratio is 1.3 per cent, compared to 2.6 per cent in Germany and the USA. Unlike Britain, the former has increased its spending since the crisis.

Lesson: Invest in measures that can help generate the company strategies and structures that enable UK companies to produce products and services that the world wants to buy. Only in this way will UK companies win procurement contracts in their own country (it is hardly surprising that Siemens' won the Thameslink train deal, with its very high R&D spending, and investment in green technology). And don't focus so much on new vehicles like Catapult Centres, which will have all the force of a pea-shooter if the research base remains underfunded.

4. Bank confidence

Quantitative easing (QE) by the Bank of England has not resulted in higher growth because this injection of money has simply ended up in the coffers and bonus pools of banks, which are not lending. They are scared because they, like business, do not believe there are growth opportunities in a country that has problems with both demand (consumer spending) and supply (new business output). Banks' complaint that they are not receiving enough demand for new loans highlights the slump in demand afflicting the economy. Thus ironically, post-crisis QE has benefited only the actors that have been most responsible for the crisis, letting them recapitalise on the cheap without reducing business finance costs.

Lesson: To increase lending, the government should create a National Investment Bank that could offer the kind of "patient capital" needed by businesses investing for the long run. As private investment banking will not be viable on the past scale after banking reforms, this could be constructed from the skeleton of RBS. At present there is £500 billion of net financial surplus hoarded in the UK (and $1.1. trillion in the USA), mainly in pension funds; government can play a greater role in releasing these funds, which also have a public dimension, in particular directions like "green" investments with high future returns (see Nick Stern's recommendations).

5. Consumer confidence

Four types of demand drive GDP. Demand by government, by private business investment, by consumers and by what other nations demand from us (exports) minus what we demand from them (imports). Of these, consumer demand is the largest, and the most stable component, about 65 per cent of our GDP. It is much more predictable than private investment, as it is largely a function of disposable income. Thus even if you get all the policies above right, if you cut down on disposable income during a recession, you'll turn it into a depression. This is indeed the real current risk. And falling household incomes (from the rise in VAT, freeze in public sector pay, cuts to fundamental social services, and general downturn of the economy) will be made only worse with the further cuts that will be needed as a consequence of the 50p rate reduction.

Lesson: Consider reducing VAT, and releasing the public sector pay freeze, both of which are damaging to demand. While marginal rates have little effect on top earners they do deter effort and initiative at very low rates of pay (see Mirrlees Report). So what is needed is to decrease the marginal rate on very low earners - sometimes 100 per cent or more - not worrying about a 50 per cent rate at the top. Do whatever you can to steer councils away from spending cuts in areas that sustain the social fabric, including after-school clubs that allow women to work more and youth clubs that allow young people to feel valued members of society.

Perhaps the biggest lesson around confidence is that government must be more confident of its own powers. It should use the ability to tame recessions through monetary and fiscal policy, and invest in the future by funding the knowledge base that is the source of new waves of growth. The new green revolution is just beginning and, like all technological revolutions, will not happen without government playing a lead role, absorbing most of the uncertainty before the private sector dares to enter. This entrepreneurial role must lead the vision in next week's Budget if the UK is to play a meaningful role in the world economy.

Mariana Mazzucato is Professor of Economics and RM Phillips Chair in Science and Technology Policy at the University of Sussex. She is the author of The Entrepreneurial State.

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Who's winning the European referendum? The Vicar of Dibley gives us a clue

These polls seem meaningless, but they reveal things more conventional ones miss.

At the weekend, YouGov released some polling on 30 fictional characters and their supposed views on Brexit.  If you calculate a net pro-Remain score (per cent thinking that person would back Remain minus the per cent thinking they’d vote for Leave), you have a list that is topped by Geraldine Granger, the Vicar of Dibley (+21), and ends with Jim Royle (-38).

It’s easy to mock this sort of thing, and plenty did: “pointless”, “polling jumping the shark”, and so on. Some even think pollsters ask daft questions just to generate cheap headlines. What a cynical world we live in.

But the answers to those questions tell you quite a lot, both about the referendum campaign and about voters in general.

For one thing, most of the fictional characters that people saw as voting to Remain are (broadly) nice people, whilst the Outers included a fair few you’d not want to be stuck in a lift with, along with other chancers and wasters. On one side, you have the Vicar of Dibley (+21), Mary Poppins (+13), Miranda (+11), and Dr Who (+9) taking on Hyacinth Bucket (-13), Tracy Barlow (-15), Del Boy (-28), and Basil Fawlty (-36) on the other. This isn’t really much of a contest.

Obviously, some of these are subjective judgements. Personally, I’d not want to be stuck in a lift with the Vicar of Dibley under any circumstances – but she’s clearly meant to be a broadly sympathetic character.  Ditto – with knobs on – Miranda. And yes, some of the Outer characters are more nuanced. Captain Mainwaring (-31) may be pompous and insecure, but he is a brave man doing his best for his country. But still, it’s hard not to see some sort of division here, between broadly good people (Remain) and some more flawed individuals (Out).

So, on one level, this offers a pretty good insight into how people see the campaigns.  It’s why polling companies ask these sort of left-field questions – like the famous Tin Man and Scarecrow question asked by John Zogby – because they can often get at something that normal questions might miss. Sure, they also generate easy publicity for the polling company – but life’s not binary: some things can generate cheap headlines and still be interesting.

But there are two caveats. First, when you look at the full data tables you find that the numbers saying Don’t Know to each of these questions are really big– as high as 55 per cent for both Tracy Barlow and Arthur Dent. The lowest is for both Basil Fawlty and Del Boy, but that’s still 34 per cent. For 26 out of the 30 characters, the plurality response was Don’t Know. The data don’t really show that the public think Captain Birdseye (-11) is for Out; when half of all respondents said they don’t know, they show that the public doesn’t really have a clue what Captain Birdseye thinks.

Much more importantly, second, when you look at the cross breaks, it becomes clear how much of this is being driven by people’s own partisan views. Take James Bond, for example. Overall, he was seen as slightly pro-Remain (+5). But he’s seen as pro-Brexit (-22) by Brexit voters, and pro-Remain (+30) by Remain voters.

The same split applies to Dr Who, Postman Pat, Sherlock Holmes, Miranda, and so on.

In fact, of the 30 characters YouGov polled about, there were just eleven where respondents from both sides of the debate agreed – and these eleven excluded almost all of the broadly positive characters.

So, here’s the ten characters where both Remain and Leave voters agreed would be for Brexit: Alan Partridge; Jim Royle; Del Boy; Hyacinth Bucket; Pat Butcher; Tracy Barlow; Captain Mainwaring; Catherine Tate’s Nan; Cruella De Vil; and Basil Fawlty.

That’s not a great roll call. And it must be saying something that even Outers think Cruella De Vil, Alan Patridge, and Hyacinth Bucket would be one of theirs.

Mind you, the only pro-Remain character that both sides agree on is Sir Humphrey Appleby. That’s not great either.

For the rest, everyone wants them for their own.

So what about those who say they don’t yet know how they will vote in the referendum? These might be the key swing voters, after all. Maybe they can give a more unbiased response. Turns out their ranking is broadly similar to the overall one – with scores that are somewhere between the views of the Outers and the Inners.

But with this group the figures for don’t knows get even bigger: 54 per cent at a minimum, rising to a massive 77 per cent for Arthur Dent.

And that’s because, lacking a partisan view about the referendum, they are not able to project this view onto fictional characters.  They lack, in the jargon, a heuristic enabling them to answer the question. Which tells you something about how most people answered the questions.

Philip Cowley is Professor of Politics at Queen Mary University of London.