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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Our union backed Brexit, but that doesn't mean scrapping freedom of movement

We can only improve the lives of our members, like those planning stike action at McDonalds, through solidarity.

The campaign to defend and extend free movement – highlighted by the launch of the Labour Campaign for Free Movement this month – is being seen in some circles as a back door strategy to re-run the EU referendum. If that was truly the case, then I don't think Unions like mine (the BFAWU) would be involved, especially as we campaigned to leave the EU ourselves.

In stark contrast to the rhetoric used by many sections of the Leave campaign, our argument wasn’t driven by fear and paranoia about migrant workers. A good number of the BFAWU’s membership is made up of workers not just from the EU, but from all corners of the world. They make a positive contribution to the industry that we represent. These people make a far larger and important contribution to our society and our communities than the wealthy Brexiteers, who sought to do nothing other than de-humanise them, cheered along by a rabid, right-wing press. 

Those who are calling for end to freedom of movement fail to realise that it’s people, rather than land and borders that makes the world we live in. Division works only in the interest of those that want to hold power, control, influence and wealth. Unfortunately, despite a rich history in terms of where division leads us, a good chunk of the UK population still falls for it. We believe that those who live and work here or in other countries should have their skills recognised and enjoy the same rights as those born in that country, including the democratic right to vote. 

Workers born outside of the UK contribute more than £328 million to the UK economy every day. Our NHS depends on their labour in order to keep it running; the leisure and hospitality industries depend on them in order to function; the food industry (including farming to a degree) is often propped up by their work.

The real architects of our misery and hardship reside in Westminster. It is they who introduced legislation designed to allow bosses to act with impunity and pay poverty wages. The only way we can really improve our lives is not as some would have you believe, by blaming other poor workers from other countries, it is through standing together in solidarity. By organising and combining that we become stronger as our fabulous members are showing through their decision to ballot for strike action in McDonalds.

Our members in McDonalds are both born in the UK and outside the UK, and where the bosses have separated groups of workers by pitting certain nationalities against each other, the workers organised have stood together and fought to win change for all, even organising themed social events to welcome each other in the face of the bosses ‘attempts to create divisions in the workplace.

Our union has held the long term view that we should have a planned economy with an ability to own and control the means of production. Our members saw the EU as a gravy train, working in the interests of wealthy elites and industrial scale tax avoidance. They felt that leaving the EU would give the UK the best opportunity to renationalise our key industries and begin a programme of manufacturing on a scale that would allow us to be self-sufficient and independent while enjoying solid trading relationships with other countries. Obviously, a key component in terms of facilitating this is continued freedom of movement.

Many of our members come from communities that voted to leave the EU. They are a reflection of real life that the movers and shakers in both the Leave and Remain campaigns took for granted. We weren’t surprised by the outcome of the EU referendum; after decades of politicians heaping blame on the EU for everything from the shape of fruit to personal hardship, what else could we possibly expect? However, we cannot allow migrant labour to remain as a political football to give succour to the prejudices of the uninformed. Given the same rights and freedoms as UK citizens, foreign workers have the ability to ensure that the UK actually makes a success of Brexit, one that benefits the many, rather than the few.

Ian Hodon is President of the Bakers and Allied Food Workers Union and founding signatory of the Labour Campaign for Free Movement.