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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Jess Phillips's Diary: Lazy attacks on “lazy MPs”, and how to tackle the trolls

The Labour MP for Birmingham Yardley takes us through her week.

As parliament kicked us out for the conference recess season on 14 September, several tabloids run the predictable story: “MPs go back on holiday today only NINE days after returning to parliament from a six-week summer break.” I imagine the journalist who churns it out hates doing the same tired “all MPs are lazy baddies” shtick as much as we hate having to rebut the nonsense idea that we are on holiday when we are working full-time in our constituencies.

Legislation is on holiday, not legislators. I have still yet to find an MP who thinks it reasonable that parliament shuts for three weeks for conference season. Why can we not have these conferences at the weekend? Or during the summer recess? Hell, why do we have to have them so regularly at all?

Is the nation screaming out for the politically minded to spend hundreds of pounds sleeping on the floor of an overcrowded Airbnb in a seaside town after a heavy night on warm wine and small food? I’ll wager that you cannot find me a person on the Clapham omnibus – or frankly any omnibus, whatever an omnibus even is – who thinks we should have a week off making laws so that the Lib Dems can do karaoke.

Her Maj

As well as time off for conference, it seems that the Tories will be scurrying home early every Wednesday as well. They appear to be on strike from voting on any opposition day motions as their governing partners, Northern Ireland’s Democratic Unionist Party, play fast and loose with their allegiances. (The DUP backed a Labour motion against raising tuition fees, which the government says is non-binding.)

I and other Labour MPs sat in parliament and watched ministerial cars speed off on 13 September as the whips told the great and good to go home. Her Majesty’s Most Loyal Opposition is a pretty important part of our democracy. If I were Her Maj I might be more than a little peeved that Mrs May cannot be arsed to turn up to fight for what she believes in, whatever that is. Presumably whatever Boris Johnson and his gang say it is this week.

Leave the kids alone

I spent the weekend at a local Labour Party fundraiser, at my surgery, and handing out certificates to hundreds of young people graduating from the National Citizen Service. I sat in front of a lively, wildly diverse group of young people and thought we should hand over managing geopolitics to them for a while. Even the naughty kid at the back (whom I had to scold) gave me more faith than what I see on the news.

Family life

At a debate about the abuse of MPs, the traditional Tory colonel Bob Stewart told the house that his son had been targeted and isolated by his schoolteacher because his father was a Conservative MP.

Now, I’ve had my run-in ins with the colonel in the past, but I was horrified by this – one of my sons is the same age as his. As a parent and an MP I dread the idea that my choices will cause my sons’ grief. I’ve got enough guilt about leaving them half the week without their being targeted and bullied. I once found my son and his mates watching videos about me on YouTube that had been made by men’s rights activists. The vicious content was unsettling enough, but the thought of his teacher joining in the hate is harrowing (and, I’m pleased to say, completely unthinkable at his school). Our families are conscripts to this life – some are conscientious objectors.

Troll detection

So, should we ban internet trolls who abuse MPs online from voting? This is the suggestion floated by the Electoral Commission. I can see the argument for trying to make people treat the electoral system with respect. I also think we have got to have a hard line and a punishment. I’m just not sure how we will decide what is abuse. People say sexist stuff to me all the time. Would a negative comment about my appearance count, or are we talking rape and death threats? (What a time to be alive, when I can give a traffic light system to my sexist online abuse.) To some, the idea of having your vote taken away would only provoke a shrug; but to me it seems too much.

Climb every mountain

I have nearly finished More in Common by my friend Brendan Cox. It is about his late wife, my friend Jo, and is brilliant, but I dip in and out because I want it to last. Reading it makes me feel so tired: maybe because I read it in bed, but also because Jo’s energy and adventures seem exhausting. I like mountains on a screen saver, but I wouldn’t climb one, especially not with a tropical disease or a baby in my belly.

I’m also exhausted because of the ridiculous late nights we seem to be adopting in parliament. Jo’s distaste for the silly hours is covered in the book. She couldn’t understand why we couldn’t start earlier than 11.30am and finish in time for people to see their kids. As I put down the story of her life (and, my god, what a life) I’ll gladly trek for her to the seemingly impassable peak of reforming the voting hours in parliament. 

This article first appeared in the 21 September 2017 issue of the New Statesman, The revenge of the left