George Osborne must ignore the siren calls – and take steps to raise potential growth

The CPS' Ryan Bourne gives its hitlist for the 2013 budget.

Over the past few weeks, we’ve heard from advocates of more government spending to attempt to stimulate the economy, advocates of shock-and-awe tax cuts to stimulate the economy, people suggesting the Government needs more interventionist long-term planning for the economy, and calls from back-bench Conservative MPs that this should be a‘cost-of-living’ budget.

Following more than £500 billion of deficit spending, £375 billion of QE, interest rates at their lowest level in the history of the Bank of England, a sharp fall in sterling, and with inflation continuously above target, it is difficult not to agree with Sir Mervyn King that most of our economic problems are structural. Years of a stagnant economy despite extraordinary monetary and fiscal policies suggest that in the wake of the crisis we are now suffering from a sustained fall in potential growth on unchanged supply-side policies – which, even if you do believe that stimulus spending policies work, cannot be solved by more short-term borrowing or money printing. Those convinced the economy just needs a kick-start to push it into a new equilibrium of self-sustaining recovery should look at Japan’s recent economic history.

Nor would increasing the structural deficit by borrowing significantly more for tax cuts be sensible. With public sector net borrowing still over 8% of GDP and debts already above the level known to permanently retard growth for two decades, adding to the deficit significantly, two years before the uncertainty of another general election, poses significant risks in bond markets (and even if we print to hold yields down, merely transfers to a problem for sterling).

The Budget then needs to recognise that the UK has a medium-term growth problem. It should therefore contain policies to raise our medium-term growth rate. This is the main insight which drives the 20 recommendations which we set out in Take the Long View, ahead of next week’s Budget. We suggest a three-pronged approach addressing fiscal strategy, supply-side reform and a robust pro-competition agenda in certain oligopolistic industries.

Support is waning for the Government’s fiscal agenda, but in truth cuts to investment expenditure and tax hikes were front-loaded and cuts to current expenditure were back-loaded. For a developed country like the UK, evidence suggests that cutting the latter not only has a far smaller impact on short-term growth, but also enhances medium-term growth. Abandoning the overall plan now, just as it about to start cutting in the right areas, would be madness. In fact, if anything the level of current spending cuts are inadequate. Because of ring-fencing of several large items, current spending overall is actually forecast to increase in real-terms over the course of this Parliament by 0.7%. But this assumes growth will generate large increases in tax revenues to close the deficit. As we mentioned above, we do not believe this will happen on unchanged policies. So further cuts to current spending, in part used for enterprise inducing tax cuts, should be implemented to enhance the economy’s medium-term growth rate.

To decide where these cuts fall the next spending review should examine all spending without any ring-fencing, particularly focusing on areas which have the smallest effects on short-term growth, like pensioner benefits, retirement ages, and eligibility for a host of other transfers. A failure to re-open spending in this way risks some budgets being savaged to protect areas of which have seen significant largesse over the past decade.

On the tax side, the spending review should be supplemented by better resourcing of the Office for Tax Simplification and giving it a more strategic role over efforts to simplify and restore trust in our tax system. Substantial pro-growth tax reform, along the lines of broadening bases and lowering rates, is an area which the Coalition has so far done little.

On the supply-side, the key aim is to raise the productive potential of the economy. A Small Business Incentive Scheme, which includes significant exemptions from regulation for small businesses, should be introduced. Though less sexy, a framework for ‘sunset clauses’ for new regulations should be rolled out and Michael Fallon’s ambitions for deregulation utilised by widening the scope of the ‘One-in, Two-out’ framework further. And the Government should look again at the case for abolishing national pay bargaining, which could substantially enhance public sector efficiency and counter regional inequalities in the medium-term.

Finally, the only sustainable way to address rising living costs for the UK public requires an aggressive pro-market agenda in many oligopolistic industries to enhance innovation and productivity, and to lower costs. Banking, energy, water, rail and education are all necessity industries or state run services where there is scope for much more competition, and there would be much more beneficial long-term effects of removing barriers to entry for new providers, and providing a level playing field for existing market participants, in these than dealing with the symptoms of our current cost-of-living problems through fiddling with changes to certain taxes or subsidies.

20 recommendations for the budget

On fiscal strategy

  1. Announce the remit of the 2013/14 spending review. This should include:
    • plans to cut government current expenditure substantially over the next five years with no ring-fences;
    • a programme of reducing entitlement eligibility;
    • a plan to raise retirement ages more rapidly than currently planned.
  2. Widen the remit of the Office for Tax Simplification to establish tax reforms for the rest of this Parliament along the principles of base-broadening and lowering rates.
  3. Pledge no new taxes or further net tax rate rises for the 2013/14 spending review period.
  4. Set out a path to raise the threshold for the basic rate of Income Tax to the equivalent of the gross income of a full-time earner on the minimum wage.
  5. Cut Capital Gains Tax immediately, as it is above the revenue maximising rate.
  6. Commit to further reductions in Corporation Tax.
  7. Re-open negotiations on public sector pensions.
  8. Supply-side reform
    Announce a Small Business Incentive Scheme to include a package of exemptions from regulations for very small businesses. This should include exemptions from: minimum wage legislation for those under 21; requests for time off for training; and pension auto-enrolment.
  9. Adopt sunset clauses for all regulations with a post-implementation audit three years after enactment of each regulation; and bring more regulation into the scope of 'One-In Two-Out'.
  10. Adopt a Consolidated Planning Act and repeal all existing legislation with a single rationalised Act.
  11. Encourage neighbouring local councils to co-operate in identifying sites for new Garden Cities.
  12. Abolish national pay bargaining in the public sector.
  13. Ensure that the recommendations of the Davies Review of airport capacity can be implemented swiftly.
  14. An agenda for competition
    Adopt the "Fair Shares" scheme for the re-privatisation of Lloyds and RBS.
  15. Reduce the regulatory burden on new banks.
  16. Give the Financial Conduct Authority a competition mandate.
  17. Require the legal separation of retail and supply arms of water companies, paving the way for the extension of retail competition.
  18. Encourage far greater competition between operators on the rail network.
  19. Lift the bar on profit-making companies running academies and free schools.
  20. Abandon the planned unilateral carbon price floor and phase out subsidies for renewable energies.
Photograph: Getty Images

Ryan Bourne is the head of economic research at the Centre for Policy Studies.

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Labour's establishment suspects a Momentum conspiracy - they're right

Bernie Sanders-style organisers are determined to rewire the party's machine.  

If you wanted to understand the basic dynamics of this year’s Labour leadership contest, Brighton and Hove District Labour Party is a good microcosm. On Saturday 9 July, a day before Angela Eagle was to announce her leadership bid, hundreds of members flooded into its AGM. Despite the room having a capacity of over 250, the meeting had to be held in three batches, with members forming an orderly queue. The result of the massive turnout was clear in political terms – pro-Corbyn candidates won every position on the local executive committee. 

Many in the room hailed the turnout and the result. But others claimed that some in the crowd had engaged in abuse and harassment.The national party decided that, rather than first investigate individuals, it would suspend Brighton and Hove. Add this to the national ban on local meetings and events during the leadership election, and it is easy to see why Labour seems to have an uneasy relationship with mass politics. To put it a less neutral way, the party machine is in a state of open warfare against Corbyn and his supporters.

Brighton and Hove illustrates how local activists have continued to organise – in an even more innovative and effective way than before. On Thursday 21 July, the week following the CLP’s suspension, the local Momentum group organised a mass meeting. More than 200 people showed up, with the mood defiant and pumped up.  Rather than listen to speeches, the room then became a road test for a new "campaign meetup", a more modestly titled version of the "barnstorms" used by the Bernie Sanders campaign. Activists broke up into small groups to discuss the strategy of the campaign and then even smaller groups to organise action on a very local level. By the end of the night, 20 phonebanking sessions had been planned at a branch level over the following week. 

In the past, organising inside the Labour Party was seen as a slightly cloak and dagger affair. When the Labour Party bureaucracy expelled leftwing activists in past decades, many on went further underground, organising in semi-secrecy. Now, Momentum is doing the exact opposite. 

The emphasis of the Corbyn campaign is on making its strategy, volunteer hubs and events listings as open and accessible as possible. Interactive maps will allow local activists to advertise hundreds of events, and then contact people in their area. When they gather to phonebank in they will be using a custom-built web app which will enable tens of thousands of callers to ring hundreds of thousands of numbers, from wherever they are.

As Momentum has learned to its cost, there is a trade-off between a campaign’s openness and its ability to stage manage events. But in the new politics of the Labour party, in which both the numbers of interested people and the capacity to connect with them directly are increasing exponentially, there is simply no contest. In order to win the next general election, Labour will have to master these tactics on a much bigger scale. The leadership election is the road test. 

Even many moderates seem to accept that the days of simply triangulating towards the centre and getting cozy with the Murdoch press are over. Labour needs to reach people and communities directly with an ambitious digital strategy and an army of self-organising activists. It is this kind of mass politics that delivered a "no" vote in Greece’s referendum on the terms of the Eurozone bailout last summer – defying pretty much the whole of the media, business and political establishment. 

The problem for Corbyn's challenger, Owen Smith, is that many of his backers have an open problem with this type of mass politics. Rather than investigate allegations of abuse, they have supported the suspension of CLPs. Rather than seeing the heightened emotions that come with mass mobilisations as side-effects which needs to be controlled, they have sought to joins unconnected acts of harassment, in order to smear Jeremy Corbyn. The MP Ben Bradshaw has even seemed to accuse Momentum of organising a conspiracy to physically attack Labour MPs.

The real conspiracy is much bigger than that. Hundreds of thousands of people are arriving, enthusiastic and determined, into the Labour party. These people, and their ability to convince the communities of which they are a part, threaten Britain’s political equilibrium, both the Conservatives and the Labour establishment. When the greatest hope for Labour becomes your greatest nightmare, you have good call to feel alarmed.