In this crazy world a little sobering of one’s self, a goal to reach, and a set of tasks to complete may just sustain you. The Government should heed this message and adopt such a mentality when it comes to their post-pandemic economic policy. In addressing the impending economic doom, yet to fully manifest, there will be challenges both old and new. For all economic actors the word of the coming age must be ‘bold’.
Rishi Sunak has already laid out the first of the British Government’s labour market proposals. The aim of the government is clear; prevent mass unemployment. By reducing the costs of firms – and one of the largest outflows of cash – firms will be able to operate for longer whilst keeping the same number of employees. That’s the theory, however, bearing two thirds of all wages is both an expensive and ill-considered policy. It is unlikely that firms will want to keep staff on the books at any cost to themselves when their regular custom and sales are far below par and where no respite seems to be on the horizon.
The UK labour market needs to be allowed to thaw out. Jobs that have been made and sustained by artificially low interest rates should be allowed to diminish in order to free-up labour for emerging industries. The government should facilitate the advent (preferably directly – in the form of subsidy) of those industries through modern infrastructure projects and skills programs. Such a series of policies would have both immediate and long-term yields. I know that such suggestions are made frequently and just as ambiguously – I will clarify. The government could take this opportunity to invest in a genuinely fast and reliable broadband network across the country. It could also launch a simple land rejuvenation policy to increase the supply of usable land and, in doing so, provide ample opportunities for future developments. Any skills programs should be commensurate with the industries of the future – as mentioned earlier. The government could even finally address the skills deficit in the construction industry which would go along win in the effort to ‘build back better’. This should be achieved in a two-prong manner. In schools’ students should have mandatory constructions skills classes which colleges/sixth forms could carry on to a higher level. On the more immediate front apprentices should be offered a higher starting salary. The minimum wage for apprentices in construction should exceed the over-25 minimum wage. Controversial, I know. Although I may assess the merits of minimum wages in future work this will not be the place for such a debate.
There are several reasons why I have refrained from proposing any tax reductions. They will be expensive and comparatively less effectual than direct government expenditure. Throughout any economic demise the propensity of the typical consumer to consume falls – this is not only concurrent with data but also behavioural theory; most people are risk averse and put money away in case the rainy day becomes a monsoon. Any nominal reduction in taxes may find itself held up in arbitrary savings. By creating new income in the form of deficit financed spending this barrier can be overcome. Security is given by the creation of a new job and risk is reduced by the corresponding income. My more ‘free-market’ oriented contemporaries may lay claim that any such spending will only be inflationary. Given that the inflation rate is barely tipping 1% I think that any temporary boost in inflation would be welcome and if the previously mentioned projects, to which this new inflation bearing income will be generated from, are incrementally beneficial to the supply of the macroeconomy then in the long-run inflation just won’t be an issue and deflation from mass unemployment would certainly not be desirable.
An area of lesser contention with respect to government intervention is in research and development. The UK is a notorious under-investor. According to OECD data the UK currently spends 1.7% of its GDP on r&d spending – considerably below the OECD average of around 2.4%. It cannot be sheer coincidence that the UK also suffers a major productivity lag on other developed economies. Investment is necessary for the deeper development of our economy and the corresponding welfare of our citizens. Investment yields innovation, innovation yields the more efficient use of our limited resources and consequently the more we as a country can do with less. Tax breaks may have a place here. If the British government were to reduce transaction costs and taxes on capital gains relative to other developed economies the UK could enjoy an investment boom. The UK, even with Brexit, is regarded as one of the most financially stable countries in the world and so any further incentive to invest here would not be hindered by political factors – quite the contrary it would be propagated.
The so called ‘Green Economy’ is one area of huge potential. The Green Economy could benefit greatly from an upscaled r&d – particularly where government intervention allows such to prevail. The reason I note the Green Economy here is because I cannot see a ‘green revolution’ without the economic feasibility and incentives that are required – as so many revolutions have shown one of these conditions must be met. Such a revolution should not and will not be achieved by the pernicious ideas of some in academia such as ‘degrowth’ and arbitrary taxation. Either the policies mentioned are not sustainable due to public opinion or they will inflict unnecessary economic harm and possibly make any technical innovation less likely. Government should support the efforts of private firms such as Tesla in upscaling sustainable goods and making them cost-competitive by alleviating their tax burden and supporting infrastructure projects that accommodate to the good to which they are selling – electric charging points for example. If there were no roads would we all have cars?
I guess the major criticism of my suggestions, aside from the lack of monetary specifics, could be: how can these proposals be afforded by a government that is already deep in debt and likely to be astronomically deeper in debt by the end of the year? This is not an altogether fair criticism. The UK has a debt-to-GDP ratio of more than 100% according to the most recent data. This may sound significant, however it pales in comparison to countries such as Japan (238% in 2018), France (114% in 2020) and the USA (106% in 2019). Japan, while not necessarily enviable in some ways, ranks 12 places higher than the UK on the inequality-adjusted Human Development Index made by the UN. This measure considers GDP per capita (PPP), educational outcomes and healthcare outcomes. So, not only can we afford to borrow more by international standards but if we take the proposed measures our economy would be less likely to sink as deep, would possibly recover more quickly and would have a greater capacity for growth in the longer term at which point more tax revenue could be collected without any change to the current tax regimen. Interest rates are minimal, as are bond rates, and so the skies are aligned the government just needs to sign the dotted line and hand over the money.
Now is not the time for same old same old. The government does not want, nor need to embroil itself in unhelpful and politically motivated economic reform – it can and should be bold.
By Brandon Lakin