Vince gets it very wrong on growth
Having set out its path of deficit reduction, the Coalition has spent some time recently talking about economic growth. If spending cuts represent pain today, growth could signal hopes of more prosperous days tomorrow. Sadly, if the government follows the prescription set out by Vince Cable in today’s Financial Times, that prosperity, along with any hopes of a more balanced, long-term, sustainable economy, might pass us by.
Vince is wrong on so many fronts that it’s hard to know where to start. He describes government’s job as “important but modest”, which is dangerously misguided. He invokes fears of “being dragged kicking and screaming by the bond markets, like some of our European neighbours”, when most economic opinion sees the UK as being in a very different place to countries like Greece. His article is peppered with references to a centre-right agenda, such as the Coalition being “committed to a liberal economic policy” and the agenda he “set out six years ago in the Orange book”, but denies that this is laissez-faire.
What Vince Cable describes as “reducing the regulatory burden caused by the industrial tribunal system” is seen by others, including trade unions, as potentially denying many workers access to justice. Is this the kind of economy most Liberal Democrat members and voters wish to see?
There are some government activities that the TUC supports, notably the introduction of Technology and Innovation Centres. Vince Cable is also partially right to say that science has been shielded from the cuts, although a cash freeze in the science budget amounts to about a nine per cent real-terms cut over four years. But if we want to compete with the best in the world, we have to match their active industrial strategies. We have a long way to go.
Let us give this some context. UK economic growth turned negative at the end of last year. Most commentators, including the TUC, do not predict a double-dip recession. More likely is a long period of sluggish growth. On Wednesday, the FT reported the Bank of England as saying that Britain will have to get used to slower growth if people want to avoid rising inflation. But on Monday, a report from Deutsche Bank Research spoke of growth of 3.6% in Germany – the best performance since its reunification – while at the end of 2010, the German inflation rate was 1.7%.
Germany has been the star economic performer in Europe for decades, of course, and it is not helpful to compare the UK with Germany, in the sense that any action taken by the Coalition in the last eight months could have taken the UK to German levels of success. Having said that, there is no law of economics that says Germany has to perform so much better than us. So how do they do it? And can we learn some lessons?
The TUC believes we can, but given the agenda that Vince Cable has set out, we don’t look as if we will learn them any time soon. In ‘A machine running smoothly’, a business briefing about Germany published by the Economist on 5th February, it is reported that:
“The [German] state has helped with research support … doling out cash in support of industries that it thinks are important areas of growth such as green energy, security or biotechnology … The government has tried to create winners as well as support them. Germany’s growing green energy industries are largely creations of the state. Generous subsidies have made the country the world’s biggest market for solar-power installations … Almost a quarter of patents awarded in 2007 for renewable energy technologies went to German firms.”
Like the UK Government, the TUC believes that growth should be primarily private sector led, but there is a legitimate role for the state that Germany, France, the US and other governments all recognise. Only the UK doesn’t seem to get it.