A prize of dazzling economic growth awaits Britain if we foster dynamic competition and enable the public sector to do better
Double-dip recession in Britain and an escalating euro crisis
have triggered loud calls to switch tracks on economic policy
and turn to Plan B for recovery. So where does the IoD stand? We've
consistently supported Plan A while calling for Plan A+.
But what does this mean? First, we don't want to see a slowdown
in deficit reduction – if anything further and faster progress would
be better. Second, we've argued that Plan A is not enough because
it focuses on the demand side of the economy in the short term. But
we need a radical supply-side revolution for the long term as
well. Further, faster and wider measures will lead to Plan A+.
Before looking at the supply side, let's revisit the claim that
deficit reduction is damaging and draconian. Overall public sector net
borrowing has fallen by £31bn, from £159bn in 2009-10 to £128bn in
2011-12. The government's chosen fiscal target, the cyclically adjusted current deficit, fell by even less – from £110bn in 2009-10 to £100bn in 2011-12. This is hardly draconian.
The gap between the two measures is explained by a £21bn drop in public sector net investment over the same period. The squeeze
on public sector spending has been relatively mild so far and backing off now could lose us our AAA rating.
So let's stick with fiscal Plan A, and push harder towards Plan A+.
The most important aspect to Plan A+ is on the supply side. In an
article entitled "How to build the 'rocketballz' economy", in the latest
edition of the IoD publication Big Picture, we set out the 10 keys to
competitive success in the 21st century. I urge you to read this
because it explains why the economy has reached a fork in the road.
Never before in peacetime have the economic opportunities and
threats been so great. If the UK implements radical reforms over the
coming decade, on a scale suggested by the IoD, underlying trend growth could rise to between three and four per cent each year in the 2020s – a dazzling prize never achieved before in Britain.
Alternatively, we could maintain the status quo and underlying growth will slide down towards one to 1.5 per cent yearly – a dismal prospect.
Many of the 10 keys to success will be familiar – a dramatic reduction in the size of the state and the red-tape burden to name two examples. But it is not just the size of the state that matters; it is the
way it operates as well.
Our proposals envisage continued state funding of public services but far greater private sector delivery as well. Whether it is operating in private markets, or providing public services, competition is vital. We must create hyper-competition not state capitalism.
Within the private sector as well, particularly in banking, the problem is too little not too much capitalism. Banks that are too big to fail will behave in ways unacceptable to those that aren't. Throughout our
economy we want greater exit and entry of firms to drive forward
productivity, growth and innovation.
The public sector must be transformed to play an enabling role. We need to pin down what it should be doing, such as spending on
infrastructure and addressing market failures, and resource it to carry out its functions while benchmarking for world-class performance.
Hyper-competition and enabling government will determine our
success or failure in the 21st century.
Graeme Leach is the IoD's chief economist and director of policy