Tuesday, May 11, 2010

What I would Like from New Government

I don't mind if the new UK government is Red, Blue, Yellow or Brown. I am much more concerned with the policies of a new government than the faces behind them. For what it is worth, I thought in the past few years, Gordon Brown probably did better than if the Conservatives would have been in power. True, he didn't regulate the finance sector or housing market in the boom years. Nor did he reign in government spending when the economy was doing well. However, I am convinced that other parties would have done almost exactly the same. (maybe the Tories would have cut taxes rather than increased spending) but, I'm sure the budget deficit would still have been 40% of GDP at start of crisis.

Given thge crisis, I thought the response of the government was reasonably bold. A real disaster was averted, though I can understand why you don't get much credit for a situation with 2.5million unemployed and the current state of the government finances.

Anyway looking to the future, these are a few of things I would like to see from a new government.

Stable Growth. We have just escaped from the longest recession on record. It has left a painful legacy - a rise in borrowing, a rise in unemployment, spare capacity in economy. Stable positive growth, is essential for stabilising government borrowing and bringing down unemployment. (importance of growth)

Fiscal Improvement.

Annual borrowing of over 12% of GDP, is clearly completely unsustainable during peace time. Part of the problem is due to cyclical factors and the financial bailout. But, there is also a medium term structural deficit which needs to be tackled. It is no easy task and a few penny pinching ideas here and there are not going to be enough.

Deficit Reduction should not be so severe, the deflationary impact pushes economy back into recession. On the one hand we need to reassure markets, but, we have to maintain a flexibility depending on state of economic recovery. We need to avoid the hysterical over-reaction of a panic spending cuts. Fortunately,
  • Monetary policy can remain loose.
  • The Weakness of the Pound should increasingly help our exports.
  • The Bank of England's own growth forecasts are cautiously optimistic.
  • Forecast growth of 3% does give us good room for manoeuvre.
But, it is unfortunately true, we could have several years of depressed growth as we focus on deficit reduction

Where to Cut?

It would be a mistake to ringfence a particular budget like the NHS. What is sacrosanct about the rising number of NHS bureaucrats?

Welfare State is the biggest burden for government spending. With an ageing population, moves to increase retirement age are essential to promote long term

Benefits Trap. There is still an element of poverty trap, which helps explain the huge social security budget.

The temptation is to cut 'easy' targets like transport, defence and local authorities. I don't mind scrapping trident. But, if we cut spending on transport, we could damage the long term productive potential of economy, and it would be self-defeating.

Taxes To Increase

Pareto Taxes. As an economist, we want government to make a greater effort to tax goods with negative externalities. Tax unhealthy food to finance spending on NHS and encourage healthier lifestyles. Tax carbon emissions. It is possible to raise revenue, and increase economic efficiency. New taxes are never popular, but, if explained, maybe people will see it is the least bad alternative.


Trang said...

I think Gordon Brown would help to recover the economy. Looking back few years ago, as being the Chancellor, I think he did well. He was just unlucky,being the PM when theere was a financial crisis.I also think he proposed policy on the debate are better than others'

Ranbir said...

I don't think the press will explain anything to the public in a fair and balanced manner. Inflaming extreme opinions instead.