Wednesday's budget measures could be directed to revolutionise the economy with growth that's smart, inclusive, and sustainable
George Osborne has a major task ahead to get growth going in the UK. The biggest challenge is to leave ideology aside. Plan A has been about austerity – with no economic evidence that it has ever worked, anywhere in the world, in times like the present.
We are in a period of massively underutilised capacity, with businesses not cash-strapped but fearful of the future, and hence hoarding money at record levels. ($2 trillion in the US, £800 billion in the UK). Interest rates are at historic lows. What the government should be doing is thinking concretely how to get the investment and innovation machine moving.
Austerity doesn't work because when consumers spend less (due to rises in VAT, and cuts in public services and public sector wages – all part of plan A), they consume less, causing business sales to decrease, which of course reduces business investment. And the strategic aspect of business investment fails when there is no bold "vision" about areas of innovation. Drugs giant AstraZeneca has cut total UK jobs – including this week in the chancellor's own constituency in Cheshire– and is moving production to countries where there is a more serious life-sciences strategy.
The bottom line is that government should not act like a business – spending too much during booms and too little during busts – but counter-cyclically, spending and investing in key strategic areas. And given that such investments create growth, it is just not true, especially in countries with their own currency and active central banks, that for every pound spend there must be a pound cut.
The trade-off being announced today as 1% cuts to departments in exchange for £2.5bn capital investment, is a false one. So what must happen? First and foremost, of course, are ailing areas of infrastructure– housing, transport and school-building. But we must also remember that although Keynes talked about recessionary times as ones in which simply "digging ditches and filling them up again" would spur growth, there is increasing evidence that the spending multiplier is almost three times higher when government investments are "directed".
In the 80s and 90s such investments were directed around IT – leading to what became decades of growth related to the internet revolution. Today, the government should be doing the same for green technologies – not only renewables but for all infrastructure spending. Indeed, those countries in Europe that have been growing after the crisis, like Germany, Finland and Denmark, all have a green strategy and are attracting international investments– with China becoming a dynamic collaborator, not just a competitor.
A successful budget tomorrow would be one that signals the Treasury understands that investments in human capital, infrastructure and education are essential to growth. That the various attacks on real incomes have hurt consumption, confidence and, worst of all, the social fabric of the country. And that the state's role is not limited to reducing impediments to business investment but increasing their animal spirits. It should be a budget that shows that the Department for Business, Innovation and Skills realises that such policies must go beyond patchy boosts to the likes of apprenticeships.
While these initiatives have at least revived the industrial strategy debate, they have limited impact not only because they are poorly funded but also because they are riding on false assumptions of what drives investment. Research and development tax credits, or "patent box" policies which target income generated from research rather than the research itself (a problem in a country with a below average R&D-to-output ratio), simply cut government tax revenue and don't make R&D happen that would not have happened anyway.
Business investment is driven by expectations about where future technological and market opportunities are. In areas like Silicon Valley in the past, and China today, this is about large direct public investments in education, research, technology, as well as publicly funded risk capital going to the most innovative types of businesses, large and small – which are poorly served by a speculative financial system. Such businesses need long-term, courageous and patient capital, exactly what discussions around a British investment bank should be about.
Tomorrow's budget could change Britain's future if it steers the country in a green direction, with well-funded infrastructure projects (green schools, green homes and a green transport system) and a plan around green innovation (wind, solar, biofuels). It must open itself to attracting the world's most dynamic people; and most of all it must want whoever lives in Britain to be proud to live in a country which can achieve growth that is not only "smart" but also inclusive and sustainable. Come on, George, go for it.