There are alternatives to the reckless ‘Plan A’

8:40 am - May 25th 2012

by Duncan Weldon    

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Yesterday we learned that GDP actually fell by a bit more in the first quarter than previously believed, -0.3% rather than -0.2%.

But important as the severity of the double-dip is, the wider issue is the longer term stagnation of the UK economy.

It’s against this background that the FT featured a whole range of ideas to boost growth. But will the government listen?

It ideas – from boosting infrastructure spending (favoured by NIESR’s Jonathan Portes) to the a ‘balanced budget expansion’ (argued for by the SMF) to more inventive and expansionary monetary policy (the preferred Plan B of the IMF).

Nick Clegg yesterday signalled that he supports a ‘massive’ expansion of investment – something the TUC would certainly support but until we get concrete details, it’s hard to get too excited by this intervention. Clegg made similar calls in the past which haven’t materialised.

The TUC has long argued that the government was under-estimating the impact that austerity would have on the wider economy.

Of course events across the Channel have had an impact, the rise in the oil price pushed up inflation and a refusal by banks to expand credit (especially to SMEs) is holding back growth. But when other factors are providing such a headwind to growth, the case for the government to be doing more to support growth is stronger not weaker.

Initial projections from the OBR in June 2010 turned out to be incredibly optimistic. The chart below compares what has actually happened to GDP since Q3 2010, the path then expected by the OBR

(slight caveat the OBR in June 2010 only provided quarterly forecasts until the end of 2011, for Q1 2012 I’ve simply pro-rataed their full year 2012 forecast):

GDP has grown by 4.1% less than the OBR expected during this period – a huge miss. We can debate what is to blame till we’re blue in the face, but it’d be more productive to spend time trying to reverse stagnation.

Given the evidence that the economy is not as strong as they hoped, they should think again. To continue with a plan devised almost two years ago, even as the economy underperforms and stagnates isn’t building credibility, it’s simply reckless.

A longer version of this post is at the TouchStone blog

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments

1. Northern Worker

No government can magic up growth, never mind the bunch of incompetents presently passing themselves off as our elite. Real, permanent growth and jobs are create by the private sector. No-one seems to recognise that growing amounts of EU red tape and growing amounts of public spending are the problem. The red tape makes us uncompetitive with the world outside the EU unless we are as efficient and productive as Germany, and we’re not. Public spending has got so large (46% of GDP in the UK?) that it squeezes out private enterprise and sucks up all the best qualified people.

Anecdote. I went for a haircut yesterday and found my barber of 30 years has closed down. I asked in the Spar shop what had happened. He said the rent and UBR has recently reached £20K per annum. Added to that all the rules and regulation – including a CRB check if he wanted to cut children’s hair – and my 60 year old barber ended up working for £2 per hour. So he didn’t renew the lease (Council-owned) and put himself on the dole.

That’s the problem. It’s got nothing to do with banks not lending to businesses. If a business needs an overdraft to pay the wages it’s bust and will close. It’s nothing to do with employing ever more jobsworths, or passing even more laws than the record 4,000 last year. It’s certainly nothing to do with politicians. It’s about people who own businesses who want to do their best. And that’s not going to happen until the government actually makes some cuts – which they haven’t (urban myth).

“the FT featured a whole range of ideas to boost growth”

Can you please not link to articles behind a login wall.

@Northern Worker

Real, permanent growth and jobs are create by the private sector.

Arrant nonsense.

For example: hundreds of thousands of jobs were “created” by the banks.

Which then hit the wall in the credit crunch costing over a million jobs.

The private sector is creating and demolishing jobs all the time. Nothing “real” or “sustainable” about that.

@ BenM

THe only nonsense being sputed there is from you I’m afraid…the private sector creates and destroys individual jobs all the time – but the NET private sector job creation has been positive.

The public sector can create jobs, as Gordon Brown illustrated, but they are paid out of taxation of the private sector and their net GDP benefit and multiplier is questionable at best. Indeed, there are many recent studies showing that over about 35% of GDP, additional state spending simply acts as a drag on growth. Hiring more unionised, overpaid civil servants who add little or no value is certainly not the solution.

@ Duncan Weldon

Your article doesn’t really go into what plan B should be, it just attacks plan A.

It’s a bit of a fallacy that infrastructure spending is always pro-growth multiplier (especially when the ineptitude of government delivery is factored in). The olypmics and things like HS2 are great examples – their costs are unlikely to actually cover themselves in future revenues from growth. So unless you advocate builiding white-elephant ‘bridges to nowhere’ as one of filips to GDP, without factoring in the costs both financial and in terms of what else could have been done with the money, infrastructure spending isn’t the be all or end all solution. Well targeted infrastructure spending might add value, but often the wastefulness of these government projects means that you would get a greater effect from simply cutting taxes.

Monetary policy itself also cannot provide a solution in itself, and can indeed store up problems, as ultra low interst rates and QE have shown. It hasn’t solved the problem and has created a massive issue in future liabilities for the pensions industry.

The cheapest and most immediate things the government can do, cutting red tape and freeing and liberalising the economy from overburdening legislation, as well as cutting taxes for business, the TUC is wholly against. So tell me, what do you suggest?

5. Duncan Weldon

@4 Tyler,

I’d argue for a short term stimulus of things such as – VAT cut, increase in infra spendings (along lines of the identifed project in the Treasury’s National Infra Plan published last Autumn – all seen as needed over next 10 years and ‘shovel ready’), a temporary cut in capital allowances to encourage investment in the short run from the private sector, good case for cut in employer’s NICS in the short run, Get the GIB up and running and able to borrow quickly, etc, etc.

Medium term, I’d like to see a State backed investment bank to drive up (private) investment spending and support lending to SMEs, a smarter modern industrial policy (taking in skills, regional policy, procurement, etc) and reforms to corporate governance.

Short term polciies to get growth going and medium term policies to ensure the ‘right’ kind of growth – balanced (sectoral and geographically), sustainable, jobs-rich and aharing the proceed widely.


6. Northern Worker



So what do you suggest. Go to the magic money tree and borrow even more billions, tax everyone even more than now, and then employ a load more public sector workers on inflated wages and gold-plated pensions.

That’s what we’ve been doing for the last 15 years and it’s really working, isn’t it?

The problems with our economy are systemic and it’ll take more than employing a few diversity co-ordinators to solve them.

Of course we can always chuck money at great public works and infrastructure projects, which employ stacks of private sector workers. Like the Fire Control centres – £300 million. Oh, they’re not in use, are they, and we’re paying £1 million per month to keep them empty for the next 20 years. Or there is the high speed train so a few rich people and politicians can save 12 minutes getting to London.

Governments are useless at picking winners or anything, really. There are no levers of government that can turn things around just like that. Governments everywhere just get in the way of real progress and growth and jobs – with red tape and sucking the life out of the economy with taxes and borrowing.

Come on now, do you really trust the incompetents in government now? I don’t; they’re just a bunch of toffs with no real life experience. Look at their energy policy. It’s absolutely guaranteed to cost us a fortune. We have shale gas, which could reduce energy costs, employ a load of people in good jobs, and give our economy a real boost. But, no, they are much more interested in making a bunch of people rich by subsidising windmills.

7. Chaise Guevara

“The problems with our economy are systemic and it’ll take more than employing a few diversity co-ordinators to solve them.”

This is going on my list of Things People Say That Make It Impossible To Take Them Seriously, along with “cultural Marxism” and “mandatory homosexuality”.

Forgive me Duncan, whilst I strongly disagree with austerity, why this fixation with growth which results in us all working harder so that the wealthy can have an even larger share of a larger pie.

@ 5 Duncan

Fair play for answering, and I agree with many of your points. Fair play also for not going directly for the less austerity (to be spent in the state sector)/print more money argument many here are so fond of.

However, as I mention, I do feel too much weight is placed on government infrastructure spending. Shovel ready doesn’t mean it should be done, for the reasons I point out above.

I also see you make no mention of rolling back legislation and liberalising the economy, given that this change is near enough cost free to enact. Is this something you think shouldn’t be done, and if so, is that your position or that of the TUC?

10. Duncan Weldon

Robert @8,

I want growth that is better shared.

I also think growth is key to driving up living standards and reducing existing debt burdens/the deficit.

Tyler @9,

I think we already have a very liberalised labour market (and very liberalised product markets too). I really can’t see Beecroft style things adding to growth.

There is no staightforward link between regulation and employment – see for example how Germany (to give one example) has a healthier and more regulated labour market.

I thought factcheck were very good on this this week:

@6 Northern Worker

Governments are useless at picking winners or anything, really.

No one in any sector is especially adept at “picking winners”. No one can predict the future.

But stuff government does didn’t cost the globe $5trn in the way that free wheeler dealing private sector casino banking did.

So don’t get all huffy about government, because no one does a full blown economic crisis quite like the private sector when it is deregulated.

12. Northern Worker


The mess we see at the moment is thanks to stupid governments borrowing too much to bribe voters and equally stupid banks lending them the money. When it comes to real wealth generation, I think we would both agree that neither banks nor governments are the answer. The solution is always honest industry, commerce and trade. Banks and governments get in the way of this only way of genuine production of wealth, which benefits us all. I wouldn’t dare put into words my opinions of both – bank managers!

13. Dissident

Just about every private sector industry is sunsidised one way or another by the state, even that little barber shop was, because that barber shop’s customers used public sector paid for roads etc. All new tech industries for decades have built themselves with state subsidies blah blah.

What right wingers chose to forget is money is only a symbol, an iou. What they pay in taxes goes back into their pockets at a later date, it is like finding the end of a circle, where is it? or which came first, chicken or egg…

As for deregulating to stimulate employment and growth, what a joke, if you want this country to be composed of wage slaves in rags, and their kids used as grease monkeys in moving machinery (pre regulation victorian Britain, which was so successful America and Germany took over the world) Or multi billion bailouts every decade for bankers (deregulation of finance) then go ahead, go set up your own country elsewhere!

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