Confessions of a Political Animal

September 13, 2008

Is it time to boom-proof the economy?

Time to raise public spending, Darling?

Time to raise public spending, Darling?

As the prospect of a recession looms in Britain, this may seem an odd time to talk about how the country should be preparing for the next global up-turn. However, the reality is that if the UK fails to make long-term considerations paramount in how it deals with this down-turn, the next up-turn could prove to be even more damaging than the effects of the credit crunch.

The simple truth is that there is no cast-iron reason why the next upward trend of the economic cycles has to include Britain. Nations have managed to sit-out boom times before – indeed, France and Germany seemed to manage it quite well last time round – and without the right choices being made, this could be Britain’ turn. Contrary to some expectations, there is no sign that the late 90s-early 00s boom will prove to be the last hurrah of globalisation. Rather it was the catalyst for the next stage of the globalising of the world economy: the breaking of US economic hegemony and the growth in the power of the BRIC nations (Brazil, Russia, India and China). Behind the dust cloud created by slowing or non-existent growth in the old economic powers of the US and Europe, these emerging powers appear to be largely weathering the storm – the IMF is, for example, continuing to predict 10% growth in the Chinese economy in 2008-09.

This means that when the older economies emerge from the slow-down, as they eventually will, they will have a lot of catch-up to play. This will be particularly hard to achieve given that some of the causes and symptoms of this recession, particularly high energy prices, are here to stay. But the countries that will find it hardest are those that have decided that the slow-down is a good opportunity to take an investment holiday – and there is a risk that Britain could be amongst them. Last week, Nick Clegg said that

We have got a recession looming. At a time when British families are tightening their belts, government should tighten its belt too.

It’s an apparently cast-iron piece of logic, but the reality of cuts in public spending at this time have the potential for catastrophe. In the short-term, a recession is in fact likely to lead to a need for higher public spending – more unemployment benefit payments, increased employment schemes, support for those in danger of repossession and for those struggling with energy bills. So, any immediate spending cut will simply hit the poorest hardest: spending on ‘soft’ areas without defined outcomes, such as most of that involving those in poverty is always the easiest to cut.

But it is the long-term effects of a serious reining-in of public spending that could be most damaging if it leads to delays and curtailments in efforts to improve the UK’s skills base and renew its physical infrastructure. We have been here before: the severe crisis of under-investment in public services and national infrastructure which Labour faced on entering office in 1997 was due to spending cut-backs in previous recessions. Labour’s attempts to reverse these short-falls have been aided by the decade-long boom which has permitted the long-term and stable investment needed, although the results have not always been as impressive as they should have been, at least in part due to an obsession with PFIs and PPPs.

But with much of the investment slowly beginning to bear fruit, now is not the time to reverse the process and return to short-termism. Rather, the government should be looking at those areas where an economic slow-down is advantageous to investment: namely, investment in physical infrastructure.

During the boom years, many vital infrastructure schemes have been put in jeopardy by two symptoms of apparent economic success: high land prices and a squeezed labour force. Only recently, it was being predicted that a glut of major construction projects, such as the Olympics and Crossrail, would mean that there was simply not enough of a workforce to go round for other schemes. Now, with lay-offs occurring with increasing regularity in many parts of the construction sector, that situation is eased. Government-funded construction projects would ease the pain being felt in those sectors.

So what sort of programmes should the government be ramping up its investment in? Housing would be a good start, especially as it is becoming increasingly apparent that the fall in prices will not solve the severe housing crisis that Britain continues to face. As a first step, alongside investment in large-scale affordable housing schemes, the fall in house prices should be met by freeing up local authorities to purchase repossessed and vacant houses to kick-start a new generation of council housing. In many cases this could work out cheaper than the refurbishment to Decent Homes standards of unsuitable and near-derelict 1960s and 70s housing stock. A society where every family is well housed would be a more than acceptable legacy for an economic downturn.

Beyond housing, the availability of labour and lower land values provide opportunities for a range of projects that would be beneficial for future sustainable growth. These could include renewable energy generating capacity, an increase in capacity on the rail network and a ramping up of school and hospital construction programmes.

The key to Britain surviving not just this downturn but the highly competitive boom that is likely to follow will be stepping up the nation’s infrastructure to a standard comparable to that which the BRIC nations will be offering by the end of the decade. Missing this opportunity to achieve parity at an affordable and attainable economic period has the potential to condemn the UK to a continued cycle of relative global economic decline, rather than the highly-skilled and equitable society necessary for a successful 21st century European economy. There are very few instances of a British government seeking to cut its way out of a recession succeeding in the long term. It will almost certainly not succeed in this instance.

PS: Anyone who enjoys engaging in back-of-the-envelope calculations on public spending could do worse than having a look at this chart in today’s Guardian.


1 Comment »

  1. […] looking to bring forward a number of major infrastructure projects (as un-exclusively predicted by The Animal), Woolas has effectively given the government’s stamp of legitimacy to the inflammatory […]

    Pingback by Two audiences: two messages « Confessions of a Political Animal — October 20, 2008 @ 9:29 pm | Reply

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