The hunt for growth

The lack of growth in the UK economy is worrying for all sorts of reasons; it hurts at an individual level for those who cannot get work and it hurts at a macro level: the deficit is increased because tax revenues are less and welfare payments are more and potentially this harms our credit rating and therefore the value of sterling and the interest we have to pay to fund the deficit.

The trouble is that there is very little the Government can actually do to increase growth. In economic terms, I think it has done one big thing well: it has sent a message on getting public sector spending under control. It hasn’t quite achieved getting it under control but it’s made more progress than most previous governments. This has had a positive impact of keeping interest rates low; had the steps not been taken the negative impact on the economy would have been horrific. But the trouble is that it has reduced confidence, it has made people nervous and that makes consumers and companies unwilling to spend money or invest.

In fact things aren’t too bad; I was in S Devon last month. Most pubs and shops were advertising for staff. There were almost as many cranes and skips as London in London. If you talk to small business owners generally about how things are going, the answer is usually “OK”. Not great – but OK. Businesses have adapted. But if they can, they are hoarding cash, they are not taking risks, and they are not investing. And if don’t have cash but want to invest then credit has dried up largely because regulatory policy limits bank lending.

So what should the Government do? It should recognise it can’t do too much. It needs to get credit flowing by reducing some of the constraints on banks. It should introduce no-fault redundancies to help employment. It should sound more positive. It should ensure there’s no more quantitative easing. It should develop small scale infrastructure projects. But the implication that it sees a third runway at Heathrow as helping is worrying: that would be irrelevant to growth now. The reduction of planning constraints on residential development could help but also conflict with the localism agenda many of us thought was an important policy.

But serious growth will only come from improved confidence. That will take time and will only come from working through the debt problems in the UK and abroad – especially Europe. In the meantime the Government needs to keep its nerve and not seem panicked.

Why do people do silly things?

A few weeks ago there were two announcements which had big implications for the companies involved and in different ways for the UK economy.

One was about the West Coast rail franchise, taking it from Virgin trains and giving it to First Group.

The second was the proposed merger between BAe and EADS.

I heard both when I was listening to he radio. Both instinctively felt wrong; it was obvious they were silly ideas.

For the rail franchise, it was obvious (I speak with experience of the bungles with the East Coast main line franchise) that insufficient weight had been given to the experience of the current operator and too much weight had been given to future promises of a previously unreliable operator. I didn't know just how badly the process had been handled, or how quickly it would unravel, but it was obviously wrong. Why couldn't transport ministers see that? How did they let it happen? It's easy to blame the civil servants who clearly made serious mistakes possibly driven by the fact that Virgin trains had previously negotiated too good a deal. But ultimately the ministers decide. I suppose you get wrapped up in a bubble and there's a limit to how much you can contradict the advice of full time officials. But this was so obviously wrong they shoud not have accepted it. The fact they did means they should not be ministers now.

BAe, given a downturn in defence spending, needs to consider it's strategic direction. But the companyis fundamental to the UK defence structure and its major clients are in the US. Its also a big UK employer. It's surely obvious that a merger with a primarily competitor  over whom the French and German governments have significant influence is going to be very high risk, in the best case, with major implications for UK defence security and for UK jobs. This is one where the Government should simply have said "don't even think about it" when they were sounded out, as they must have been. Yet there's a major lobbying operation which appears to be having some success. If the Government is lucky shareholder pressures may put a stop to the deal. If they don't then the Government belatedly needs to stop it. If not they'll regret it even more than the rail franchise -although by the time the consequences arrive they'll probably be out of office.

But again: why is this not obvious?