Plan A is looking shakier than ever. After a slow climb out of recession, growth is now stalling and unemployment rising again, the approach taken thus far – cutting the deficit, and waiting for a spontaneous boom in the private sector – feels ever more risky, both politically and for our pockets. Vince Cable, who has always looked uneasy with a “plan for growth” that involves little except sitting back with fingers crossed, must feel increasingly unnerved.
And he’s right to be worried. His credibility is on the line and his legacy at BIS is yet to be secured. Now is the time for him to develop his Plan B, or Plan A+, or whatever language he needs to use to make an alternative approach politically acceptable. Our recent examination of the UK’s growth potential suggests that without a strategic but vigorous set of policy interventions by Vince’s department, we will struggle to survive, let alone flourish, in ‘the Asian Century’.
The report makes clear that the UK is a serial under-performer compared to our competitors. On investment in business, on skills, on innovation and productivity, and on presence in emerging markets – all key components of a successful, adaptive, innovative economy – we are decidedly mediocre and, in some cases, worse than mediocre when compared to similar OECD and G7 economies. None of this is Vince’s fault but all of it is now his responsibility. With this profile, even if the UK does manage to continue our limp out of recession, we will be truly challenged by the confident new players from the East striding into global markets, and by the revolution in business practices being ushered in by web 2.0 technologies.
So how can we remedy these key weaknesses? Not by sitting back and assuming that all will be well if Government stays out of the way. While this may have ideological appeal to some members of the Cabinet, the evidence is – as Lib Dems well know – that some of the fundamentals underpinning growth don’t arise automatically, but need Government to step in and provide them, or at least provoke them out of an otherwise reluctant private sector.
Number one on the list of potential solutions is a state investment bank. Germany, Japan, the Scandinavian economies and, yes, even the USA use the state to provoke the business investment and innovation that the private sector – for a range of reasons, from slower returns to higher risk – tend to avoid. And most do this through a state investment bank.
Intervention of this kind has been a non-starter in the UK for a long time, but that shouldn’t hold Vince back from taking this agenda forwards. Privatising banks was beyond the pale, as was a separation of investment and commercial finance, but he pushed both into the spotlight while others kept their heads firmly in the sand. Indeed this is an issue which the Business Secretary and the Secretary of State for Energy and Climate Change – Chris Huhne – should work together on. An ambitious Green Investment Bank focused on climate change could be the first incarnation in the development of a ‘British Investment Bank,’ which would also have a strong climate change portfolio but focus too on other areas of strategic interest (such as infrastructure, or SMEs in emerging sectors). At present, though, even the Green Investment Bank in its original formulation is threatened by the Treasury’s deficit focus.
Another example of the challenge posed by the deficit agenda comes in the form of Enterprise Zones. While these are encouraging in that they are a concrete response by Government to stymied growth, the 38,000 rise in unemployment that we have seen over the past three months has more than wiped out the 30,000 jobs that Enterprise Zones are meant to deliver. They are built on the same model as the wider plan for growth – less Government (in this case though tax rebates) equals more private sector.
Our research suggests that this simply won’t work. It isn’t the recipe that has been followed by any of our more successful G7 or OECD counterparts, it is too small scale, and too ideologically rigid. I have a strong suspicion Vince knows this, but our report should give him an extra incentive to act.
The Asian Century will seriously challenge Britain. Cutting the deficit is not an adequate response.
Laura Chappell is Associate Director at the Institute for Public Policy Research.