Diane Coyle: A Christmas wish list for finance ministers to make everyone better off

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The Independent Online

We've got to that stage of the shopping year when even the least spiritual among us have grown tired of the rampant materialism of the holiday season. So as a corrective to the presents to be wrapped and mounds of food to be stuffed into the fridge, here is an economist's Christmas wish list. After a year of decent growth in the world economy, low inflation and housing booms in several countries, what gifts could finance ministers such as Gordon Brown, Hans Eichel and John Snow - unlikely Santas, admittedly - offer this year to make us all better off?

1. Top of the list would be higher taxes in the US.

The Federal budget deficit is likely to be more than 3 per cent of GDP for the next decade, and higher still in later years, unless either taxes rise or spending declines. President George Bush has made it clear he would prefer to shrink the government by cutting core spending programmes. But not only is the US already a low tax and spend country by the standards of the industrialised world, other Republican presidents have had the same plan and have come to grief. Cutting government expenditure is too hard. Taxes will have to rise to plug the gap. The US deficit is one of the main sources of potential instability in the global economy. As the first chart shows, private investors are still putting plenty of money into US assets, but the deficit means the US government is increasingly relying on official purchases of Treasury bonds, mainly by Asian governments. They will not continue indefinitely.

2. Still, the US is not the only culprit when it comes to running an unsustainable fiscal policy. Step forward all the finance ministers of the big four European economies, along with colleagues from Greece, the Netherlands and Portugal.

All seven of these European Union countries are running structural budget deficits estimated at about 3 per cent of GDP by the International Monetary Fund, as the second chart shows. Like their colleague, the US Treasury Secretary John Snow, they seem to have forgotten the great lesson of macroeconomic policy in the 1990s: low budget deficits mean low inflation, low interest rates and a more stable economy. Indeed the situation in the EU is worse than it is in the US because most European governments are running these big deficits from a base of high public spending and high taxation, which makes them much harder to correct.

3. Getting macroeconomic policies right is the easy bit. Much harder is structural reform, because this is always controversial.

France has had a measured unemployment rate of 10 per cent for as long as anyone can remember, and yet even this has not been enough to trigger labour market reforms. On the contrary, the French have made matters worse with the 35-hour week, which reduced corporate profits by making businesses pay employees the same for less work. The new finance minister, Herve Gaymard, has made a timid start by permitting workers to volunteer for longer hours. But if he really wants to help the one in 10 adults in France rejoin the labour market and earn money again, France will need the type of welfare-to-work policies introduced so successfully in countries such as the Netherlands and the UK.

4. While we're on tricky political territory, the German government should be doing more to deregulate the economy.

At the moment it is businesses leading the way by threatening to relocate production to central Europe or even further afield if unions will not agree to greater flexibility and a less rigid and costly "social model". Hans Eichel, the finance minister, therefore has the dubious honour of being less bold and visionary than Germany's corporate executives - perhaps he should have opted for accountancy instead of politics. Much of the sluggishness of the German economy since 1992 is due to the huge task of transforming the east of the country after unification, but a challenge of transition from a highly regulated and corporatist economy still faces the former West Germany too.

5. Turning closer to home, Gordon Brown would do us all a favour if he can hold back from a spending and borrowing spree ahead of the general election expected next May.

The latest figures suggest he has next to no hope of abiding by his own rules on borrowing unless he halts real growth in public spending from now until the end of the fiscal year. Although users of public services such as hospitals and primary schools are well aware of the welcome improvements thanks to the Chancellor's recent generosity with our tax payments, overdoing the increases would spell higher mortgage rates and run the risk of higher inflation and a recession down the road. The past instability of the British economy was linked closely to the electoral cycle, as Chancellors splurged our money ahead of the poll date and tightened all our belts for us afterwards.

6. The Government should also bite the bullet on pensions.

If those of us who are now middle aged or younger want a reasonable standard of living in retirement, though, we'll have to work a bit longer and save a lot more. Whether companies or the government end up bearing the responsibility for paying pensions is irrelevant, economically speaking, because the additional resources to be saved have to be generated by people who are working currently, whatever the mechanism for transferring them to pensioners. Either way, governments are going to have to force us to save more out of our incomes because we're not doing enough ourselves.

7. So far all these policy gifts have been a bit like finding the improving book from Auntie under the tree - it will obviously be good for you but it's a bit disappointing. What about something of more immediate benefit?

The overwhelming challenge in much of the world is containing the HIV Aids epidemic. According to a recent IMF assessment of the economic and social impact of the disease, "from modest beginnings, the economic damage caused by Aids can assume catastrophic proportions over the long run, and thereby threaten the social fabric itself". About 40 million people are infected, with 45 million additional cases expected by 2010, and as the table shows, the effects on life expectancy have been dreadful.

The prevalence of malaria and tuberculosis throughout much of the developing world is also extremely damaging. The single biggest gift all of us in the rich world could offer the majority of our fellow human beings would be a substantial increase in the budgets available for research and the purchase of drugs, so that pharmaceuticals companies have the commercial incentive to develop them. The Global Fund to fight HIV Aids has $5.7bn (£3bn) to last until 2008: not enough.

8. The obvious way to end this Christmas list would be to wish for higher spending on aid to the developing world in general.

The rich countries are a long way from the United Nations target for aid spending of 0.7 per cent of GDP. But it's more important for poor countries to develop the capacity to generate their own savings, investment and tax revenues. So I will conclude with the hope that the governments of developing countries, and the international agencies offering them advice, can progress in creating an environment favourable to economic growth: reducing red tape and corruption; establishing a banking system that allows poor families to make payments safely and save and borrow a little bit; and running a competent legal system and public bureaucracy.

A WASHINGTON radio station famously rang the ambassadors posted to the city in 1948 asking what each would most like for Christmas. While some hoped for peace and freedom throughout the world, Britain's ambassador replied: "I'd quite like a box of crystallised fruit." This economics Christmas list certainly falls into the category of worthy hopes rather than realistically modest expectations, but policymakers who are serious about making people better off should ponder it over the festive season.

diane@enlightenmenteconomics.com

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