Economics: Nine steps to climb out of recession
Sunday 09 August 1992
There is also an economic case for action. The risk of another leg of the recession is incomparably greater than the risk of inflation. Britain's inflation rate is falling rapidly. Even pay settlements are moving down to historically low ranges. With spare capacity growing, the downward pressure on inflation will remain.
But a new fall in output this autumn could severely damage the long-term prospects of many companies, causing further cuts in investment, training and research and development. The CBI survey a fortnight ago showed a rise in companies that thought their stock levels were more than adequate: that may spell a renewed cut in production as businesses meet demand from the storeroom rather than the factory floor.
Any package, though, has to meet a demanding set of criteria. First, it must be credible. A splashy package with little substance, rather like the Government's housing package last December, will not help the economy and will probably not take the political heat off the Government's ERM policy. Whatever the Treasury invents has to be enough to persuade people that it will work: the present problem is one of confidence. As President Roosevelt said: 'The only thing we have to fear is fear itself.'
Unfortunately, the Government's second constraint does not help: any package must be temporary and cheap. The financial markets are worried by the deterioration in the Government's finances, due both to recession and to a fiscal easing this year worth nearly 2 per cent of national income. They would take fright at any permanent increase in public spending or cut in taxes.
Here, then, are some ideas - most of them unoriginal - for improving the outlook. I put them forward in the spirit of encouraging the Treasury, rather than setting out blueprints, particularly after the unfair savaging of the Abbey National's Sir Christopher Tugendhat last week. Sir Christopher started from the correct premiss that consumers' spending is slow in part because so few people are moving house. They are therefore spending little on furniture and decoration.
He suggested that home-owners who incurred a loss of up to pounds 10,000 could receive a tax refund from the Inland Revenue for the same amount, thereby allowing some people whose house is worth less than their debt to move. At present, they cannot do so unless they have large savings, as lenders are forbidden from lending more than the value of the house securing the loan.
The scheme might be open to abuse as people swapped houses to cut their tax. But the details are much less important than the message: you Treasury people have the time and the expertise, so get on with it. Here are my nine thoughts for a happier autumn:
Reduce VAT to 15 per cent for six months. The object is to kick-start spending, so any measure which encourages people and companies to spend now rather than later will help. When the recovery is rolling, VAT can go back up without imperilling the upturn. A temporary cut makes goods and services cheaper now - and tells people that they will have to pay more if they wait.
Bring forward investment projects. The Chancellor is now committed to existing planning totals for spending, but he should start contracts early so long as there was a corresponding reduction in later years of the planning period. Tender prices are now falling. This is the time to build the Jubilee Line extension, or extend the motorway system.
Tax breaks for investment. The Chancellor should allow companies to set off any increase in investment over the 1991-2 level against their corporation tax liability. The concession should end in 1994 so that investment plans are brought forward.
Cut prices and increase output. The Confederation of British Industry has suggested that the Government could afford more public services - in health or education - if it kept the lid on costs and used the extra to expand services. It is right.
Keep mortgage rates down. Try to disengage mortgage rates from the money market rates, which need to stay high to prop up the pound. Don't just cut National Savings interest rates, as the Chancellor has now done twice: suspend all National Savings investments until further notice, except for those reinvesting maturing investments.
Cut the cost of funds to the banks and building societies. Tell them that the amount of capital and cash they need to support a given level of lending will be temporarily eased. Raise the building societies' limits on funding from the wholesale market.
Encourage first-time buyers. First- time buyers are the key to starting housing chains, and hence to the number of transactions. They will be reluctant to enter the market while they think they might lose all their 5 per cent deposit in a new 5 per cent fall in house prices over the next year. A doubling of tax relief for seven years, available this year only, could tip the balance. It could be financed by cuts in relief for others.
Encourage private renting. Another way of mopping up the stock of repossessed houses would be to encourage companies and big institutions - pension funds and life assurers - to buy residential property for letting, perhaps in co-operation with housing associations. Richard Best of the Joseph Rowntree Foundation says that not a single home has been built for private rental since the Second World War, and the sector has been shrinking by 80,000 homes a year. The court procedures for dealing with recalcitrant tenants should be speeded up. Residential property investment might also be put on the same basis as industrial property by giving a 4 per cent a year straight-line capital investment allowance against corporation tax.
Slow down repossessions. December's proposals for turning owners into tenants never achieved lift-off, but with more Treasury effort they might. The big mortgage lenders and their insurers should curb their repossessions and sell fewer repossessed houses in exchange for help with the rest of the housing market. They are financially strong and can afford to hold houses on their books.
Raise public service charges. If the Government is to promise credibly to reduce any short-term rise in the deficit, it needs new sources of revenue for later years. It should be more radical about charging for public services, starting with motorway tolls, which raise pounds 2bn a year in France.
The Government should encourage private road-building - for example, the Birmingham northern relief road - but it should also levy tolls on existing public motorways. Congested cities would benefit from road user charges, which would have the extra effect of curbing subsidies to public transport, because it would be able to charge more.
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