Forum for National Recovery: Economists press case for leadership: A meeting organised by the 'Independent' in London yesterday to discuss the manifesto for change heard
Wednesday 09 December 1992
Many of the country's leading economists urged the Government to tackle the long-term structural problems which face Britain - a chronically weak manufacturing industry and an undereducated and undertrained workforce - as well as the short-term need to get national output growing again.
Speakers called for the Government to invest more in Britain's infrastructure - roads, rail, hospitals and schools - to prevent recession degenerating into slump. But leading economists warned that the shortfall between government spending and tax revenue might soon stray into a danger zone, in which the country's public finances could become an Italian-style debt trap. There was almost universal backing for a rise in taxes in the medium term.
The meeting was called by the Independent to address the deepening sense of economic malaise and drifting political leadership after sterling's enforced departure from the European exchange rate mechanism.
It featured sessions on whether the current recession was deepening into slump and what could be done to address that danger. Speakers also commented on how much risk could be taken with government borrowing. The Government has been predicting for more than a year that the economy is poised for recovery. But speakers were unconvinced that Britain showed any signs of pulling out of what is now the longest recession since the Second World War. One even argued that Britain was facing 'terminal decline'.
Patrick Minford, professor of economics at Liverpool University and one of the Chancellor's 'seven wise men' appointed to defuse criticism of Treasury forecasting, argued that the risk of a deepening recession demanded further interest rate cuts.
Gordon Pepper, of the City University Business School, said that the huge overhang of consumer and business debt meant there was a risk that the economy could move into depression in the next one or two years, but also 'that we might then have another inflationary boom'.
Speakers from the floor said that interest rates were less important as a stimulus than a general revival of confidence. This needed the Government to demonstrate that it had a clear idea of where the economy should be going.
Part of this vision should be a greater emphasis on education and training. This would help reduce unemployment, itself a drain on confidence among consumers and businesses. It would also make Britain a more attractive base for manufacturers, hopefully allowing the country to avoid a ballooning trade deficit by exporting more and importing less.
Speaker after speaker said that the measures in the Autumn Statement recovery package had not made them confident that a slump could be avoided. Rosemary Radcliffe, chief economist of Coopers & Lybrand, said: 'I don't think the monetary or fiscal relaxation to date is enough to avoid a slump.'
In addition, two economists called on the Treasury to abandon its full funding rule, in which the budget deficit in any given year must be fully financed by sales of gilt-edged stock to investors outside the banking sector in the same period.
Professor Tim Congdon, another of the 'seven wise men', said that a slump could be avoided if the Treasury simply borrowed from the banking sector. This tactic would have the effect of promoting an acceleration of broad money supply growth.
He was joined by Roger Bootle, chief economist of Midland Montagu and an expert on the gilt market, who warned that the Government was facing a crisis in attempting to finance the budget deficit according to the full funding rules.
He also urged a further fall in interest rates and the pound to help manufacturing grow, boost exports and encourage industry to make products which at present can only be bought from foreign manufacturers.
Longer term, he called for 10-year programme of national revival. 'The whole economy needs a sense of leadership and direction,' Mr Bootle said.
Manifesto for national recovery
Cut interest rates to 5 per cent straight away
Push ahead with major road and rail building projects
Take immediate measures to revive the housing market
Tell the banks to stop foreclosing on sound businesses
Establish an independent Bank of England
Balance budget over the course of an economic cycle
Replace Treasury forecasters with an independent body
Set up a new Department of the Economy
Eventually restore pound's link with EC currencies
Save the Gatt free trade talks from French veto
(Photographs and graph omitted)
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