Leading article: Volatile markets are the Chancellor's cue to focus on growth

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The Independent Online

Is it hysteria? Or the herd instinct? Or the only rational response to the growing threat of double-dip recession in the developed world? Whether a knee-jerk reaction or not, the spectacle of yet another dizzying sell-off on world stock markets is alarming. Spooked by gloomy economic indicators, investors are piling out of anything perceived to be even slightly risky, shovelling money into supposed safe havens such as gold, apparently heedless of the measly returns.

The biggest worry is that the spasm of risk-aversion that sucked £62bn out of FTSE 100 shares in a single day this week continues long enough to become a self-fulfilling prophecy. Rational or not, economies can talk themselves into slump: concerns about slowing growth put a brake on lending, which stifles expansion, and the economy is tipped into the feared recession.

Against such a background, it is time for the Government to stop arguing about cuts and start emphasising growth. This is not to call for a Plan B that would slow down reductions in public spending. Rather, it is about looking at what else can be done to boost growth, without recourse to the taxpayer. There are other levers the Government can pull, and they are potentially good ones. But we may not be able to wait until the Chancellor's much-trailed Growth Plan that is due in the autumn.

One option, floated by Andrew Haldane, the Bank of England's executive director for financial stability, is that the regulation of Britain's banks be loosened. If there is a problem with banks' lending to businesses – which there surely is – then sticking to the post-financial-crisis path of forcing them to hold more capital is to skip away from the open manhole straight into the path of an on-coming bus. There is no question that banks' capital structures need beefing up. But now is not the time, even with the floods of risk from the European debt crisis lapping at their ankles.

The banks are only one side of the equation. It is no use freeing up lending if no one is confident enough to borrow. But that too is an area that could benefit from a helping hand. The recession purged the private sector, leaving surviving businesses lean, efficient and, crucially, cash-rich. There is an estimated £60bn sitting on company balance sheets. But the money is not being spent. The equivalent of 4.5 per cent of Britain's entire economic output is sitting idle because there is no confidence that the orders needed to justify spending it will materialise.

The Government cannot make orders appear. But it can change the arithmetic for investing, by offering temporary tax incentives for capital investment, say. As soon as companies start buying extra delivery vans or upgrading machinery, a wave of orders multiplies down the supply chain, boosting confidence – and demand for bank lending – with minimal impact on the Exchequer.

The world's stock markets are not wrong. The situation is grave indeed, amplified by the absence of the kind of political leadership needed to address the challenges of the eurozone crisis and global trade imbalances. The British Chancellor cannot do it all by himself. But we need his plan for growth and we need it now. To paraphrase the favoured adage of the paranoid: just because we're talking ourselves into it, doesn't mean it won't happen.