The first proposal, to cut interest rates to 5 per cent, is risky. It would encourage foreigners to desert the pound. Our exchange rate would fall and foreign goods would cost more, fuelling inflation. On the other hand, exports would be cheaper in foreign markets and British businesses impaled on the interest-rate hook would be released. On balance, therefore, a dramatic move such as this is worth the risk. Inflation is less of a threat than depression.
No points for the suggestion of pushing ahead with major road and rail projects. Government has no money of its own. If it spends on public works, it takes cash from private citizens to finance them - or, by borrowing, pre- empts the cash that private businesses could have raised. Either way, it starves the private sector of capital which could be creating real jobs more efficiently than the state can create bogus jobs.
The idea of reviving the housing market is good, but not by tax concessions, which selectively channel funds into housing by making it more attractive than other investments. Why not reform conveyancing instead, thus speeding up and cheapening house purchases and sales? This would cost money to no one except lawyers.
The destruction of small businesses by withdrawal of bank credit is rightly fingered as a major contributor to recession. Full marks for proposals to curb it by a firm lead from the Bank of England. But do not forget that the majority of bankruptcies are triggered by the Government itself, with either the Inland Revenue or Customs and Excise pushing for liquidation. As preferred creditors, they have an interest in doing this. That position should cease.
Of course, the Bank of England should be independent. More than that, it should be able to behave like a real bank, with high- street branches and merchant banking services.
That the Treasury should seek a balanced budget over the course of an economic cycle makes obvious sense; indeed, it is virtually government policy already. Certainly the Treasury's Economic Forecasting Unit should be independent: it should make its projections and economic model available to private business on a commercial basis.
No marks at all for a Department of the Economy. We have been there before. The Department of Economic Affairs under George Brown was a laughing stock even before it produced its laughable National Plan. Centralised planning is not the way, as Eastern Europe has shown. The spontaneous outcome of the plans made by thousands of individuals and businesses doing it for themselves will achieve a better result than blinkered bureaucrats can put together.
It is remarkable that the Independent should propose linking our currency once more to those of our European partners. Wasn't that part of the trouble? It is all very well saying, 'when the economy has regained its strength' - if it does, we won't need fixed exchange rates.
The commitment to free trade is fine rhetoric, and of course we should support it. But we have no control over the ability of the French to torpedo the Gatt talks. They have overpriced food throughout Europe and pauperised the Third World to support their inefficient farmers. There is little reason to suppose British 'leadership' can change their minds. Half a point for sentiment; no points for practicality.
The overall score of 6 1/2 is creditable, but it overlooks one key element in any recovery. We desperately need more private investment, for with private investment come economic growth and expansion. We can boost this only by increasing the returns on capital, which means lowering the marginal taxes on investment income. Government has to cut capital gains tax, and probably upper-rate income tax and corporation tax as well. But these highly necessary tax cuts would have to be paid for by corresponding cuts in spending. Over to you, Mr Lamont . . .
The author is president of the Adam Smith Institute.Reuse content