COALITION´S ECONOMIC GAMBLE STILL STANDS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Coalition’s economic gamble still stands

By Julian Astle

Published: March 23 2011 13:37

The coalition took a gamble in 2010 when it promised to eliminate the deficit over the course of this parliament. Its bet was that private-sector growth would outpace the planned public sector contraction. That gamble still stands. Wednesday’s Budget does not guarantee it will be won, though it makes it marginally more likely.


When George Osborne, the chancellor, delivered his emergency Budget in June, the hope was that the negative effects of fiscal tightening on growth would be offset by monetary loosening by the Bank of England. This was the Conservative-Liberal Democrat coalition’s real Plan B. But with the Bank’s monetary policy committee increasingly boxed in by fast rising inflation, this looks less sustainable.


The good news for Mr Osborne is that despite the Office of Budget Responsibility downgrading its growth forecast, he is still, on balance, likely to win his bet. The bad news is that if growth stalls and inflation rises further there is not a great deal he can do about it, a fact Wednesday’s Budget only served to underline.


The fact that inflation is rising means the onus is now back on the government to help hard-pressed families and to boost private-sector growth. The cut in fuel duty, corporation tax and income tax will all help and will shift incentives to invest and to work, though hardly decisively.

Indeed, if Wednesday’s steady-as-she-goes Budget achieved anything, it was to remind us of the limits of what governments can do to stimulate growth in the short term. That comes down to our ability, over time, to raise productivity, a task that falls not to the chancellor so much as to Vince Cable, the business secretary.


Mr Cable knows there are no short-cuts to success. Instead what is needed is the patient application of liberal economic principles. This means clearing the way for growth through labour market flexibility, liberalising our overly restrictive planning laws and protecting businesses (particularly small businesses) from unnecessary and burdensome regulation. The chancellor has sought to do exactly this today.


A liberal approach, however, is also about government intervening sparingly to address market failures: to promote investment in low-carbon technologies, to protect investment in high-return infrastructure projects, to nurture science, technology and innovation and to raise the skills base. Again, the chancellor made several welcome announcements – on a single carbon floor price, the Green Investment Bank, on science funding, technical colleges and apprenticeships – but their benefits will only become apparent in 2020, not 2011.


The danger comes when the coalition allows populism to trump its liberalism. It has done this, for instance, by imposing an unwise, arbitrary cap on immigration. Liberal Democrats have won important behind-the-scenes battles to mitigate its effects (such as the decision not to scrap the post-study work routes for foreign graduates) but those victories only go to underline the main point: that in pursuit of growth, the coalition’s best ideas are its liberal ones.

The writer is director of the liberal think-tank CentreForum


Copyright The Financial Times Limited 2011.