How is the Governments economic policy working?

In the 1990’s recession tight Government controls on spending, lower interest rates and sterling devaluation worked, a budget deficit of 8% of GDP turned to a surplus in five years.

This time things seem tougher. Public sector borrowing has come down.

  • 2009-10 – £159billion
  • 2010-11 – £142billion
  • 2011-12 – £119 billion projected

Future reductions are going to be hard especially as the cost of benefits has grown and corporation tax payable by companies has decreased.

Recent studies have found that 44% of business leaders had postponed at least one of their investment, expansion or employment decisions in 2012 because due to economic or business uncertainties. Furthermore, of those polled, more than half have delayed these decisions until at least 2013.

Apart from the obvious Eurozone problems, where 50% of our exports go, there are constraints on access to finance, some confusion over Government policies and rising pension deficits.

Rising pension deficits are a major worry. Pension funds have always invested heavily in Government bonds, but the return on these and other non speculative investments are just not meeting the income requirements and projections of the pension fund operators. When this happens the fund needs to call on subscribers to increase their contribution.

As a result companies are having to divert funds, that could have been used for expansion, into their pension schemes.

Recovery is going to be consumer led, so Labour’s conference call to remove stamp duty payable on properties for first time buyers would help. There is a demand for starter homes and the government should focus on how they can get this sector moving. There is already some help towards mortgages, some help on deposits and stamp duty holiday will help as this has to be paid from deposit money, not part of the mortgage.

The rental sector is still buoyant and there are many buy to let mortgage products available to help the would be property investor. If we could increase housing supply then possibly the government could look at ways of encouraging the rental sector, by making funds available through short term bridging finance to get developments moving quickly.

Historically building of the country’s infrastructure, roads, railways and homes has always helped to lead the country out of recession and get people back into work. Unfortunately many of these projects take time to get started so anything that can kick start a development project would be a bonus.