What next for the British Economy?

Traditionally when the Government wants to stimulate the economy they do so by higher public spending and tax cuts. Unfortunately neither is possible in the current economic climate. As a result the Government wants the banks to lend more money to business so that they can increase productivity and the economy will then start to grow. If it works there will be more jobs, increased incomes and greater tax revenues. So far Quantative Easing has been well tried by both the British and American banks and arguably there has been a degree of success and possibly things could now be a lot worse if QE had not happened. The Government has also introduced schemes to help first time home buyers and only this week Redrow announced increases in profits and turnover and stated that the housing market had been boosted by these schemes. Historically the housing market has often led the way out of recession.

Despite these efforts the economy shows little sign of growth and there is not much sign of further improvement. Moodys, the American ratings agency has down graded Britain’s credit rating from triple A to AA1 and the value of the pound has fallen. So what happens next?

Possibly a down grading of Britain’s credit rating might be the kick in the teeth we need to look more extensively for more radical ways to boost the economy. In the last week there have been two broad hints as to what might happen.

At the February meeting of the Bank of England Monetary Policy Committee the Governor Mervyn King voted for further Quantative Easing. Although he was out voted at this meeting, which has happened twice before, at each subsequent meeting he has won the day and more QE has been announced.

More interestingly, Paul Tucker the deputy governor, has suggested that further reductions in the interest rate should be considered, even to the extent of a negative interest rate! The argument for a negative rate is to try and push banks to lend more of their money as money they hold on deposit could cost them interest instead of earning them interest. I believe that we are more likely to see a cut in interest rates of one quarter or half a percent so that we will have an added stimulus. In addition we will see further money available for the Bank’s Funding for lending scheme. This makes cheap funds available to banks and building societies to lend to individuals and businesses.

These three courses of action are all directed at business who the Government are relying on to grow the economy out of recession. Even if all this was done today it takes months for results to start to show so we have some way to go yet. But actions taken over the last twelve months will now be starting to work their way into the economy. Total employment in the UK has increase by 600,000 in the last twelve months.

In the longer term there needs to be a major rethink about changes to our tax system, changes to the welfare state, including retirement, changes to business regulations, the future of education , skills training and the health service, infrastructure and future power resources.

For the good of the country I would propose a forward planning committee made up of all political parties to map out a 20 year strategic plan. We have a coalition government now and historically Labour, when in power, have been broadly similar in thinking! Perhaps now is time to get together and plan a better Britain.