Relying on growth was always going to be a risky strategy. Yet a healthy recovery, with robust GDP increases of 2%-plus, formed the core of the government’s deficit reduction plan. In this context, the combination of prolonged recession and yesterday’s higher-than-expected borrowing figures is a cause for deep concern. Indeed, there are several reasons to believe that the outlook for the UK economy is bleak and that growth will not be sufficient to play the key role in deficit reduction assumed by the government.

Firstly, the stimulus policies adopted after the onset of recession have hampered the necessary market adjustment process by which resources ‘malinvested’ during the artificial boom are reallocated. In other words, stimulus measures have cushioned the decline in the short term but at the expense of recovery in the longer term. Secondly, the expansion of the state under New Labour will have reduced the long-term growth rate of the economy by crowding out wealth-creating private sector activity. Finally, there are a number of more specific negative factors, including an ageing population (contributing to slowing labour force growth); regulatory pressure on the banking sector; the euro crisis; and the potentially disastrous impact of various green policies on business costs.

Since the government can no longer rely on growth (and the extra tax revenues that flow from it) to bring the deficit down and stimulus measures would be counterproductive, spending cuts are the only realistic policy option. And the likely scale of the tax shortfall resulting from the double-dip recession means that these cuts will have to be very substantial indeed. Many of these cuts can, however, be combined with reform to produce long-term economic benefits, as set out in the recent IEA study, Sharper Axes, Lower Taxes. In particular, spending reductions should be combined with deregulation. Reducing unnecessary burdens on business feeds directly into higher productivity. Strict planning controls, green energy policies and restrictive employment legislation are key restraints on business growth and should be urgent priorities for liberalisation.

Richard-Wellings-2012b.JPG

Director

Richard Wellings was educated at Oxford and the London School of Economics, completing a PhD on transport and environmental policy at the latter in 2004. He joined the Institute in 2006 as Deputy Editorial Director. Richard is the author, co-author or editor of several papers, books and reports, including Towards Better Transport (Policy Exchange, 2008), A Beginner’s Guide to Liberty (Adam Smith Institute, 2009), High Speed 2: The Next Government Project Disaster? (IEA , 2011) and Which Road Ahead - Government or Market? (IEA, 2012). He is a Senior Fellow of the Cobden Centre and the Economic Policy Centre.

4 thoughts on “Cut more, regulate less”

  1. Posted 22/08/2012 at 13:39 | Permalink

    And this is going to happen in whose dream?

  2. Posted 22/08/2012 at 15:40 | Permalink

    @Lola – Substantial spending cuts are the only realistic option. The other options will only make the situation worse.

  3. Posted 22/08/2012 at 16:40 | Permalink

    I think Lola knows that, Richard. I think everyone with a brain in their head knows it.

    I honestly don’t know why meaningful cuts haven’t already been made; if the (so called) government are afraid that the mean, nasty left will call them names on the BBC if they do, they needn’t have worried. The left are acting as if they had anyway. So do it! ‘Hung for a sheep as a lamb’ springs to mind.

  4. Posted 22/08/2012 at 16:43 | Permalink

    @Smudger – Good point – and some cuts would be popular with the public, e.g. foreign aid.

Comments are closed.