How to wrench the UK economy out of its downward spiral

I was recently chatting to the chairman of a FTSE 100 company. I suggested that the UK economy reminded me of a failing company in need of a turnaround.

When companies start to fail, the initial reaction is to maintain profits by cutting costs. This works for a while. But unless the company can create the financial space to re-launch itself, cost cutting keeps sapping effectiveness which in turn leads to further cost cutting. And so on until death or takeover.

The UK economy is in the same downward spiral. Business confidence and business investment are down. Fiscal space is limited so maintaining a lid on government expenditures has been made a priority (though it is not clear how long, politically, this can last).

The economy has become over-dependent on debt-fuelled consumer spending rather than industrial production. Wages are stagnant and inflation is sapping disposable incomes. As interest rates rise, as they inevitably will, consumers will feel an even greater squeeze and the consumer-led economy will splutter. Add to that the chaos and confusion surrounding Brexit, and the conditions for a death spiral in the economy are all there. And all under the watch of a Conservative government – the party of supposed economic competence. One which, this time, cannot blame ‘international conditions out of our control’.

Is there any form of solution? Yes there is. But it requires co-ordinated action by the government and that, frankly, does not seem credible at the moment.

So, what to do? I suggest that three actions could start to turn confidence round and stimulate the economy:

First, while interest rates are low, the government should borrow extensively for investment rather than for current spending. This should have been done years ago and was only stopped by stubborn Conservative ideology rather than by any form of logic. A government investment programme used wisely will start the process of generating confidence and jobs.

Second, the Bank of England should review its quantitative easing programme. As we highlighted over a year ago, the QE programme as currently structured makes the rich richer and the poor poorer while having, at best, a doubtful effect on the real economy. In our report, we put forward alternative approaches to QE that would have a stimulus effect on the real economy rather than just pushing up asset prices.

Finally, the government must end the chaos and uncertainty over the shape and timing of Brexit. Again, our most recent report suggests a way forward that would calm nerves, stop the brain drain and create the conditions under which business investments can be made.

Having had this discussion, the chairman I was speaking to said: “There is usually one more element that is essential in turnaround processes: a change in leadership.” That, too, will soon become overdue.

The Summer recess should provide sufficient time to put together a plan to restore confidence and stop the downward spiral. A half-competent government would announce such a programme by the Autumn party conference season and in the Autumn budget. Failing that, it is not clear how long the British economy can be maintained in anything like a reasonable state.

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Radix is the radical centre think tank. We welcome all contributions which promote system change, challenge established notions and re-imagine our societies. The views expressed here are those of the individual contributor and not necessarily shared by Radix.

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