Bouncing Back! How Britain can Avoid a Recession
Other economists HATE him! Four WEIRD tricks to avoid a recession
It looks as though the UK has narrowly escaped slipping into a recession. We should obviously be careful here as despite what some commentators like to say there is no actual agreement about what constitutes a recession. Yes it has to involve negative growth but economists can’t seem to agree just how long that has to go on for. Regardless, it looks as though we are still set for a recession in the future although it shouldn’t be as long as originally feared. In short, things are still looking pretty bleak but not as truly awful as expected.
This simply isn’t good enough. Recessions are terrible things. We see people losing their jobs, livelihoods, and homes. They experience stagnating living standards and the scarring impact of recessions can last for years and decades. Below I offer four areas for the government to focus on. They overlap significantly and each would support the other.
Tackling inflation
Tackling inflation is often seen as the preserve of central banks such as the Bank of England. Now it’s true that the Bank has the key role to play here – in part by correcting mistakes made during lockdown where monetary policy probably was too loose – and we see that its tighter monetary policy is starting to work, the government does have a role to play.
For example, it was right to provide support for businesses and firms to help them with their energy bills. Unfortunately, the plan enacted by Truss and Kwarteng was huge and poorly targeted. This should be reviewed in the Budget and become much more generous for those who need it the most. Given that energy bills are one of the key drivers of the cost of living crisis, this should provide real support for households and businesses, allowing them to save and spend their money on other things.
We should also look at tariffs. Last year James Forsyth argued that we should cut tariffs on all non-agricultural goods in order to deal with the cost of living crisis. I wrote an article explaining why this makes very little sense. Tariffs on non-agricultural goods coming into the UK are either covered by free trade agreements or are very low under WTO terms anyway and so would make absolutely no difference. What we should do instead is temporarily reform the UK Global Tariff and suspend all tariffs on food and other agricultural goods coming into the UK. Again, the savings won’t be huge but every little really does help and would have the potential to lower the weekly food bill for households, giving them more chance to save or for discretionary spending.
Supporting hospitality and the high street
Our high streets and hospitality sector were hit significantly by lockdowns. The government did try to ease the pressure and help them to bounce back through various support schemes including Eat Out to Help Out. Such a scheme would be inappropriate given we’re still seeing high inflation, but the government can still help in other ways.
Targeted support schemes for the businesses who are most at risk of closing through no fault of their own would be welcome. As mentioned above, part of this should be to support high energy costs but other financial support should also be considered.
However, there are ways the government can help which won’t cost them a penny. I’ve written about this a lot but it needs to start allowing hospitality businesses to stay open for as long as they like – including on Sundays – in order to help boost their profits. Not only will this help businesses but will also be good news for workers as it will give them more choice about when they work and allow them to increase their salary.
Not only that, we should pedestrianise our town and city centres. This will allow hospitality venues to have more space and serve more customers and also make shopping on the high street much more pleasant. This should encourage more people to visit hospitality venues and the high street and spend more time and money there, especially as Spring approaches.
This is actually easier said than done. It will be opposed by NIMBYs who seem to dislike the idea of anyone under the age of 50 enjoying themselves and are seemingly shocked that they are experiencing a bit of noise in the townhouse they bought opposite a nightclub. Local authorities are often too spineless to stand up to these rich and powerful residents so the government should simply overrule them if venues are denied a late licence or plans for pedestrianisation face opposition.
Incentivise investment
The government needs to encourage businesses to invest more. This leads to higher productivity which in turn grows the economy and encourages further investment. For a number of reasons, the UK has been really bad at engendering confidence as of late (Great Recession, Austerity, Brexit, and the tax system have all played a role). Many of these are difficult to fix, at least in the short term, but the tax system is something which Jeremy Hunt should definitely take a look at.
I’ve written here and elsewhere that the big thing holding back the UK economy right now is not the tax burden. However, we do need to look at reforming the tax system so that it incentivises investment.
An obvious place to start is to look at Corporation Tax. The Adam Smith Institute has a good paper looking at the potential pitfalls of signing up to the Global Minimum Corporate Tax. I agree with much of it, but as Dan Neidle (the tax nerd who helped bring down Nadhim Zahawi) points out, not signing up to it will also cause problems.
People often get obsessed with the headline rate when it comes to Corporation Tax and, as I’ve pointed out before, this is quite misleading from those on the left and the right. It’s not necessarily the headline rate which matters when it comes to incentivising investment but rather what is the definition of ‘taxable profits’ and how investments are treated as well as the wider political economy of the country.
However, the headline rate can play a role in signalling to businesses and investors about how open the country’s economy is. As such, in the upcoming Budget Jeremy Hunt should commit to not increasing the headline rate in the short term. More importantly, he should extend the Super Deduction which is set to expire at the end of March and commit to move to a form of full expensing.
Plugging the labour gap
We have a record number of vacancies in the UK. This is hampering productivity and increasing costs for businesses. Thankfully, there are a few things we can do about it.
It will come as no surprise to most of the people reading this that I’m in favour of Open Borders and so I’d pretty much let anyone who wants to come here, do so. However, I’m also not detached from reality so I know this isn’t going to happen in the short term. Regardless, the economy has experienced a shock due to the ending of Freedom of Movement despite some positive liberalisation of the immigration system. It will probably be deeply unpopular, but the government should reintroduce Freedom of Movement on a time-limited basis to allow businesses to access the workers they need.
We also need to look at childcare. I wrote a blog on this last month, and there is a great deal of debate about whether direct cash transfers to parents is better than universal childcare and the role of abolishing adult to child ratios in bringing costs down. It’s obviously complicated, but I’d argue in the short term that direct cash payments would be a quick and effective way to help some parents not only deal with one of their biggest expenses, but also get back to work or to work more hours.
Finally, despite spurious reports, it’s not true to say that we have a system where people are getting something for nothing. In the UK, for the most part, if you can work then you do work. However, there are lots of people who have been signed off from work who would like to return to the labour force but fear doing so in case it doesn’t work out and they lose their benefits or because workplaces are just not designed to help them. It was encouraging to see that DWP was working on a policy to allow those with disabilities to keep their benefits to help them back to work. However, the government should go much further and help ensure that every workplace is accessible and supportive to those with disabilities who would like to return to work.
So, there we have it. Those are some short term solutions, many of which can be implemented pretty quickly, and should help to boost growth or at least avoid a recession. Obviously we also need more long term thinking and radical supply side reform to deal with the deep seated structural issues which are holding the UK back.