Politicians should allow a business-led recovery

December 1, 2009

evansAnthony J. Evans is assistant professor at ESCP Europe business school. He will participate in a Reuters pre-budget live blog on Dec. 9, at 12 p.m. British time. The opinions expressed are his own. –

The main issue underpinning Britain’s next pre-budget report is the state of the public finances. Let’s be clear – they’re dire.

The budget deficit may well exceed 200 billion pounds this year, contributing to a net public debt of over 800 billion pounds (i.e. 60 percent of GDP).

Some credit rating agencies have already cast doubt whether UK gilts can maintain their triple-A status, but if investors do turn their back on government debt there’ll be little advanced warning – this possibility needs to be anticipated, and acted upon, now.

I’m looking out for three main things in the pre-budget report on Dec. 9.

First, I’d like to see that immediate action will be taken to reduce the budget deficit. This doesn’t necessarily mean a fire sale of government assets, but it does mean that non-essential spending plans should be trimmed. For an economist, it’s easy to identify low-hanging fruit, but the political will needs to be there to make bold steps.

Second, I’m interested in the scope of tax reform. I expect to see an array of policies designed to buy off special interests and secure cheap headlines. Whether an extension of the VAT cuts, National Insurance breaks for start-ups, or a few pennies off a few taxes for a few companies – these are stunts, not reforms. The entire budget for Regional Development Agencies could saved if we provide businesses with the help that they really need – lower and simpler taxation.

Finally, I want Alistair Darling to realise that this isn’t about New Labour. The fact that entrepreneurs are so keen to hear what policies will be announced indicates why we’re still in a recession. The U.S. economy only left the Great Depression once politicians stopped changing the rules of the game and investors got back to business.

The vast and arbitrary interventions that have constituted the financial crisis increase uncertainty whilst people wait to see what the effects will be. Government needs to leave centre stage and allow businesses to get back to wealth creation. This pre-Budget report should be an exit plan.

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