Entrepreneurs needed if the UK is going to make up the deficit

June 22, 2010

BRITAIN-BUDGET/

-Joe White is managing director of Moonfruit.com. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

The first Tory budget is a critical one. The Treasury and Chancellor George Osborne have been dropping hints for weeks about a big slash in public sector spending in an effort to try and prepare Whitehall for the worst, and to rally the private sector to step in and fill the deficit.

It’s a risky strategy. The belief that you can slash deficits and generate private sector growth is close to Tory hearts, and further encouraged by recent successes in this area by the Canadians.

But the difficulty is that when Canada implemented rapid deficit reduction, the wider global macro-economic climate was much more benign. One person’s spending is another person’s income, so reducing spending will reduce income unless other kinds of spending rise to fill the gap.

Economically there are only four kinds of spending, the total of which equals the national income: Consumer (you and I spending), Government (we all know about that one), Investment (generally spending by companies) and the net of Imports and Exports (net imports sends cash overseas, net exports increases domestic income).

Government spending is going to fall, that much is clear. Unless something else rises, national income will fall by definition.

Given that many different countries (particularly in Europe – who are our key trading partners) are planning to make similar cuts, the outlook for growth in our exports is slim as each country is reducing domestic spending.

We can’t all export ourselves out of this problem, someone has to be importing something. Consumer and corporate spending is also down considerably, and so there’s real concern about where the demand to fill the deficit created by reduced government spending is going to come from. The short and medium term in the UK could be very tough indeed.

However, I do agree that some reduction in public sector spending is necessary. The challenge is over what time frame. Public sector spending over the last ten years has gotten a little bit out of control as it has adopted some private sector pay principles on top of its already generous pension plans.

At the margin, this will have had an impact on  individual decisions to join the public sector rather than the private, as the benefits of the private sector were less clear and rewards were not so different. If the private sector is going to thrive, a better balance needs to be struck.

The big question, of course, is how to stimulate the private sector. The economic levers that it looks like the Tory government will be using are lower corporation tax, concessions on National Insurance, and exemptions for entrepreneurs within the new capital gains tax rules.

In the longer term, a focus on education and training will be a critical way to encourage bright new people into the economy to generate income.

It’s the short term which is toughest. In order to kick-start the private sector, we need to encourage a culture of starting and building businesses in the UK, particularly in high-growth technology.

Just one Google or Microsoft in the UK would do an enormous amount for the economy, and so encouraging entrepreneurs to build, and keep, their businesses in the UK is going to be absolutely critical for the Tory strategy to work.

It will most likely be the public sector which will feel most of the pain when Osborne stands forward, but it’s still going to be tough times ahead for everyone. It will be down to creative and driven entrepreneurs to help move the economy along.

Picture Credit: A row of piggy banks adorned with the colours of Britain’s Union Jack flag are displayed in a souvenir shop in London March 24, 2010. REUTERS/Darrin Zammit

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