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Monday 28th November 2011 | 18:37
The Chancellor is in a tight spot. The economy is not in good health. But whilst Britain has fared better than many countries in the OECD forecasts, today’s figures confirm that there are still turbulent times ahead. For families, the effect of this is felt most acutely in the rising cost of living. For businesses, uncertainty brought about by the doom and gloom means investment held back, fewer jobs and no growth. The Government needs to be bold, but Labour’s approach of higher spending, more borrowing and more debt has already been tested to destruction and proven not to work.
The reality of our current situation is that Britain is walking an economic tightrope, from which any deviation could cost the Government its hard won credibility with the financial markets. Against this backdrop, the Chancellor’s Statement has to boost confidence, encouraging businesses to invest and reassuring families that there is light at the end of the tunnel. In doing this, the Chancellor has to persuade voters that his actions are not just tactical, but part of a longer term strategy.
Firstly, it is vital that the Government sticks to the austerity plan introduced last year. Keeping the confidence of the international markets will enable Britain to maintain its AAA credit rating, and continue to borrow money at low levels of interest. It is right that the Chancellor has said the Autumn Statement will be revenue neutral, as anything else would understandably jeopardise our credibility. Increasing our borrowing to fund an extensive programme of growth measures may sound appealing, but the fact is that this approach cannot lift us out of a debt crisis.
Secondly, the Government needs to restore the confidence of the banks in lending to UK businesses. The problem is that as the crisis in the Eurozone has unfolded, banks have become increasingly risk averse and unwilling to lend to each other. With reduced access to finance themselves, they have become increasingly cautious in extending loans to businesses. By using its balance sheet and credit rating to provide a backstop to banks in the form of a guarantee, the Government will provide the incentive for banks to refresh their existing loans and approve new loan applications. This confidence will be passed on to businesses in the form of lower interest rates. Alongside other proposals, some of which I have already called for in a report with the think-tank NESTA, this approach could help transform the lending landscape.
Thirdly, a smart tactic to boost investment is to target the cash–rich institutions that could help our recovery. It makes sense for the Chancellor to unlock investment from a range of sources, from pension funds to large corporates and sovereign wealth funds like the China Investment Corporation. By taking a responsible economic approach, infrastructure investment of this kind can boost employment in the short term and address the need to build schools, roads and enhance our rail network. Needless to say, without credible economic foundations these institutions would seek to put their money elsewhere. This is a more responsible policy than the New Labour approach (epitomised by Peter Mandelson) of trying to pick winners and writing cheques that businesses couldn’t cash.
Restoring Britain’s economic prosperity will not be a quick or painless process, whatever the detail of tomorrow’s announcement. Indeed, the crisis in the Eurozone will continue to cast a long shadow over our financial future. But at a time of great uncertainty it is confidence, not the approach of borrow and spend, that may prove our most valuable asset.
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