At the next Etonian re-union over English tea and scones, Cameron & Co would finally have something to be smug about. The ‘proverbial doctor’s medicine’, for the time being at least, seems to be working; with inflation falling below the BoE ceiling target of 3% and unemployment decreasing by 51,000. Yes, there is reason to be optimistic and celebrate, but Mr. Prime Minister, please don’t overdo it- you don’t want to be forgetting your daughter again and you know as well as I do, it ain’t over till the fat lady sings (and no, that’s not a cue for Ed Balls to start singing)
The foremost task for the coalition is to translate these figures into growth, and form a concrete foundation for economic recovery. Cameron & Osborne have to focus their energies on attracting foreign direct investment and encouraging the banks to start lending again. Due to an ominously large debt, I feel monetary instruments would be more effective and accessible than fiscal instruments.
With the Bank of England’s interest rates already at a record low of 0.5%, there’s not much scope in slashing interest rates. Instead the government should embark on a further round of quantitative easing to encourage borrowing and consumption. I do acknowledge that there are inflationary effects that accompany quantitative easing, but with inflation having finally fallen below 3%, it has provided some leeway. An increase in inflation could prove beneficial as it may help to overcome the liquidity trap. If everything else fails, the government could borrow to finance government spending, which could result in a ‘crowding in’ rather than a ‘crowding out’ effect. This has to be the last resort because as the Japanese recession of the 1990s has taught us, such action can uproar, rather than calm, the temperamental tides of our economy.
Overcoming the liquidity trap should lower borrowing costs, in turn, encourage consumption and investment and should lead to positive multiplier and accelerator effects.
Assuming that the Mayans are wrong, the economy grows, and Alex Salmond realizes that the prospects for an Independent Scotland are bleaker than the prospects for Greece, the next step for the coalition is to think in the long term. This means they have to continue on the road of fiscal discipline and scrupulously navigate the restructuring the economy. Lets face it, if we weren’t so over-reliant on the banking sector and London, the recession wouldn’t have been half as bad.
I’m not saying we have to downsize our tertiary sector, but rather, expand our secondary sector. This generally requires the use of supply side policies such as re-structuring the education system to help increase the future mobility of our labour. This will not only allow us to be more productive, but would act as a magnet for foreign direct investment. We should invest more through grants, subsidies and interest free loans to address our innovative deficit and to encourage manufacturing. Lastly, we need to further curb the powers of the militant Trade Unions. I’m tired of them regularly holding the nation to ransom. Many of their strikes are unnecessary and unjustifiable, especially the recent bus drivers strike. Just because they’re as reckless as bankers, they believe they too should be getting large bonuses.
I really did want to end this entry on a positive note, but I guess the optimism was rather short lived (a mere five-hundred odd words). The latest story on my news feed is ‘British banks downgraded’. Well isn’t that all fine and dandy? I guess we are as close to economic recovery, as we are to Syria becoming a democracy.