How to stimulate the ailing economy

One of the few good things in the late unlamented Kwarteng budget was a reminder of the Economics 101 insight that productivity improvement is the key engine of economic growth.

A sensible proposal too was to delay the rise in corporation tax as this might lead to increased capital investment; the resulting small increase in government debt, would have led to a small increase in interest rates, thereby heralding the demise of zombie firms that had been able to sustain over-borrowing in recent years despite being run inefficiently.

Many of the laid-off workers would be re-employed by more efficient firms who would produce at a lower cost, with the consequent price decrease thereby leading to greater demand for other goods and a subsequent redeployment of the remainder.

Trust eroded

However, Kwarteng managed to spook the markets and even enrage some of the wealthy by his tax concessions to the latter. This has led to the Tory perception that government is no longer trusted by the markets and therefore there is no margin for government budget deficits.

Whether this is true is highly questionable given that a budget deficit of £70 billion is hardly an enormous increase in the national debt of nearly £2 trillion. So, instead of a Keynesian stimulus to the economy precisely when it is needed, we face Austerity Mark 2, with rumours that Jeremy Hunt was advised by the George Osborne, the author of the failed Austerity Mark 1.

We are now faced, partly because of the Autumn Statement, with a reduction in the real wage and ultimately lower standards from the NHS, although this is temporarily in abeyance, up to the period when there is highly likely to be a new Labour government that will be forced to take the blame.

Focus on productivity and worker representation

So, what should the government be doing? The focus needs to return to productivity, and another sensible Kwarteng proposal was to restore full funding to the Northern Powerhouse rail project, which under Hunt is back to Powerhouse Lite.

This could be done by cancelling HS2; yes, the crucial point of this project is not to reduce transport time to Birmingham by 20 minutes but to increase the availability of freight transport, but regenerating the North seems to be a much more important consideration. Additional funding for apprenticeships would also improve productivity by helping decrease the proportion of unskilled workers in the economy.

And why not borrow from the Labour party playbook and invest more in wind and wave power, not to mention Britain’s expertise in battery storage technology.

A final measure that has been espoused by members of both the Right and Left is to ensure worker representation on the boards of large firms.

Contrary to basic economic theory, the latest 2021 empirical research on German corporations concludes that worker representation has no effect on workers’ wages but leads critically to higher capital investment, and as a result a 2-8% higher level of labour productivity.

Professor Joe Pearlman is Professor of Macroeconomics at City, University of London’s School of Policy & Global Affairs. His research relates mainly to monetary policy and expectational learning. Currently his research is extending to cover macroprudential policy. In the past, he has researched into trade, growth and migration