Spend, spend, spend – but do it wisely
25 November 2008
I am not the most cavalier of people with money, but I'd guess that many would share my belief that being given a bit more, or making prices a bit cheaper, is not going to send us off on a consumer frenzy.
Trimming back VAT might save a few pounds on a digital camera, but is it going to make the difference between whether someone buys one or not? Personally I don’t think so. The same is true of tax cuts. A small amount of money at the end of the week or month is unlikely to really make that much difference to someone’s spending habits.
What is more likely is that people would save anything left over because we have all been told that what we are getting now, to help stabilise the economy, will have to be paid back later. Giving a small amount of money to a lot of people costs a lot of money. Personally I can’t see how Alistair Darling’s box of tricks in his pre-budget report (PBR) on Monday (24 November), is going to help out the economy in either short or long term, but will cost us a lot of money.
The problem is that this hugely expensive tinkering does not solve the core problem – people are worried about their jobs. Giving someone an extra tenner a week isn’t going to make them want to spend it if they are worried that they may lose their job the week after. People will spend if they have job security. Marry that with the fact that industry is the backbone of the UK’s economy, and it strikes me that Darling’s billions would be better spent providing an insurance policy for small and medium manufacturing and design companies.
I do not know the feasibility of such a scheme – one of the luxuries of being in my sort of job, a bit like being in an opposition political party, is that you can throw about ideas without having to be accountable for them. But bear with me as I explore the possibilities. Darling announced in his speech that the ‘cash-injection’ into the UK economy as a result of the PBR would be around £20bn. This works out at somewhere in the region of £300 (over the next year) for every man woman and child in the UK, or about £100 a month for a family of four. While this may be welcome it would do little more than compensate for the effects of inflation from the past year, and would (according to my predictions above) do little to change confidence in the market, especially as most of it (£12.5bn) is as a consequence of the VAT cut.
Now lets look at the idea of the government offering a job insurance scheme for the industrial sector, by which an employees salary, or a large proportion of it, was guaranteed for a year. Psychologically this would be a massive boost for any employee - the guaranteed income would do far more to stimulate his or her retail juices than a pocket full of change created by shaving down VAT. As a consequence, consumer spending rises and the manufacturing jobs that were vulnerable become viable.
Manufacturers who were pulling on the reins because of the threat of having to lay off staff can now revert to spending plans formulated in happier times. Design projects that were being shelved could be progressed. The upshot being that rather than costing a lot, it could cost relatively little. In fact, in a perfect world, it could cost nothing at all.
Let us suppose this is not a perfect world and people do lose their jobs. A lot of people. Suppose that number ran to 500,000 people involved in engineering, manufacturing, industrial sectors - and that is about as bad as it could get – then it is still a relatively cheap option compared to the tax cut option. Half a million people, with the national average wage of around £25k comes in at £12.5bn - £7.5bn less than the PBR option. Treasury contributions could be further reduced by offering 90% of salary (we are now down to £11.25bn), or by requiring the employer to provide 30% to keep the job open (which could reduce it to £8.75bn) and therefore protect the employers and the country’s skill base for the future. I am sure there is a whole host of variations that could make the scheme work for employees, employers and the economy alike.
The big advantages of such a scheme is that it would help keep people in work, paying tax and keeping essential industries afloat for the future as well as the present.
The downside? Well it is probably that I don’t understand the complexities and intricacies of how central finances work, and that as a consequence my plan is deeply flawed from its very inception. However, while I accept that this is probably true, I am also sure that if the government is to make full use of vast quantities of borrowed money, it requires bigger thinking than Darling announced in the PBR.
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