The Chancellor is surely looking for antidepressants. Austerity and higher taxation, as German Chancellor Bruning demonstrated in 1930, are fatal prescriptions. Conversely, and this still surprises left-wing politicians, nobody gets rich just by spending money: one must distinguish “good” public investments, like autobahns, which work, from the “bad” like the UK’s £13bn. expenditure on wood fired power stations, which emit more CO2 than coal-fired. Hitler took the credit for autobahns, which undoubtedly helped lift Germany out of depression, even though they began in the decade before he came to power: “By December 1941, when wartime needs brought construction to a halt, Germany had completed 2,400 miles (3,860 km), with another 1,550 miles (2,500 km) under construction.”
The concept of return on investment does not work for public expenditure, such as infrastructure; so how does one distinguish good from bad? Three tests should be applied: is it capital expenditure on long term assets, is it essential, and is it good value for money, a test HS2 conspicuously fails? A depression is a relatively good time to carry out essential capital expenditure. Interest rates are low, labour is plentiful and will cost a lot more when the economy revives.
Large companies can, and should, take care of themselves but there are four other antidepressants in his medicine bag:
Tax reduction and incentives
Reducing regulation
Responsible banking
Private sector financing
Thus the Taxpayers’ Alliance proposed five tax cuts: employer and employee national insurance, abolishing capital gains tax and significantly raising both investment allowances for corporation tax and the bar on property stamp duty. This Institute has made similar proposals, specifically business rates and the ‘Factory Tax’. Everyone will propose their favourite tax cuts but those selected should be few, targeted and show clear antidepressant effects, for example a general rule that no business in its first five years should pay taxes, e.g. business rates, until it generates at least twice as much profit as the levied tax. Furthermore, following Brexit, no business should pay taxes on its first five years of export profits. It seems unlikely that generalised tax cuts or incentives would boost trade and industry or be affordable by the Exchequer.
Relative to some countries, e.g. France and Italy, the UK has a competitive advantage in setting up business, hiring and reducing staff. But improvements can be made, e.g. Philip Ross’s June 16th letter: “reintroduce fees for tribunals so we’re not faced with unfair dismissal claims by ambulance chasers and chancers [..and..] entrepreneurs’ relief at 10 per cent”. Formal de-regulation is a legal mares’ nest which is why it so rarely happens; in any case, we promised Brussels we would not do so. Simpler is to advise the enforcers to do as many already do, namely help rather than harass. Fill in the forms themselves or turn a blind eye to any minor transgressions that do not endanger health or safety.
The Bank of England (BoE), rather like the MoD, tries very hard to fight the last war and does that very well. Inflation, however, is unlikely to be an issue for some years to come and interest rates can be expected to hover around zero. As the first word in the name implies its Prudential Regulation Authority (PRA) is more concerned with minimising the bank’s risk and zipping up banks’ pockets rather than with encouraging trade and industry to go out and prosper. The last war was indeed about keeping banks solvent but this one is about getting the economy back on its feet.
The Chancellor’s spritely 17th March announcement of government backed Covid loans was assisted by the BoE lowering interest rates and capital requirements as well as putting a brake on dividends and cash bonuses for senior bank executives. Yet customers were met with bureaucracy and box-ticking with only 20% initially getting the loans they needed. The Chancellor came to the rescue with 100% guarantees but the point here is that the non-empathetic attitude of the banks was counter-productive. Unless the BoE, in its fatherly way, inspires banks to re-discover their traditional role as long-term supporters of small businesses, they will, as they did last time, demand their umbrellas back when it rains, as it surely will.
The last item in the Chancellor’s medicine bag is the most important: only the private sector itself, not government quangos, can cure depression. Venture capitalists and business angels back their judgment with their own money, their long-term involvement and their experience. Given the importance of start-ups and SMEs, business angels matter more initially; venture capitalists come into their own as businesses grow. Government to date has ignored all that and set up myriad quango schemes which early stage entrepreneurs are supposed to find their way around. After going through all the hoops, they usually find self-important committees dashing their hopes. Even if the entrepreneurs had time to explore the maze, these quangos show no evidence of producing the right answers.
Earlier blogs proposed recycling government funding from the national (UK Research and Innovation, UKRI) and London quangos as well as local quangos (Local Enterprise Partnerships and Growth Hubs) to topping up business angel investments. The simplicity of one nationwide scheme that would not require the entrepreneur to divert attention from building his or her business would be a major bonus in itself. The degree of top up could vary by region, e.g. more for the north, by sector or domestic vs. export, according to government priorities without the need for many different schemes. And evidence for its potential is provided by the long-running BBC Dragons’ Den series.
Another issue arising from the earlier analysis is the confusion in the current quango-led system between encouraging new private enterprise and public investment, e.g. in universities and infrastructure. UKRI funds both new private enterprise and academic research: in its self-evaluation an extra arts PhD rates alongside a commercial technology start-up. LEPs fund transport infrastructure and new businesses out of the same pocket. They should be treated quite separately with new private enterprise funded locally and academic funding left to universities. In short, we do not need UKRI, and its sub-quangos, at all. Similarly LEPs mostly fund public infrastructure projects but also small private sector initiatives. The former should be returned to local government and the latter taken over by whatever scheme replaces quangos playing Santa Claus.
The big difference between quangos delivering private sector support and the private sector itself doing so, is that venture capitalists and business angels are not just pontificating, they are betting with their own money. That is why HM Treasury should trust them more than quangos. Maybe there are private sector-led solutions other than the business angel top-up scheme. Now would be a good time to tell the Chancellor about it. And, of course, anything radically new should be piloted before being rolled out nationwide.
Depression is hard to cure. It will need a combination of therapies: essential value for money public investment in the true sense of the word, targeted tax incentives, relaxed regulation, banks with their customers well-being as their priority and incentivising the private sector. It is no coincidence that stimulating one’s own creativity is an important depression therapy.