As we struggle to emerge from a second quarter of negative growth, any thoughts of us witnessing the final death throes of the economic apocalypse seem increasingly distant.
The UK isn’t alone is experiencing the continued crisis of disappearing cash and confidence – but somehow we thought that we’d be out of the woods faster than our increasingly impoverished European neighbours. In struggling Spain and Ireland whole ghost towns built during boom time lie empty, awaiting not just a spark of growth but a flood of wealth. Portugal is punishing its population by cutting back salaries and removing public holidays. France has opted for a new President, one keen on stimulus over austerity. While in Greece -the true eye of the economic storm– every day seemingly brings more misery for its people.
Compared with our nearest neighbours you could suggest that the UK has gotten off relatively lightly. Under the Coalition unemployment reached a 12 year high of 8.4% late last year. While a worse figure than the likes of the Netherlands, it still compares favourably to the jobless levels in France, Italy and Spain. Likewise while Cameron and Clegg were quick to hit the public services with budget cuts, the impact of their austerity measures haven’t been as brutal as elsewhere on the continent.
Cutting back the budget deficit in a structured and safe way needs to be done, how fast and how swiftly is open to debate. What’s also open to question is how the UK can encourage the sort of business growth required to bring the country back from the brink.
The recent Queen’s speech outlined a raft of bills the Coalition plan to pass through. Everything from reforming the House of Lords to making sure that grocery suppliers are treated fairly was covered. What didn’t seem to be on the agenda was a plan to push forward business growth and build the sort of strong private sector David Cameron always promised.
So with public sector workers taking to the streets in protest against cuts, youth unemployment at almost 25% and stagnant growth across a number of sectors; what can be done to bring the UK back from the brink of more misery?
In France newly elected President Francois Hollande is determined to start spending again, convinced that this is the best way to generate more jobs across the country. But this technique is not one that will appeal to the Coalition, so what can they do?
As far as job creation goes, small businesses generate more than larger businesses. 65% of new jobs created in the UK come from companies employing fewer than 100 people. Small businesses are also more likely to haemorrhage staff when times are harder, so their growth not only needs to be encouraged but also maintained. A VAT decrease would almost certainly provide a short term boost and hopefully encourage uncertain shoppers back to the high street. But that’s not all that could be done suggest business leaders.
Simon Walker, director general of the Institute of Directors welcomed the recent reduction in corporation tax but stressed that more needed to be done. “We should be aiming for a corporation tax rate of 15% by 2020, that would put Britain in a very strong position,” he said. The struggle with cutting taxes is that on paper that means the government can expect less income and with less income this government won’t be able to fund the public services it does. Lowering corporation tax to 15% would probably lead to an initial shortfall.
A lower tax rate should, in theory, lead to more businesses setting up shop in the UK meaning more money being given back to the government.
If such business incentives were to backfire though, even more unappealing cuts in the public sector might have to be forced through. And this ever tightening of the nation’s purse strings may just be the inevitable result of what some economists see as the end of the welfare state.
The highly respected Carnegie Endowment’s International Economic Programme are one of the many think tanks who are suggesting that the only way for any of the advanced nations to claw their way out of recession and stagnant growth is to kill off their social welfare spending. They, and others, think that the days where governments are willing to support the unemployed, elderly and underprivileged in the same way as they have previously are gone.
Instead they see nations much less heavily reliant on tax income, but in return much less likely to spend the money they have on the sort of assurances we’ve come to expect. With this in mind the Coalitions choices seem stark. It’s unlikely they’ll spend their way out of trouble and any revolutionary tax reductions could prove risky when you consider the climate at home and abroad. But surely the idea that they will start to scale back the social welfare state at an even faster rate would be even less appealing?
If the UK enters a third quarter of recession then the government may well have to risk the public’s ire with even more public sector cutbacks. And such a move would be the beginning of the end for the system of support we’ve been brought up with unless some way can be found to nurture the nation’s small businesses.
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