UK recovery is built on a debt bubble that cannot last – it’s time for change

Allen Simpson
RELIEF over recent economic data is over-done. Even if we are seeing pockets of growth in specific regions and sectors of the UK, it is far from clear that the structural imbalances in Britain’s economy have been addressed.

In the last few years, the West has seen a number of financial crises of escalating seriousness, as the inherent contradictions in our growth model become deeper and more fundamental. Our over-reliance on monetary stimulus and imported credit to fund growth has grown in parallel with the sheer impact of each resulting shock.

This is the unlearned lesson of recent economic history. Crises repeat themselves, partly because these fault lines remain the same. But crisis also returns because we so stubbornly refuse to alter our solutions.

We are, of course, doing it again. Every sinew is being strained to make the same mistakes at an even greater intensity. Interest rates have never been so low for so long, and there cannot ever have been such a focus on stimulating lending to businesses – at times with too little regard for whether that finance is in the interests of either the borrower or the depositor whose money is being lent. Elsewhere, the country’s demand for house price growth continues unabated, as does our collective failure to address the unfunded costs of an ageing population.

So much of this assumes that access to cross-border debt at huge scale will exist in perpetuity. In the years leading up to the last crisis, China and the Middle East exported $5.3 trillion (£3.2 trillion) in credit to the West, as a positive trade balance made them hugely wealthy. But as these New Economies mature, this money will fade away like sand in the wind.

As a nation, we have to resist obsessing about the length of this economic cycle or the deficit as a goal in itself. Instead, we should set our sights higher, and begin a historic shift away from a subsidised dependency on debt towards self-sustaining alternatives like equity capital – unlocked from our corporate balance sheets, pension funds and retail savers. In the face of these vast unused economic reserves, it seems perverse not to.

But the change will take cross-party consensus and deep structural change to our accounting rules, fiscal environment, and our national propensity for buying things on credit. Some of this is a fundamental question of culture, and will take generations to unpick. But there are material changes we can make today.

First, cutting stamp duty on growth market shares in the 2013 Budget was a bold move, and should be extended to a cut on all share purchases. It would make long-term equity capital as much as 15 per cent cheaper for UK firms, materially improving their growth potential and beginning the slow process of addressing our over-reliance on credit. The added attraction of this as a policy is that, over a five year period, the enhanced economic growth would more than cover the short-term loss in tax receipts.

Second, get retail savers investing by creating savings products that give better tax treatment for investment funds that put patient capital into growth companies in a risk-managed way. Since this money is currently earning the Exchequer precious little return sitting in cash accounts, the loss to the public purse would be minimal.

Third, expand the proposal for a British Business Bank and create an independent, professionally-managed investment house, able to invest on a commercial equity capital basis in high-potential small businesses. If we were feeling bullish, we could even take a lesson from the Californian public sector pension fund CalPERS, and use public sector pension funds to invest, driving growth and pension savings at the same time.

Fourth, give capital gains tax breaks to encourage large businesses to invest in high-growth SMEs in their sector through minority equity stakes. The funding could be hypothecated for a specific purpose, for instance a particular innovation or product development.

These proposals are not about driving growth today, nor are they intended to address the deficit as a discrete goal in itself. They are geared towards delivering a self-sufficient economy, able to grow in the long term for the benefit of the country as a whole.

In effect, we have two choices as an economy: we can use the tax code, monetary policy and direct government subsidies to try and keep the debt bubble on life support; or we can accept a slower return to growth, but redraw our economy to be internationally-competitive, long-termist and self-sustaining.

Allen Simpson works in the City, and is a member of Labour in the City.