Lessons for Britain from California's crisis

Allister Heath
IT was not that long ago that David Cameron, the Tory leader, was holding up California as the economic model he most wanted to emulate. One of his closest aides, Steve Hilton, is based in Silicon Valley, where his wife works for Google; and the more radical Cameroons thought they had discovered the perfect cocktail of entrepreneurialism, sunny lifestyle, environmentalism, social liberalism and third-way economics. <br /><br />Not too surprisingly, we are hearing much less talk of rebuilding post-credit crunch Britain in California&rsquo;s image at the moment. California faces a $24.3bn budget deficit and is set to run out of cash by late July; its European-style welfare state, pegged on to its hardcore capitalist culture, is facing total collapse. A recent referendum saw voters reject proposals to raise taxes (even though the state is heavily Democratic and pro-Barack Obama); the result will be sweeping cuts to everything from prisons to welfare over the next few weeks. <br /><br />Like Britain, California spent far too much during the good years, making the fatal error of confusing a souped-up tax base caused by the bubble with a permanent rise in revenues; voters are fed up with the public sector and political establishment. Arnold Schwarzenegger, in who I had great hopes, blew it early on in his gubernatorial career, failing to push through radical reforms to tackle public sector vested interests, and he is now stuck trying to square an impossible political circle: voters who want neither tax hikes nor spending cuts. <br /><br />It is a total disaster that looks eerily familiar to the British situation. The only difference is that we, unlike California, aren&rsquo;t legally forced to balance our budget every year; and we can print money to buy our way out of trouble in extremis. But it is important to learn the lessons from California&rsquo;s shocking near-bankruptcy. This is no longer time for gimmicks. We need to find new ways of financing and managing health, education and pensions. Britain definitely needs a much larger, Californian-style technology sector in the years ahead, as well as a new generation of start-ups &ndash; but for that we will need radical supply-side policies to liberate the economy, more business-like universities, a pro-entrepreneur tax code and a bonfire of regulations. <br /><br />Yet the Tories remain wedded to Gordon Brown&rsquo;s destructive tax hikes and much of his unsustainable big government agenda. Red tape from Brussels is also a problem. We can&rsquo;t just wish for Britain to embrace a new culture, make a few speeches about green technology and hope for the best; a few politicians parading in public wearing recycled trainers will be as useless for job-creation as a former Hollywood star-turned Governator.<br /><br />Britain needs a more balanced economy &ndash; but not in the way we think. While we can&rsquo;t afford another bubble, the City will have to remain a key engine of expansion. But the other growth industry of the Brown years will have to undergo its own credit crunch: government will have to shrink as a share of GDP, just as it will have to do in California. We need our own mini-Googles, Microsofts and Facebooks if we are to start helping those losing their jobs &ndash; as well as all of our other existing private sector industries, from the City to the creative arts. It will be a long, slow road ahead and as different to a Hollywood movie as it is possible to imagine.<br />allister.heath@cityam.com