Only smarter policy can improve these monstrous numbers

Marc Sidwell
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THE confirmation by Sir Martin Sorrell that WPP will bring its headquarters back to the UK is a cheering signal that the right policy really can bring rapid returns. Royal assent to the Finance Act 2012 was granted on 17 July, so changes to the controlled foreign companies regime, which governs the taxation of overseas profits, will be in force from 1 January 2013, and WPP’s shift has followed at the first opportunity.

On the other hand, we have concerted gloom from the CBI and the British Chambers of Commerce on the economy’s growth prospects. Both groups now predict that 2012 will see UK GDP growth in negative territory overall, demonstrating that one tax change does not make a recovery.

There are plenty of forces at work here beyond the UK’s control – seemingly endless Eurozone uncertainty, stuttering growth in China and a feeble American recovery among them. But blaming external factors is not enough. The real problem is the coalition’s failure to commit to a fiscal correction that would bring results.

For all the talk of savage cuts, the facts are very different. As Ryan Bourne of the Centre for Policy Studies pointed out in his column for City A.M. earlier this week: “Current spending continues to increase in real terms, and the 25 per cent deficit closure that occurred by the end of 2011/12 was driven by cuts to investment and economically damaging tax hikes.”

This might seem like pedantry. Cuts are cuts. But the details matter. In its deluded quest to be all things to all people, the coalition has botched together a nightmarish chimera in place of true austerity, with neither impressive economic results or even much noticeable political capital to show for it.

A new research paper by economists Alberto Alesina, Carlo Favero and Francesco Giavazzi explains the problem. Behind its dry title, The Output Effects of Fiscal Consolidations pins down the outcomes correlated with following different paths to deficit reduction. The authors find “a strong common message: tax-based plans [ie, tax hikes] induce prolonged and deep recessions, while spending-based plans [cuts] are associated with very mild and short-lived recessions, in some cases with no recession at all.” They add that the cuts to spending most favourable to growth are accompanied by supply-side reforms and labour market liberation, among other factors. They also cite an unpublished paper written this year by Alesina, together with Silvia Ardagna, What Makes Fiscal Adjustments Successful?, which finds that all this only works if you cut current spending, rather than public investment.

In other words, there’s nothing wrong with austerity – it’s the grotesque, neither flesh-nor-fowl monstrosity that Osborne has sewn together out of electoral expediency that belongs dead. Unwilling to stop the unsustainable growth of current spending, the most effective course to mitigate the UK’s slump, the coalition has settled for raising taxes and cutting public investment instead, destructive choices both. As for supply-side reforms, despite the odd call from the likes of Boris Johnson, we’re still waiting. Osborne needs to learn from WPP’s reaction, stop playing mad scientist and do the simple things right.

Our Paralympians have already hit on a winning formula. Jonathan Fox and Sarah Storey brought home not only gold medals from their finals but also a brace of world records. With silver for Mark Colbourne, Nyree Kindred and Hannah Russell and bronze for Zoe Newson and Ben Quilter, Team GB had a first day to be proud of.