Time for plan AA

 
Tim Wallace
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BRITAIN urgently needs to slash red tape, cut taxes and improve transport links to get growth back on track, City grandees argued last night, urging George Osborne to reform the economy without wasting any more time.

The government lost its triple-A credit rating from Moody’s on Friday night as borrowing is on course to rise despite pledges to reduce the budget deficit.

The pound lost ground in Asian trading this morning, the first big chance for the markets to react to the downgrade. Sterling slid to $1.5077, from $1.5160 late on Friday.

Terry Smith, head of brokerage Tullett Prebon, said Osborne has wasted years failing to reform the economy.

“We have to restructure the economy for the long run. The government should shrink the state by about one-third, back to where it was 10 years ago,” Smith told City A.M.

“That means cuts to the health service and welfare, raising the pensionable age, and cuts to the EU budget and overseas aid are a no-brainer. When that is done there will be scope to cut taxes and boost growth.”

Former Monetary Policy Committee member Andrew Sentance told City A.M.: “The focus has to be on ways to stimulate the supply side of the economy through tax reform and changes to business regulation.

“The government should remove tax exemptions in order to get the main rates of tax down, for example by removing the VAT zero-ratings and using the money to cut corporation tax right down to somewhere between 15 per cent and 20 per cent.”

He said a new runway at Heathrow would boost infrastructure spending and show the world the UK is improving transport links.

Sentance’s proposal echoes Bank of England governor Sir Mervyn King, who this month called for supply-side reforms to complement the deficit reduction plan.

Moody’s blamed the weak growth environment for the downgrade as sluggish expansion means tax revenues are not rising as chancellor Osborne hoped – but many City figures argue he can do much more to help without raising spending and adding to the country’s debt problem.

Meanwhile analysts at PwC called for reforms to the planning and tax system to allow shale gas development.

“This is a new kind of resource and you have to do a lot of drilling, meaning there is potentially a more complicated planning environment – so making sure that works smoothly would be helpful,” said Adam Lyons.

However, analysts at fund manager Fidelity took a different line. Trevor Greetham, Fidelity’s asset allocation director, cited the economist John Maynard Keynes’ paradox of thrift and argued that ratings agencies are sometimes best ignored.

His colleague Tristan Cooper added “it probably makes sense for the chancellor to ease the pace of fiscal consolidation”.

But economists expect Osborne to tweak spending on infrastructure rather than implementing any radical changes – either inspired by supply-side critics, or by those calling for less austerity – in his Budget next month. The chancellor this weekend pledged to stick to his spending plans, arguing the Moody’s downgrade highlights the need to be tough on the deficit.