The ideas emerging from Lib Dem conference dissolve under scrutiny

SOMETIMES, it’s hard not to feel rather sorry for the Liberal Democrats. After the public relations disaster of Nick Clegg’s toe-curling apology on tuition fees last week, the party faithful have gathered in Brighton only to be battered by violent storms. The Lib Dem leadership was hoping to pilot a course to sunnier political climes and calmer economic waters. But, thus far, the policy proposals emerging give little grounds for optimism on either count.

If the Conservative side of the coalition is insufficiently bold on supply-side reforms, their Lib Dem partners often seem incapable of comprehending how such reforms could bring growth to a sluggish economy at all. The Lib Dems’ default position remains one of old-fashioned demand management, and often comes with a fairly hefty price tag attached.

So it is with Vince Cable’s plan for a government-backed business bank. At £1bn, the price isn’t gigantic and the intention to assist small to medium-sized enterprises (SMEs) facing a credit squeeze is understandable. But the policy shows an incoherence and inconsistency at the heart of coalition and, specifically, Lib Dem thinking.

On the one hand, the government is aiming to prevent future bank failures by increasing regulation – hardly a sure-fire way to encourage banks to lend more. On the other, Cable seems keen for the government, rather than the private banking sector, to explicitly bear the risks of underwriting loans taken out by individuals and businesses. Although on a much smaller scale, this seems almost identical to the sort of government-backed securitisation policies that played such a large role in the financial crisis in the first place. The proposal might help grab a headline, and deliver a morale boost to Lib Dem activists concerned that their party isn’t winning enough concessions from the Conservatives. But the prospect that it will deliver any sensible, measured assistance for SMEs in the short term is deeply questionable.

Cable’s plan for more state lending to businesses came hot on the heels of Clegg’s wizard wheeze to help first-time buyers onto the property ladder. The idea is to allow parents to use their pensions to guarantee their children’s mortgage. But the policy doesn’t bear much scrutiny. We did not get into the current economic situation because there were too few opportunities for people to run up debts, guaranteed by others. Once again, some of the core lessons of the financial crash have been missed entirely.

But, even overlooking this, it is very hard to see how the scheme could have any measurable practical effect. There are surprisingly few middle-aged people with a decently-sized pension provision. Those with such provision are very likely to own a house or other assets, which could be put up as a mortgage security in any event. It’s just possible that the Clegg scheme could help the very small proportion of middle class families who are income rich but asset poor. But it isn’t going to come close to tackling the root causes of problems in the UK housing market.

Both Clegg and Cable could both have put forward braver, bolder and – crucially – affordable supply-side reforms in these policy areas. To unleash the entrepreneurial power of SMEs, the business department needs to go much further on deregulation. This isn’t to say that a lack of credit isn’t a problem. It is. But it is neither easy or cheap to solve. Providing SMEs with a raft of exemptions from the red tape which frustrates and limits UK business, however, would cost the government virtually nothing and would have an invigorating effect.

Similarly, Clegg should have pressed for a dramatic liberalisation in planning law if he is really serious about helping young people onto the housing ladder. Only 10 per cent of land in this country is developed and only 5 per cent is actually under concrete. An enormous programme of construction is entirely possible without bulldozing over areas of great natural beauty. But, it will take a full scale assault on Britain’s out-dated, complex and time-consuming planning laws. It appears to be the Conservatives who are more determined to lead on this, with Clegg’s ideas something of a side-show.

The Lib Dems are in danger of giving the impression that they are simply limping on and muddling through. There is little sign that they are willing to seriously consider the radical reforms our economy truly needs.

Mark Littlewood is director general of the Institute of Economic Affairs (IEA) and former head of media for the Lib Dems.

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April 22, 2014, 2:25pm