Slash spending and taxes

The answer to Britain's economic woes isn't century-long borrowing, says Merryn Somerset Webb. It's spending cuts and startups.

So just how bad are things in Britain? Dr Tim Morgan of Tullett Prebon appears to be on a mission to make sure no one thinks for a second that the answer is anything but "awful".

He's been circulating a UK economy primer that sums up our problems all too clearly: the economy has for too long been "excessively dependent" on the "twin drivers of private borrowing and public spending". Both are now dead in the water, something that has left 70% of the economy in "growth lockdown".

At the same time, Britain is so over-leveraged that the government has had no choice but to focus on deficit cutting and find novel ways to finance its debt (Osborne's new plan to issue 100-year gilts into the world's yield-starved bond markets).

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But the deficit plan it insists on following depends largely on growth and hence on rising tax revenues, rather than on genuinely large cuts in spending. Without the twin drivers mentioned above there is no growth. The upshot? If we carry on as we are, we get to keep the deficit and the debt and we get to have a stagnant economy too. Not good.

So what's the solution? According to Morgan, it is to cut spending a lot. There is, he says, a widespread idea that Britain cannot cut public spending any more than the "modest real-term 6.8% currently planned". Nonsense. "Between 1990-2000 and 2009-2010 real state expenditures increased by 53%. No one has yet explained why the British state must somehow spend about £700bn today having managed perfectly well on £450bn (at today's values) ten years ago."

The truth is that we're just getting worse value than we used to. So we should really slash spending and also slash taxes to get growth moving too. Then we need to get going with the much discussed but little acted on microeconomic reform, rejecting our "over-regulated slow growth economy" for a deregulated, more dynamic one.

There isn't much to argue with in this. I had it in mind when I went tointerview Mary Portas this week. She thinks she has something of a solution for Britain. She's using a factory just outside Manchester to produce a new range of knickers for sale across the UK. She's hired eight of the UK's one million unemployed young people in the process, and her short-term plan is to prove that it is possible to manufacture good-quality goods at a reasonable price without going to China.

Her longer-term plan is to try to persuade other people to do the same. You can read the interview, and watch her new programme (Mary's Bottom Line) on Thursday nights on Channel 4 if you want to see just how she's done it.

Then if you have any better ideas about how we can put some life back into our suffering communities or our manufacturing industry (or both), you can go tomy blog (or send me a tweet to @merrynsw) and tell us.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.