Osborne's private gamble

On becoming leader of the Conservative party, David Cameron commissioned Built to Last, a statement of party aims and values. The first of the eight aims was the encouragement of enterprise ‘in all its forms — in the economy and in the community’ because ‘the enterprise of our people is the source of our progress’.

True to these quintessentially Thatcherite principles, for Cameron and George Osborne, individual entrepreneurs are the fingers and enterprise the blood stream which animate the invisible hand of the market.

Indeed, it is the extension of entrepreneurial initiative from the economy to the provision of welfare which offers the key to both ‘re-balancing’ the economy and fixing the ‘broken society’.

Not surprisingly, George Osborne’s inaugural budget as chancellor of the exchequer was rooted upon the assumption that if the frontiers of the state, taxation and regulation are rolled back, the market will spontaneously advance as entrepreneurs identify the opportunities for profitable risk-taking and competition. These will lead in turn to the innovation, investment and employment which will deliver a ‘re-balanced’ economy in which the market and entrepreneur, and not the state, are once more the prime movers of progress in the United Kingdom.

To promote enterprise, the budget’s principal measures included a reduction in corporation tax from 28 per cent to 24 per cent over the four financial years from April 2011; a reduction to 20 per cent in the small profits rate from April 2011; the abolition of the nine English regional development agencies and their replacement by ‘strong’ local enterprise partnerships.

As recognition of the continuing difficulty which small and medium-sized enterprises experience in accessing affordable finance, the government also proposed a £200m increase in the Enterprise Financial Guarantee ‘to support additional lending of up to £700m until 31 March 2011’. Taxpayers will also make a £25m contribution towards a new £37.5m Enterprise Capital Fund, as part of the government’s existing £237m fund for supporting small businesses with high growth potential.

The problem with this scale of intervention and expenditure is that it is simply inadequate and of the wrong order of magnitude to foster a globally competitive and private sector-centric renaissance of enterprise in the regions of England, and in Scotland, Wales and Northern Ireland.

As the Bank of England’s latest statistics attest, having grown by 17.5 per cent during 2008, and contracted by 1.7 per cent during 2009, the twelve-month growth rate for lending to UK businesses by UK banks contracted by between 8.5 and 9.3 per cent during the first four months of 2010. Rather than advancing, finance for enterprise is in wholesale retreat.

To maintain the global competitiveness of the City of London’s financial markets, during the past three decades the successive British modernisation projects led by Margaret Thatcher, Tony Blair and Gordon Brown intervened in markets to liberalise and deregulate in the mid-1980s’ ‘big bang’; invested billions of taxpayers’ money in the construction of a new financial district at Canary Wharf and the Jubilee Line extension to it; yielded billions of pounds in revenue to incentivise share dealing; and based the UK’s entire macroeconomic model upon a ‘risk-based’ approach to financial regulation.

Most importantly, when the political and economic dividend from that ‘risk-based’ model was the deepest recession since the stock market ‘great crash’ of 1929, the taxpayer rewarded unprecedented market failure by providing £850bn of loans and loan guarantees.

This heroic scale of state intervention and subsidy far outweighs anything given in the past to any other parts of the private sector, not least defence or civil manufacturing, or those enterprises in low carbon and the other advanced manufacturing and services which are now identified as the sources of a market-led ‘re-balancing’ of the economy.

The UK retains a significant presence in world markets for manufactures in only those sectors, such as defence, aerospace and pharmaceuticals, where there has been sustained taxpayer support. In these sectors, the state has recognised that intervention should be strategic, and not limited to the correction of market failure. Where UK-based manufacturers re-entered world markets during the 1980s, as in the motor vehicle industry, it was because of foreign direct investment by multinationals, enticed by state subsidies and incentives.

As the budget report has detailed, the six regions of England beyond Greater London, the east and south-east, and the other constituent nations of the UK, have become overly dependent upon employment in the public services. But this dependency is precisely because of the retreat of private sector enterprise, employment and investment over a period of decades. Facilitated by the City’s expertise, UK companies preferred to invest overseas, which is why their total international investment stood at £1,039.5bn at the end of 2008, far in excess of the £672.9bn invested in the UK by foreign direct investment.

The private sector was not crowded out by an overbearing state. It was the state, in the form of investment and employment in the public services, which filled the void left by market failure and the long tail of under-performance in innovation, skills and investment detailed in innumerable select committee reports and official inquiries.

The scale and continuity of state support enjoyed by enterprises and entrepreneurs in the City of London’s financial and associated markets for commercial services to sustain their global competitiveness was simply not available elsewhere. Successive British governments failed to provide that same developmental state role for private enterprise and entrepreneurship beyond London which would have maintained a ‘balanced’ economy (in the government’s terms).

John Maynard Keynes famously warned: ‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’.

In this respect, the most glaring omission from George Osborne’s budget statement, and from the coalition’s whole economic strategy, was decisive action to end the whirlpool of speculation in the steady stream of derivatives which poses the greatest threat to stability and economic recovery.

The chancellor has instead attempted to profit from the speculators by imposing a limited bank levy whose predicted revenue for the exchequer of £2,400m in 2014-15 will be more than offset by the £2,700m cost of the reduction of corporation tax to 24 per cent from 2014-15.

The budget report acknowledged that between 2002 and 2007 there had been ‘a near tripling of UK balance sheets and the UK financial system had become one of the most highly leveraged in the world’, which had made the UK ‘particularly vulnerable to financial instability’. Those bank balance sheets now carry obligations equivalent to more than five times the UK’s GDP, and loom like an almighty sword of Damocles over the future prosperity of the British people.

Osborne’s 2010 budget has outlined action to control imbalances in the public finances. It has singly failed to take action to control the much larger imbalances in the financial markets, and to redress the imbalances between speculation and enterprise, which brought about the current economic crisis.

The forthcoming spending review promises wholesale reform of welfare spending to engineer Cameron’s ‘big society’, but it is business as usual for the speculator-driven sources of risk, uncertainty and instability arising from the unreformed ‘big market’.

Osborne is correct to believe that the market can be a discovery process for entrepreneurship and innovation, but equally, the democratic process, in the form of the state and interventions, is the means by which the market is defined and enterprise inspired or negated by laws, public policies, and regulations.

Only the state can check and balance the excesses of the market. If the economy is to be ‘re-balanced’ in favour of enterprise, necessity must become the mother of intervention.

Dr Simon Lee is Senior Lecturer in Politics at Hull University, and is the author of Boom and Bust: The Politics and Legacy of Gordon Brown, and co-editor with Matt Beech of Built to Last? The Conservatives under David Cameron and Ten Years of New Labour.