Freeing corporate cash the key to UK recovery
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

Freeing corporate cash the key to UK recovery

Britain’s monetary and fiscal policy appears increasingly impotent after four years of flat-lining growth and stubborn inflation. To end its economic malaise the UK requires radical supply-side reforms that create the conditions for business to thrive, not further stimulus. Ross Walker, Senior UK Economist at RBS explains.

Ross Walker, Senior UK Economist at RBS

The fallacy at the heart of the current policy debate is that there exists a quick, pain-free fix: another round of quantitative easing, one more dose of fiscal expansion or a weaker pound to encourage exports.


Such demand-orientated thinking blithely ignores the massive stimulus already unleashed: 500 basis points of rate cuts, QE gilt purchases equivalent to a quarter of national income, a substantial depreciation in sterling and persistent fiscal deficits. The QE experiment was entirely justifiable given the severity of the financial crash, but it is hard to argue that monetary policy has been overly restrictive and the problem could be rectified by another say, GBP125 billion of QE.


Nor can ‘austerity’ be blamed as the principal cause of Britain’s stagnant growth. The deficit is being lowered at pedestrian pace – 1 per cent of GDP a year. In any case, the chancellor has very little leeway to offer significant fiscal easing in the Budget without prompting bond and currency markets to balk.


Unprecedented stimulus has offered dismal returns so far. Inflation has averaged 2.7 per cent since QE began, while real GDP has flat-lined.


No, a lack of fiscal discipline and a reckless credit bubble are the real causes of stagnant growth – not least because they disguised the rot that was eroding Britain’s economic foundations. What the UK needs now is a long overdue programme of reforms that lower barriers to production: addressing regulations, taxes, infrastructure and public services which are holding back a business-led recovery.


The key point is that a revival in private sector investment would provide the biggest single fillip to the economy. British firms hold roughly GBP670 billion in cash and also have ready access to cheap money on capital markets, yet they are holding back – uncertain over future demand and pessimistic about returns. Measures such as a cut in corporation tax could help to start unleashing that money.


The private sector first needs to see a commitment by the state to improve Britain’s infrastructure. The upgrading of the UK’s road, rail and air infrastructure must be a priority in that. Accelerating the planning process and expanding the role private firms play in financing and running infrastructure would get things rolling and have the added benefit of allowing the chancellor to stick to spending targets. London in particular urgently needs more airport capacity, either at Heathrow or a new hub. That would not only ease the strain on crammed airports but also improve Britain’s links to fast-growing emerging markets with which the UK has depressingly little trade at present.


The UK’s energy policy needs urgent attention too. The regulator, Ofgem, has warned that a ‘near crisis’ in energy supply is approaching. Despite becoming increasingly reliant on gas, Britain’s gas storage capacity is woefully inadequate. The UK should urgently focus on improving that capacity and bringing on stream greater and cheaper supplies.


The government needs to look for ways to lift anaemic rates of residential and commercial construction by reducing local opposition and a tortuously slow planning process. A bill smoothing the planning process will hopefully raise the number of housing starts (currently at multi-decade lows). If it does, the economy will feel the benefit - both in direct GDP and also in giving a whole swathe of the population access to the housing market for the first time.


There is a need to address regulation right across the economy. Deregulation is not exactly de rigueur at present, given the recent experience in financial markets. But bureaucratic obstacles for small and medium-sized enterprises in particular could be lowered and the tax system simplified with lower, flatter taxes paid for by abolishing a plethora of allowances and reliefs.


That is not to argue for unfettered capitalism. There are questions over whether Britain’s competition policy is sufficiently active with sectors such as supermarkets and broadband operators dominated by just a few players. Encouraging competition by lowering barriers to entry should be given greater attention.


The prospects for many of these, and other, supply-side reforms do not appear good. Even though the UK economy has not seen serious supply-side reforms since the 1980s, a lack of political consensus and their unpopularity in the near term invariably stifles the reform agenda. The bad news from history, specifically the 1970s, is that things have to get far worse before the public’s attitude shifts and policymakers take action.


Is the UK therefore condemned to suffer years of weak growth? Yes, if it continues on the current path and pretends another wave of QE, even larger fiscal deficits or currency debasement offer a sustainable solution. If the debate changes to one about creating an environment that provides incentives for wealth creation, then there is hope. 


For more RBS Insight content, click here



Disclaimer

The contents of this document are indicative and are subject to change without notice. This document is intended for your sole use on the basis that before entering into this, and/or any related transaction, you will ensure that you fully understand the potential risks and return of this, and/or any related transaction and determine it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such advisers as you deem necessary to assist you in making these determinations. The Royal Bank of Scotland plc (“RBS”) will not act and has not acted as your legal, tax, regulatory, accounting or investment adviser or owe any fiduciary duties to you in connection with this, and/or any related transaction and no reliance may be placed on RBS for investment advice or recommendations of any sort. RBS makes no representations or warranties with respect to the information and disclaims all liability for any use you or your advisers make of the contents of this document. However this shall not restrict, exclude or limit any duty or liability to any person under any applicable laws or regulations of any jurisdiction which may not lawfully be disclaimed.


Where the document is connected to Over The Counter (“OTC”) financial instruments you should be aware that OTC derivatives (“OTC Derivatives”) can provide significant benefits but may also involve a variety of significant risks. All OTC Derivatives involve risks which include (inter-alia) the risk of adverse or unanticipated market, financial or political developments, risks relating to the counterparty, liquidity risk and other risks of a complex character. In the event that such risks arise, substantial costs and/or losses may be incurred and operational risks may arise in the event that appropriate internal systems and controls are not in place to manage such risks. Therefore you should also determine whether the OTC transaction is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances.


RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.


RBS is authorised and regulated in the UK by the Financial Services Authority, in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the United States Securities Act of 1933, as amended. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC (www.sipc.org) member and subsidiary of The Royal Bank of Scotland Group plc. Dubai International Financial Centre: This material has been prepared by The Royal Bank of Scotland plc and is directed at “Professional Clients” as defined by the Dubai Financial Services Authority (DFSA). No other person should act upon it. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Professional Client”. This document has not been reviewed or approved by the DFSA. Qatar Financial Centre: This material has been prepared by The Royal Bank of Scotland N.V. and is directed solely at persons who are not “Retail Customer” as defined by the Qatar Financial Centre Regulatory Authority. The financial products and services to which the material relates will only be made available to customers who satisfy the requirements of a “Business Customer” or “Market Counterparty”.


The Royal Bank of Scotland plc acts in certain jurisdictions as the authorised agent of The Royal Bank of Scotland N.V.


The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB

Gift this article