Budget: ‘Now not the time for harsh cleansing of the economy’, warns Brewin Dolphin’s chief strategist
The UK government’s actions throughout the Covid pandemic, to protect the livelihoods of many., has led to a national debt pile not seen since World War 2. No wonder all eyes are now on next week’s Budget.
With the vaccine rollout well under way, thoughts are slowly turning to how the UK can reduce its debt, and what steps it can take to speed up economic recovery now the Covid storm seems to gradually settle.
Morning Wire caught up with Guy Foster, chief strategist at wealth manager Brewin Dolphin in the City, to discuss what is the best way of addressing our long-term fiscal sustainability. According to Foster, spending big will be inevitable, but it must be spending with long-term productivity in mind.
“It is really important that the government doesn’t tighten fiscal policy too soon, that they are prepared to spend and invigorate the economy,” Foster said.
He argued that de-politicising infrastructure projects and building affordable housing are essential for Britain’s recovery from, what Foster calls, “essentially a natural disaster.”
“There will be a time to allow market forces to perform the necessary but harsh cleansing of the economy.”
“However, now is not the time, the chancellor [should] not risk economic scarring that would result from turning off the taps too quickly and undermining all the good work that government support has provided,” Foster said.
Credit and benefits are a costly but necessary part of the response that has been money well spent by the Treasury, compared to the alternative of a deeper depression and slower recovery if the taps are turned off before the environment allows a recovery to take hold, he added.
Infrastructure
If anything, the government should take this Budget as an opportunity, presented by low borrowing costs, spare capacity and high policy flexibility to make strategic and well-considered investments with a long view in mind.
“At a time when the world is changing so rapidly this offers the government a rare opportunity to chart a bold vision for the future, with strategic and well-considered investment. These can be focussed on meeting our national digital and environmental objectives amongst others,” Foster said.
Although he acknowledges that making long-term infrastructure decisions is difficult and often prone to swings in political cycles, which regularly resulting in enormous costs and poor decisions, but Foster singled out independent boards like the Monetary Policy Committee and Office of Budgetary Responsibility as “fine examples” of how independent experts can de-politicise decision-making, whilst suffering appropriate scrutiny from both sides of the House.
“A similar body to approve, recommend or appraise infrastructure decisions could help with this process,” he said.
Regional approach
Any government intervention should support the creation of companies away from the South-East to re-balance the country, London-based Foster said.
“This means investing in infrastructure that supports business, from broadband to travel,” he clarified.
The new ease with which remote working has been adopted by many industries has demolished the last barriers standing in the way of regional rebalancing.
“Many parts of the country have space and housing stock which is ideally suited to those who are no longer tethered to their workplace [so] unleashing this potential provides the opportunity to address housing shortages in more congested parts of the country.”
To do so, Foster thinks regions need appropriate digital-age infrastructure, access to skills training and reduced friction to restructure existing property assets, including brownfield sites, which will require significant investment.
Housing
Finally, Foster turned his attention to house, pointing out that building booms have repeatedly supported economic recoveries. “Now we need to ensure people can live near the new jobs and have homes that are appropriate,” he said.
“Vested interest has historically created barriers to building more houses. Governments inevitably resort to demand-side measures which intensify the shortage rather than addressing the lack of supply,” Foster observed.
Supply side measures are urgently required, he argued, stressing that now there is a greater chance to success through “the new-found geographical flexibility which many jobs now offer and which makes this mettle well-worth grasping.”