The outgoing Chancellor, George Osborne, leaves the UK economy suffering the weakest recovery from a crisis in recent history.
Mr Osborne’s fiscal austerity agenda has been pursued under the misleading guise of ‘sound’ public finance ostensibly to strengthen the economy’s credibility in international markets and restore economic growth. Yet the required rebalancing of demand from the public to the private sector, particularly private investment and net exports, has not materialised. Business and consumer confidence remains weak, growth forecasts are continually downgraded and high unemployment persists.
The austere fiscal policy settings associated with my predecessor have undermined growth and exacerbated the current economic malaise. With monetary policy channels largely exhausted, the UK economy now faces significant policy challenges and risks further declines in its productive capacity. We must now (re)establish an active State.
Government has a central policymaking role which no market based rhetoric can undermine. HM Treasury and its Central Bank (Bank of England), collectively the ‘State’, has both the responsibility and financial capacity to manipulate effective demand to enable all individuals of working age to secure employment should they so choose.
The UK enjoys the policy freedoms associated with full fiscal-monetary sovereignty. That is, the State is the sole issuer of its own fiat non-convertible currency and operates with a flexible exchange rate so that monetary policy is freed from the need to defend foreign exchange reserves to maintain an exchange parity. Unlike Eurozone economies which face fiscal constraints, fiscal austerity in the UK is unnecessary unless inflationary pressures develop as nominal demand growth exceeds the economy’s real productive capacity. Currently there are no such pressures as significant spare capacity exists.
Thus, the outgoing Chancellor’s ‘fiscal mandate’ is to be immediately abandoned. Active fiscal policy is now required to create jobs, promote equality and stimulate growth. Two broad fiscal measures are proposed; traditional fiscal stimulus and direct job-creation.
Weak consumer sentiment, sluggish growth in nominal wages (declining real wages) and high unemployment has contributed to poor household consumption since the crisis. Further, household debt remains high. We propose household cash handouts to temporarily boost consumption and/or allow households to repair their balance sheets, restoring more sustainable consumption growth.
In addition, we propose increased infrastructure spending particularly within the education, health and transportation sectors. While the improved provision of these public goods is necessary for enhanced economic and social welfare, the investment will engender confidence and improve the recent poor sectoral performances in manufacturing and construction given well known multiplier effects.
With official unemployment approximately 8 percent, long-term and youth unemployment, and involuntary part-time workers have increased markedly in the UK, now reaching approximately 900,000, 950,000 and 1.4 million persons respectively. The rising trend in the number of youth not in employment, education or training (NEET) is particularly worrying and is now among the highest of EU economies. This erodes human capital, reduces potential growth, and undermines social cohesion and entrenches poverty.
Despite multiplier effects, the aforementioned fiscal stimulus measures are unlikely to affect the most marginalised individuals in a sustained fashion and may only reinforce current income inequalities.
We announce a direct job-creation program with the provision of employment to any individual ready, willing and able to work. This program will be phased in, initially targeting the youth. Further, it will be coupled with a robust minimum wage policy, set at a ‘liveable wage’ and adjusted with discretion, perhaps annually, in line with the inflation target and productivity growth.
Youths engaging in the jobs program will be paid the minimum wage and their income will be supplemented with a benefits package (e.g. health and child care, and access to legal aid). Individuals will be allowed to engage in a maximum number of hours per week or less if preferred. Unlike the current Big Society framework, the youth job-creation program seeks to directly engender socially desirable activities to boost social capital, and does not rely on private market mechanisms or financing arrangements (e.g. Big Society Capital).
The political debate will now be geared to addressing, for example, the spatial distribution of underutilised labour, capacity constraints, and occupational planning with respect to future skill needs and associated (on-the-job) training and education requirements.
The benchmark for macroeconomic policy should never be the endogenous outcome of some fiscal accounting ‘imperative’ (e.g. budget deficit). It is our elected responsibility to serve the public purpose via active fiscal policy geared to creating jobs, promoting equality and stimulating growth.