Economic soundbites and a speech that matters

There have been two big economic stories over the past 48 hours. One of them has big implications for business in the long-term, the other for politics now. You can guess which one hogged the headlines.
The release yesterday of the first impression of the UK’s economic performance in the last three months of 2010 got hijacked by a yawn-worthy shouting match between Government and opposition. The most informed analyses came from Stephanie Flanders, the BBC’s economics editor, and Gavyn Davies of the Financial Times.
Neither characterised the figures as an unmitigated disaster, while Davies said that because they varied so much from the aggregate of surveys tracking the performance specific industries he didn’t really believe them.
Anyway, the point is that those figures are not where the action’s really at. A much more telling contribution to the debate about where UK business goes from here was provided by Sir Richard Lambert.
It’s the last speech Sir Richard has given in his role as director general of the CBI. Once again, one particular theme in his speech got well and truly ‘politicked’ after the CBI emailed out advance copies to media organisations.
I’ll digress for a moment and explain why this happens. The reason is that this one theme – that the Government hasn’t said nearly enough about policies for business growth – plays to a political agenda currently being driven by the big unions.
The GMB, for example, is in the midst of a PR campaign which involves emailing journalists across the country with round-ups about public sector job losses which it says are ruining the recovery. Whether you agree or not, it’s an effective campaign and in the absence of another narrative from government it’s made the running.
Len McCluskey, the incoming boss of one of the big unions, Unite, went so far as to suggest that Sir Richard’s speech showed that the CBI and the unions are now singing off the same hymn sheet. He clearly didn’t read all 14 pages of it.
Thanks to the good offices of Paul Southby, the Nottingham lawyer who did a sterling stint as the CBI’s regional director, I had a couple of long chats with Sir Richard during the depths of recession. He is a hugely intelligent and very measured man, and anyone who characterises his speech as a political pot-shot is wide of the mark.
And the really important point is not what he says about what the government hasn’t done, but what he says about what it should do. That section his speech – which is much longer than the bits which suited the current news agenda – wasn’t covered at all.
I’ll come on to that in a moment. Sir Richard’s speech contained a useful recap of why the economy is where it is now and why, in his view, public spending would have been slashed even if Labour had been re-elected.
Granted, the coalition has gone about the cutbacks in an uncompromising fashion, but two statistics tell you why public sector retrenchment of one flavour or another was inevitable. Government spending last year was around 3 per cent above the original forecast made by then Chancellor Alistair Darling two years ago. But Government tax revenues meant to fund it were a whopping 13 per cent lower than expected.
Plummeting tax revenues are a measure of how much business activity has fallen out of the economy. Much of it will never come back, leaving a permanent hole in Government budgets. Tellingly, Lambert says that regardless of the economic cycle, “the tax and spending policies of the last government created a substantial structural deficit…that’s what made substantial spending cuts inevitable” (I’d be amazed if Len MCluskey is on the same hymn sheet as that).
So Sir Richard’s speech wasn’t a one-sided attack on the coalition. He poured scorn on the idea that higher business taxes would help plug the deficit, pointing out that this would be an even bigger long-term drag on jobs and growth than the public sector cutbacks are now.
His take is that the ingredients for a private-sector led recovery are definitely there: many businesses have cash in the bank because they cutback in recession, significant opportunities for growth lie in areas like the UK’s power generating infrastructure (which has to be upgraded to meet future demand) and manufacturing-led exports, where the weak pound is beginning to pay off.
So what’s lacking? This is where the serious criticism kicks in: business needs confidence to get spending and investing, but it’s lacking because the government has been far too slow in outlining its policies for supporting business growth.
And those policies that have impacted on business so far – the immigration cap, the localism agenda, the introduction of Local Enterprise Partnerships – have been woefully ignorant of the law of unintended consequences.
Finally, here’s the bit that matters. Beyond those soundbites (which most media focused on) Sir Richard went into some detail about what the Government now needs to do to unlock the growth potential the private sector can deliver.

Long term

• Put a relentless focus on the development of human capital (education, skills, training) and physical infrastructure (power, transport, digital). And do it across the regions to tackle our lop-sided economic geography. So the message for government is that it must invest again once the deficit is tackled

Short-term

• target policies which help small to medium enterprises, NOT large businesses. SMEs, says Sir Richard, are the main source of new jobs in the UK and successful ones are spread all over the country (so fewer ministerial photocalls with big companies!)
• Don’t fall into the hoary old political trap of trying to back ‘winning’ industry sectors. Sir Richard cites fascinating research by our own Experian here, which points out that innovative, ‘growth champions’ are NOTdefined by industry sector – they are defined by the “entrepreneurial zip” of management and an innovative approach. Experian’s research shows it can happen in any industry, anywhere.

Sir Richard says: “What politicians find it difficult to get their mind round is that it is just as possible – and important – to be an innovator in the brick making industry as it is in biosciences. And innovation is not confined to the South East corner of England.”
It follows that if government launches initiatives which back sexy industry sectors it will almost certainly exclude massive numbers of businesses with great potential for growth. So government has to concentrate on policies which support firms which display certain characteristics, not certain SIC codes.
Sir Richard criticises politicians for placing huge emphasis on trade with India and China when UKTI, the Government’s export advice service, would be better supporting these smaller firms trading with Europe.
He says the government’s lukewarm attitude towards Knowledge Transfer Partnerships – which put postgraduates into innovative work in companies – makes no sense when evidence suggests the scheme costs peanuts but delivers significant economic benefits.
Then there’s finance. Again, he says the emphasis should be on making sure cash gets through to those growth champions, not setting one-size-fits-all lending targets for banks based only on a number.
Sir Richard says he isn’t looking for the Government to come up with a five-year, Soviet-style blueprint for the economy. If you read between the lines, he would probably attach a health warning to any slogan-led grand plan.
And there is no succour in this for the public sector or for unions, despite the soundbites. Sir Richard’s analysis is grounded in hard, economic facts presented in a non-partisan manner.
You get the impression he feels politicians have failed the economy once and that we can’t afford it again.
Here’s hoping Vince Cable read all 14 pages, not the news channel soundbites.