Mindful Money

A well-targeted stimulus would help cushion an expected slowdown in growth following the UK’s vote to leave the European Union. It would also provide ammunition to address the deterioration in growth rates seen over recent years, through targeted investment and structural reform. With markets concerned over the long-term effects of leaving the European Union, these priorities have become even more pertinent.

‘Time to rewrite the UK’s fiscal rulebook’ is the first in a series of Public Policy Perspectives, a new research publication which aims to broaden the debate on policy issues across a range of economies and make neutral, evidence-based recommendations. The paper argues that a coordinated fiscal and monetary stimulus would represent a much more effective policy mix than monetary easing alongside further fiscal austerity. The upcoming Autumn Statement provides an ideal opportunity for a step change. The firm says it would advocate the following measures.

• A new fiscal framework which provides scope for a sustained loosening in policy and increased public investment through the business cycle. Under this new framework, the government should announce an immediate stimulus of 1.25% of GDP, with policy in subsequent years conditioned on the performance of the economy.

• Action should be weighted towards an increase in infrastructure investment (0.75% of GDP) to be sustained over a number of years. This should be tilted towards smaller scale local transport projects, which provide the largest return.

• Increased public investment should be complemented by progressive welfare spending to support consumption. Funding should also be earmarked for the ‘Sure Start’ and ‘Post 16 Skills’ programmes to help address the UK’s skills shortfall.

• The Government should actively address inefficiencies in the tax system. In the short-term it should address capital allowances and establish a consistent tax system for the financial sector.

• Longer-term priorities should include a shift in taxation away from property values/transactions towards land, and a tax allowance for corporate equity that reduces the bias towards debt financing.

• A redoubling of efforts to increase housing supply through further planning reform and increased incentives for building.

‘Time to rewrite the UK’s fiscal rulebook’ is co-authored by James McCann, UK & European Economist (pictured), and Stephanie Kelly, Political Economist, Standard Life Investments.

Mr McCann says: “Monetary policy has been overburdened since the financial crisis, with fiscal policy actually working against the recovery. A large fiscal push in the Autumn Statement would complement the easing measures implemented by the Bank of England over the summer. It would also help lift long-term growth rates, primarily through targeted infrastructure spending and structural reforms.”