New solutions to a new economic reality

Another Bank of England meeting has been and gone and for another month its Monetary Policy Committee (MPC) sat on its hands.

Is this an admission of defeat, that the conventional tools (and even the unconventional like quantitative easing) of monetary policy are no longer fit for purpose for the UK economy?

Even with the odd good sign coming from the service sector, our economy is still smaller than it was before the Lehman collapse in 2008.

This has been the worst economic crisis we have faced since the Great Depression in the 1930’s. Perhaps a bit of Depression-era thinking could get us back on track.

[Related feature: What on earth is quantitative easing anyway?]

The old way forward

Back in the Great Depression John Maynard Keynes was a newbie economist and government spending in times of crisis was considered revolutionary. In the US President Franklin D Roosevelt’s launched the New Deal, executed between 1933-1936, to get people back to work and growth back on track. It’s gone down in history, not only for being a heroic effort to “save the nation”, but also for its alphabet soup of acronyms referring to the government agencies that the New Deal created.

But today government spending is considered the problem in the UK. The solution to the financial disasters of the 20th Century won’t work again, just look at Greece to see what happens if you spend, spend, spend. Our government, similar to governments across Europe, are trying desperately hard not to spend and fiscal austerity is always the dish of the day in the halls of Westminster.

You can debate the merits and drawbacks of fiscal austerity until the cows come home, but rather than replicate what the major economies did back in the 1930s, we should adopt the spirit of the New Deal and Keynesianism instead and try to come up with completely new ways of fixing our broken economy.

The “New, New Deal”

So what are the biggest problems now and what can be done about them that hasn’t already been tried and failed. A New, New Deal would need to target youth unemployment and boost growth – particularly in manufacturing – with the ultimate aim of re-balancing our economy away from financial services and towards exports.

Let’s look at dealing with youth unemployment first. All those out of work, including the under-25s and most likely plenty of arts graduates, should be given intensive training in the “useful” skills in the modern world like digital marketing, computer programming, how to operate machinery and how to operate and manage operations that are useful for export-related industries like factories and ports.

In an ideal world this training would be outsourced to export power houses like Germany and China. This would involve a cost, but it would pay dividends in the future.

This training could go some way to helping solve the growth problems in the manufacturing sector, as the training could help increase productivity and may even generate some manufacturing entrepreneurs. After all, the creative arts graduate types could come up with whole new industries that they can then spend their retirement writing books and screenplays about.

[Related feature: Why youth unemployment is a problem for everyone]

Building a better Britain

Re-generation is also key for some of the most recession-ravaged areas of Britain. Look no further than Northern Ireland, which has reaped massive benefits from promoting itself as a film location offering mouth-watering tax breaks for big productions.

HBO’s ‘Game of Thrones’ alone is thought to have generated £65 million for the region. How about some “artist-friendly” tax breaks for some of the most deprived areas of the UK like Jaywick in Essex? It could do with the re-generation that a big film (or even better, a series spread over many seasons) could bring; it would help bring employment to the region and also a much-needed boost to morale and confidence, especially if some big name stars were involved.

Re-balancing the economy

In 2008 the US government sent a cheque to every household to get them to spend money and boost the economy. Since the UK’s problem has been too much spending, maybe the government should think about sending a cheque to our export partners’ householders?

The eurozone is our largest export partner, so there is a risk that these cheques would be used to pay down their sovereign debt, so rather than “cheques”, the government offer free trade agreements and preferable rates to come and set up manufacturing hubs in the UK. Hey, the weather might be bad, but if we train our unemployed youth our workforce will be the most skilled in the world.

Of course, a more conventional way to boost the economy is to reduce VAT. Currently the standard rate of VAT is 20%. That means that for the majority of goods and services you buy (a few are exempt) you pay 20% to the government coffers.

Let’s say you want to buy a hat for £200, your bill will actually be £240 once hat’s VAT is taken into account. If you reduce VAT to 15%, then the VAT you pay on the hat is only £30. It’s only a £10 difference, but you feel less ripped off paying £30 in tax, than you do paying £40.

And you have to remember what else VAT is charged on. Petrol and diesel for example. A reduction in VAT would make filling up your car cheaper, making it cost less to move goods and people around Britain, reducing costs at the tills even more and seeing Britons spend less getting to work or the shops.

Of course, no VAT would be best, but that isn’t going to happen with frugal George at the helm of the Treasury for the foreseeable future.

Overall, too much emphasis has been put on traditional economic boosters that just don’t seem to work anymore. If we really want to change our economy then radical thinking must be the new order of the day at Westminster and at the Bank of England.

More from Forex.com

Kathleen Brooks is author of Kathleen Brooks on Forex, published by Harriman House.