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CBI Chief warns of dangers of not sustaining growth

GDP figures out today are expected to show the UK officially moved out of recession during the last quarter of 2009.


CBI Chief warns of dangers of not sustaining growth

GDP figures out today are expected to show the UK officially moved out of recession during the last quarter of 2009.

CBI chief Mr Lambert said the UK should aim to achieve "as much economic growth as we possibly can" to avoid "serious damage" to our standard of living and employment.

In a speech hosted by Thales UK, the defence and technology company, Mr Lambert set out what would happen if the economy didn't grow as hoped over the next few years. He said: "Without growth, unemployment will not fall back to its pre-crisis levels, and the life chances of a generation of young people will be seriously impaired. Without growth, it will be next to impossible to restore the public finances to health, no matter how far spending is cut. Without growth, businesses will look elsewhere in the world to invest, and the huge investment that is needed in our country’s infrastructure – in power generation, transportation and the like – will be in jeopardy."

Mr Lambert said what the private sector wanted from politicians in the run up to the coming election was "a simple commitment - which is to restore macroeconomic stability as soon as is sensibly possible". He said: "Growth is the natural outcome of such stability. Only then will businesses have the confidence to invest in the future and create new jobs."
On a positive note, Mr Lambert recalled how quickly the UK recovered from the last recession in the early 1990s. He said: "I remember how a very senior treasury official told a colleague back in 1992 that it would take a whole generation or more to get the public finances back into shape after the recession of the early 1990s. But then the economy bounced up, and the job was done in the space of five years.

"Achieving an annual growth rate of 3 per cent over the next five years would yield around 300,000 more jobs and an additional £35 billion reduction in the public sector deficit than would be achieved if we only grew at 2 per cent."

How future growth is achieved will be very different to the past decade, however. He said: "Then, the story was all about rapid increases in government and consumer spending, both of them supercharged by record levels of borrowing. That game’s over.

"Over the last five years, roughly two thirds of all the new jobs created were driven by the public sector. Some of those jobs are bound to be lost in the squeeze that is coming in public spending, whoever wins the election. If the economy is to move forward, the slack will have to be taken up by the two other major components of the economy, which are private sector investment and trade.
"And provided the conditions are right, growth in the private sector has the capacity to offset falls in public sector employment. That’s exactly what happened, after all, in the mid 1990s, when the economy grew by well over 3 per cent a year despite a crunch on government spending. The task will be harder this time round, but there are still 23 million jobs in the private sector compared with 6 million in the public. A little bit of growth in the former can more than compensate for quite a fall in the latter."

Mr Lambert said that getting the economy on to a balanced, sustainable growth path will be a serious challenge, and requires difficult political choices to bring the deficit under control. He said: "First, and above all, it means setting out a credible pathway back to fiscal stability. One of the troubles with the Government’s current programme is that it’s long on aspirations and short on detail, and it’s stretched out over the lifetime of two whole parliaments. Credibility will require a greater show of determination than that.

"Second, it means placing the emphasis for the necessary fiscal consolidation on current spending, rather than on the capital investment which is vital to our future prosperity or on increased taxes. The Government has got off to a poor start here, by promising to cut future capital investment down to 1.25 per cent of GDP, and placing an undue emphasis on tax increases in its recent Pre Budget Report.

"Third, it means making the right choices about those elements of public spending that are necessary to support jobs and investment in the future, and which therefore need protecting through a period of fiscal austerity. Obvious examples would include spending on education and skills, science and innovation, energy security, and transport infrastructure.
"Fourth, it means recognising that private sector capital is increasingly mobile, and that corporate and personal tax rates are a key determinant in the decisions that are made on the location of investment. That’s not a plea for tax rates to be slashed right now: that would clearly be ridiculous given the current fiscal position, but it does call for a much greater degree of consistency and certainty in tax policy, plus a strategic goal of getting business taxes on to a more competitive level over a sensible period of time.

"Fifth and last, it means sending clear signals about the future direction of policy for critical infrastructure projects. An obvious example here is nuclear energy. Our nuclear capacity needs replacing, and there is plenty of private capital around the world ready to finance the programme if the conditions are right. But these are huge up-front investments with a very long payback period. If there are any doubts at all about the political commitment to the programme, then it simply won’t happen."

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