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How to Kick-Start Economic Growth

Dr Moorad Choudhry, Head of Business Treasury, Global Banking HKSCKPVIamp; Markets, Royal Bank of Scotland
Thursday, 6 Oct 2011 | 4:29 AM ET

People are often biased by their immediate surroundings, to the extent that it crowds out other relevant thinking. We econometricians suffer from this; we are constantly trying to counter effectively the bigger influence of more recent data on results.

Recovery sign
Recovery sign

This is an issue right now because the debate on how to address the present difficult economic conditions is centered almost exclusively on spending.

Are there any solutions to the problems affecting the USA and EU that do not require yet more public money? To judge from the debate on both sides of the Atlantic, it would appear not.

A measure currently being debated is “credit easing”. With this, funds are made available to small and medium enterprises (SME) via a mechanism in which the government buys up the bonds of the companies direct, or bonds that are secured on such SME loans.As a means to get cash direct to the coal face of the economy, “CE” is certainly an appropriate step to take to assist the economy.

The concept of CE has been topical for a while but I suspect is now back on the agenda because virtually all of the economic debate appears to be about spending; how we can bail out indebted governments, how we can make more money available to companies, how we can “create” more jobs. In other words, every problem is reduced down to how we can find more money to spend on it.

Implementing CE would certainly have upside; after all, SME financing is a key issue right now and SMEs are the engine room of growth in any economy. But it shouldn’t be carried out in isolation. There are other measures just as important that we can take.

I’ve been beating the drum for urgently-needed measures on the labor market and supply side for some time now….the SMEs are indeed the sector to focus on, but the most worthwhile measure to implement now would be to declare a one-year suspension of payroll taxes for all new employee hires.

No ifs or buts, just no employee national insurance to pay on all extra staff taken on in the next 12 months. This is a practical measure that would have an immediate impact on unemployment, the No.1 problem in Western economies.

And this solution doesn’t require that we spend public money, it’s just an opportunity cost forgone, which will be more than covered when newly employed individuals start paying income tax.

Measures such as quantitative easing and CE both require the commitment of taxpayers' money. While there is a healthy debate raging on the costs and benefits of both, we should remember that not every solution to the problems in the economy requires public expenditure. There are concrete steps we can and should take that don’t involve tax dollars at all.

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Dr Moorad Choudhry is Head of Business Treasury, Global Banking & Markets, Royal Bank of Scotland, and Visiting Professor at London Metropolitan University

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