Whoever takes government in 2015 will inherit an unenviable economic situation, including
public debt at 80% of GDP. We think of that government’s principal task as making
selective state spending that will return more than the outlay. Put in
commercial marketing terms, the state needs to identify unmet demand in a down market
opportunities to generate new revenue. Obviously social welfare issues are also
important, but we need to keep focused. Please consider the following policy
ideas for tapping spending power in a recession:

1. Convert empty buildings to council flats. This is now a consensus between Ed Balls, George Osborne, and the CBI about affordable
housing. However, George Osborne’s plan for mortgage loans for private building
is not the best option. The mortgage schemes in the March 13 budget are being
snapped up by wealthier house-owners. Councils could commission conversions of
empty office into flats, either for lease or for council purchase. Central
government could raise the money by issuing two-year gilts at 0.2% interest. The
income in council rents would promptly repay the gilts and remove the loan from
the PSNCR. Conversions also give VAT income to government, by contrast with
new-build.

2. Electricity generation. Power that is below the strike price of 10p per kWh set by Qatari gas will be readily sold. The likely schemes are:

a. Biogas. Food waste, grass
cuttings etc can be fermented to give methane, which drives gas turbines to
generate electricity. Ludlow currently has such a scheme, in which the local
council collects the waste and sells it as feedstock. Round Hill sewage works
and Russells Hall Hospital also have such generation schemes, though the power
generated is used within the plant.

b. Gasification. Waste including end-of-life cars can be burnt to generate steam for turbines. See e.g. the new Chinook plant at Oldbury. Such plants can also sell waste heat for
public buildings (CHP). Here again the council could be the selling point for
the feedstock.

c. Hydro-electric. English rivers generally have low heads so big hydro schemes are impractical. Weirs of a few metres head, or suspending turbines in-stream are possible. In-stream milling was the historic method of grinding flour in the Seine.

3. Public sector tourist attractions. The UK is the world’s 7th
biggest tourist destination, with 29.2 million visiting in 2011 and spending
US$17.2 billion. Chinese visitors are the most
numerous. The weakness of the pound makes the UK attractive. London is by far
the most-visited capital in the world. There is additional scope for expanding
internal UK tourism, for example to recent retirees. Olympic heritage sites are
likely venues. A possible re-enactment is:

· the charge of the light brigade. There could be a small number of actual horses and riders, and laser and holographic horses for casualties. The jingoistic effect might be offset by
Tennyson’s sorrowful poem.

Events from Labour history (the 1819 Peterloo massacre, the Miners’ strike, the Peasants revolt of 1381) could be alternated with nationalistic
themes (Elizabeth I addressing her army, Henry V at Agincourt). The government
would gain revenues from ticket sales, and also indirectly from corporation and
income tax from the hotel industry.

Thanks for the reply Ranjit. I suppose what I’m wondering is where the tipping point comes in terms of assessing the success or failure of government policy. At what point does (did?) the OBR go from saying: ‘the structural deficit is coming down, but the cyclical deficit is taking longer than we hoped to get rid of’, to saying ‘actually, we now realise that the structural deficit has not been falling at all. In fact it’s been growing’? I’ve struggled to find any up-to-date figures/projections of the structural deficit, as opposed to the overall deficit.

Thanks for the reply Ranjit. I suppose what I’m wondering is where the tipping point comes in terms of assessing the success or failure of government policy. At what point does (did?) the OBR go from saying: ‘the structural deficit is coming down, but the cyclical deficit is taking longer than we hoped to get rid of’, to saying ‘actually, we now realise that the structural deficit has not been falling at all. In fact it’s been growing’? I’ve struggled to find any up-to-date figures/projections of the structural deficit, as opposed to the overall deficit.

Thanks for the reply Ranjit. I suppose what I’m wondering is where the tipping point comes in terms of assessing the success or failure of government policy. At what point does (did?) the OBR go from saying: ‘the structural deficit is coming down, but the cyclical deficit is taking longer than we hoped to get rid of’, to saying ‘actually, we now realise that the structural deficit has not been falling at all. In fact it’s been growing’? I’ve struggled to find any up-to-date figures/projections of the structural deficit, as opposed to the overall deficit.

Thanks for the reply Ranjit. I suppose what I’m wondering is where the tipping point comes in terms of assessing the success or failure of government policy. At what point does (did?) the OBR go from saying: ‘the structural deficit is coming down, but the cyclical deficit is taking longer than we hoped to get rid of’, to saying ‘actually, we now realise that the structural deficit has not been falling at all. In fact it’s been growing’? I’ve struggled to find any up-to-date figures/projections of the structural deficit, as opposed to the overall deficit.

Thanks for the reply Ranjit. I suppose what I’m wondering is where the tipping point comes in terms of assessing the success or failure of government policy. At what point does (did?) the OBR go from saying: ‘the structural deficit is coming down, but the cyclical deficit is taking longer than we hoped to get rid of’, to saying ‘actually, we now realise that the structural deficit has not been falling at all. In fact it’s been growing’? I’ve struggled to find any up-to-date figures/projections of the structural deficit, as opposed to the overall deficit.

Ash: “and surely past a certain point we have to question whether the part of the deficit we assumed was cyclical is still, in fact, cyclical, or whether it’s become structural due to a further permanent loss of productive capacity?”
Absolutely:
In my humble opinion; the clear problem is a lack of demand and if we are not only trying to boast demand, but actually inadvertently dampening it, there will be a point when the damage is permanent as the economical cycle has been disturbed, unconventionally. Also, there is Japan which clearly is a big warning.

TIm Duy and Felix Salmon had a good, but incomplete discussion on this recently.

This may be also be missing the bigger issue- that of the human cost in the convening years that is being missed by not minimising the output gap as soon as possible.

As I understand it, there’s a window of opportunity immediately following a recession during which the economy can (and usually does) make up for all the lost growth, so that after a few years it’s as if the recession never happened and the economy just grew steadily at its long-term trend rate. But if this window is missed, the rot sets in and productive capacity is permanently lost (e.g. because entrenched unemployment has eaten away at the skills and experience of the workforce).

This has direct implications, presumably, for the size of the structural deficit. We were told in 2010 that a typical post-recession bounceback would eradicate the *cyclical* part of the deficit (as usually happens), but that on this occasion – due to a permanent loss of productive capacity in the economy caused by the crash of 2008 – a *structural* deficit would remain unless closed by tax rises and/or spending cuts. The Tories’ idea, then, was to shrink the structural deficit by raising taxes and cutting spending, while leaving the cyclical deficit to take care of itself as the economy grew.

But the economy hasn’t grown, and surely past a certain point we have to question whether the part of the deficit we assumed was cyclical is still, in fact, cyclical, or whether it’s become structural due to a further permanent loss of productive capacity?