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Balancing the books

September 28th 2010

We all know that balancing the household budget is never easy.  Before the recession, a financial problem meant cramming in the overtime or borrowing on the credit card. In today’s economy, however, many people are taking the tough decisions needed to deal with their debt hangover. In many ways, the same applies to the nation’s finances.  Wales PLC has record levels of borrowing and surging debt.  I hear people say ‘you can’t cut your way out of a recession’. But nor can you spend your way out of debt. Next month, the UK government will set out its plan for putting the economy back on track.  The Comprehensive Spending Review will mean tough decisions have to be made.  The challenge facing the government is to produce a budget that both reduces debt but does not damage the UK’s growth potential.

 With the lingering effects of the financial crisis, the shrinking of the financial sector and weakness in household and public balance sheets, supporting the private sector becomes all the more crucial.   It is the private sector, not the public sector that will produce the wealth and employment the UK so badly needs.  Certain areas of government spending, such as investments in transport infrastructure, low-carbon technologies and skills and knowledge – are all essential for future growth. Giving sufficient priority to those areas of spending that increase the UK’s growth potential will enable the deficit to be reduced in a sustainable manner.

 A second key challenge will be the problem of poor productivity performance across the public sector.  The public sector will need to increase significantly the efficiency of the services it provides. UK government support, such as welfare benefits, will need to be closely targeted to those most in need, but at the same time be simply delivered and provide an incentive to work.  Not easy.

 If the UK government get it right, the sharp reduction in borrowing may be viewed as lowering the likelihood of further tax increases later, providing a confidence boost to businesses and consumers. It will also lower the risk premium on government debt, helping to maintain lower interest rates. Greater certainty about the UK government’s planned cuts can help support consumption and investment. While lower UK government spending also reduces direct labour demand, this also holds down overall labour costs, potentially boosting badly needed private sector employment in Wales.

 The Welsh Assembly Government also has a duty to reflect these priorities.  The public sector in Wales could increase efficiency while preserving frontline services if it had a more open relationship with the private sector. The Assembly Government’s spending on infrastructure, universities and colleges, and low-carbon technologies will also play an important role in supporting growth.  The key message to the UK and Welsh Assembly governments is simple- reduced spending on our growth potential would be like robbing Peter to pay Paul, with the Welsh economy and its’ people losing out.

Leighton Jenkins is Assistant Director, CBI Cymru

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