Thursday, 23 October 2008

The key issue is not financing small businesses but keeping up investment levels

In a recession demand declines - helping create the fall in output. But the different components of demand have different driving forces.
Considering only the domestic components of demand the biggest fall in a recession takes place in investment. Consumers will spend if their incomes are kept up, which is crucially affected by maintaining employment, and can be supplemented by measures such as tax cuts, while government final expenditure is under the government's direct control and can therefore be increased in a counter-cyclical fashion. It is the fall in investment that, in terms of domestic components of demand, therefore most importantly determines how deep the recession is.
The overwhelming priority in fighting recession is, therefore, also to keep the level of investment up. The government is therefore quite right to have been discussing bringing forward major infrastructure projects and initiatives such as that by Jon Cruddas, Frank Dobson and other Labour MPs to call for nationalisation of at least parts of the construction industry to embark on a major government house building programme also address the crucial issue.
The Tory party however has a different agenda - which is not to deal with the recession but to support their own electoral base. That is why the core of their policy response has been to demand tax concessions to small businesses - who by a big majority support the Tories. But this is not the priority for dealing with the recession, as investment is not primarily carried out by small business.
Small businesses will primarily be helped by keeping up the level of demand in the economy and thereby maintaining their markets. There is nothing wrong with the government discussing how to help small businesses in principle, as with Alistair Darling and Peter Mandelson's meeting with the chief executives of major banks today, but it is not the main priority in fighting recession - those are to maintain the level of income of the population and to keep investment up.
Government policy needs to focus on the key issues in fighting recession. It should not allow itself to be sidelined into any agenda which is a Tory political one and not the central one in the present economic situation.

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