Policy stimulus not a panacea for driving up UK economic growth

There is much talk of the need for policy stimulus following the vote for Brexit and the inevitable uncertainty it has unleashed and the potential for recession. Certainly policy stimulus has a role to play. The Bank of England's role in pumping liquidity in the system has been useful, but scope for further cuts in interest rates are fairly limited, with a cut in base rate from 0.5% to 0% likely to have little impact on the pace of economic activity. And it is the same for further quantitative easing which is likely to suffer severely diminished marginal returns. I am much more positive regarding the stimulus from lower sterling. There is plenty of evidence that competitive devaluations still work for advanced economies and I think we can potentially  replicate the situation of 1992 when the UK left the European exchange rate mechanism (ERM) and growth boomed.

As regards fiscal stimulus, there is a strengthened case for it, given the risk of a sharp downturn in aggregate demand. And also with respect to increased investment spending given the plunge in government yields, meaning servicing any increased debt is now close to zero, minimising the risk of "crowding out" private sector investment. But the focus on infrastructure spending and hopes not only for boosting demand but also increasing much-needed productivity is weakened by previous government's (both in the UK and overseas such as most notably Japan) track record in picking projects with poor returns. The HS2 project is probably a good example of this given its escalating costs.Furthermore there is always the danger that any increased spending on projects may come at the wrong time in the economic cycle, given one cannot just start a project right away.

I believe there is a stronger case for cutting taxes to a modest degree (without threatening a big increase in the budget deficit given their supply benefits) such as lower corporate taxes, as part of a strategy to boost growth and to reduce uncertainty following the Brexit vote. Uncertainty could be reduced by outlining as quickly as is feasible, the UK's plans for Brexit including not only its relationship with the EU but also its trade strategy with the rest of the world.  We need to know what the trade-off between access to the single market and immigration controls will be, if the EU will not offer any special deals. We can clarify the position on existing EU migrants in the UK as well. We can trigger Article 50 in a matter of months. Within our growth strategy, we can follow a policy of lowering of  taxes; of unilateral free trade (which I do not think will weaken our bargaining position), loosening planning controls; securing cheaper energy and increasing airport capacity and so on.