The big rebalancing act: Cable's plans for broken britain

From the refusenik right-wing of the Conservative party to the Greens to Mervyn King to the International Monetary Fund, there is a broad consensus about "what went wrong" with the British economy.

We become too reliant on financial services; we got into too much debt, both personally and as a nation; we consumed too much; we invested too little; we became mesmerised by house prices. Industry has shrunk to less than a fifth of the economy; the growth in bank lending has been dominated by real estate (largely "socially useless", as some might say); investment and savings have collapsed. The agreement on the need to "rebalance" the economy was one of the outstanding features if the recent election campaign.

Or, as the new Business Secretary Vince Cable, one of the few front-rank politicians to point out the dangers, put it in the election campaign: "Our economy is too reliant on consumer spending and debt and a failing financial services industry. A lasting and sustainable recovery can only be achieved if we correct these fundamental imbalances."

So what will he do now, especially when his department last week lost £886m of its funding? He will tell us today in his first major speech since his appointment, at the Cass Business School in the City of London.

First, Mr Cable is keen to shrink the state. It may sound odd to some, but he is far from the sort of social democratic "spy in the cab" he is sometimes made out to be. He may harbour misgivings about he speed of the cuts and how they will hit infrastructure spending, essential to boosting long-term growth – but in a revealing pamphlet published by the Reform think-tank in February, he set out his credentials as a fiscal conservative.

"There has been an extraordinary growth in the share of public spending over the last decade: a rise of over 10 per cent of GDP," he wrote. "With the benefit of hindsight it is clear that much of this expansion was based on taxes from the financial services sector and the inflationary housing bubble which was a temporary windfall rather than a secure, permanent source of revenue."

He added: "The emphasis for fiscal consolidation must fall on controlling public spending, not higher taxes... The process will be painful and difficult... There should be no 'ring-fenced' areas."

Were Mr Cable the Chancellor, the end result would not be so very different from George Osborne's plans; the differences between the two, though significant, are more temporal and temperamental than ideological.

But what of the role of the Department for Business? Mr Cable joked on his first day there that he had once called for its abolition – but he really did, and not so long ago. In that Reform pamphlet, he called for a "curbing" of industrial policy and the abolition of the regional development agencies. However, he defended some aspects of the department's work "for which there is a compelling case", such as "blue skies" scientific research.

But how much money Mr Cable will be able to spare for such schemes is debatable. He may be forced, through the very prudence he supports, to trim some of the loan guarantee schemes launched by his predecessor, Lord Mandelson. The car industry, in particular, may suffer: all of manufacturing will be hit by the removal of investment allowances to cut headline corporation tax rates. It is unclear how loud Mr Cable's voice will be in these internal debates.

Then there are the banks. Mr Cable has called for direct intervention to force state-owned banks to lend more to small and medium-sized businesses. The Treasury and the Bank of England may be sympathetic to that aim, but doubtful about the value of compulsion and not so upset to see the banks rebuild their balance sheets. The Treasury, it appears, has asserted its primacy here: it seems a cause than Mr Cable seems destined to lose.

As for exports, it's up to the Bank of England. Low interest rates have helped push sterling down by 25 per cent since its 2007 peaks; exports are at last picking up, but there is a long way to go. Export credits, a prime candidate for cuts, are in any case trivial in importance compared to the exchange rate.

That battle is, in that sense, won, and the rebalancing has begun. The crisis in the eurozone, though, threatens to erode that through euro depreciation and lower demand from the European economy. There is little that the Department for Business or the Treasury can do about all that. More significant is whether Britain's emaciated manufacturing sector is anyway too small to generate the sort of export-led growth we enjoyed in the past.

On housing, it may be left to a second term of a more radical Liberal-Conservative coalition to finally go after the tax incentives for housing – the only asset free of any capital gains tax – that have so badly distorted the economy for so long. Adding house prices to the Consumer Price Index (CPI) may help. Well, maybe.

But this a political scrap as much as an economic argument. Historically, the omens are not good for Mr Cable. The political graveyard is replete with the corpses of those who challenged the Treasury's hegemony. In the 1960s, Harold Wilson's Labour government tried to raise the long-term growth rate from 2.5 per cent a year to an absurdly optimistic 4 per cent. The task of implementing the "National Plan" was given to a political rival of the prime minister, George Brown, who used his new Department of Economic Affairs to counter the "Treasury view". "Creative tension" they called it: It failed.

By the late 1980s Michael Heseltine, a rival to prime minister Margaret Thatcher, was advocating a beefed-up Department for Trade and Industry. Mr Heseltine was sent there by John Major and famously said he would intervene "before breakfast, dinner and tea" and revived the Victorian title of "President of the Board of Trade". But that was all that changed.

Thankfully, Mr Cable is far too modest to indulge in such folies de grandeur, but one wonders how far he will get if Mr Osborne and his mandarins don't like his ideas. Rebalancing the Government may prove a precondition for rebalancing the economy.