The issue of velocity

Recessions aren't really caused by money disappearing so much as its circulation slowing down. The economy is a complex thing but as a simplification if I receive £100 and spend it within a month as  does everyone then we generate a total spend of £1200 a year, just with that £100. If we all delay by a few days the last in the chain doesn't get the money this year and the total spend is £1100. That's a recession.

On the other hand if we all spend it a few days earlier we see growth. That's why things like increasing the minimum wage or raising tax thresholds when either are too low have a big impact on growth. The extra money in the hands of someone who doesn't have much tends to get spent quickly. At least until basic needs are being met and they can save any further increase.

Small companies are like people and tend to spend (reinvest) the money they receive quickly, until there is little return on investment for doing so. My sense is we are long way from that in this economy.

There's much more governments could do to speed the payment of businesses but they are mostly pretty silent on it. For the self employed and owner managed communities changing minimum wages or raising tax thresholds doesn't mean a thing. Changing the culture on invoicing and payment for the value they bring would mean something very real. It would increase millions of businesses profitability and bring forward the profits and income taxes they pay to the state, reducing the deficit and the debt faster and more sustainably too.

The next government needs to be much bolder than the last. It's in all our interests. None of the options offered suggest they will be.

William Buist

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