The quarterly release of GDP data by the Office of National Statistics has become a great event in the political world since the start of the recession; the beginning of a round of visits to studios, columns in newspapers and much gnashing of teeth on social media about the direction of the economy. Today’s release of the preliminary Q2 2011 GDP data, which showed a 0.2% increase, was no different. As with the two preceding quarters, the ONS noted the impact of temporary factors on the growth - in this case, the impact of so many bank holidays so close together in April and the lingering impact of the Japanese tsunami on manufacturing. Much hay was made by Labour and other opposition politicians from this declaration - talk of excuses offered by the Chancellor (even if the reasons were given by the ONS) and more talk of “too far, too fast” with regards to the fiscal policies of the government. 

Personally, I have a deep-seated conviction against sustained deficit spending and increasing levels of debt. I passionately believe that running a deficit - especially during the good years - is one of the least progressive things a government can do; heaping additional costs onto future taxpayers, reducing existing resources to spend on services and capital costs with rising interest payments and hemming in future generations ability to choose their own policy paths because they are burdened with the cost of paying for our own choices. In this vein, I view the overall approach of the government to reducing the deficit as a positive policy for Britain - though it does make it much harder to support other policies, such as the Higher Education funding settlement. I want to see a government, and indeed a country, that does not spend a penny it does not raise in revenue. From a purely fiscal standpoint; that is, not withstanding my personal convictions about a need to unwind the state; I have no problem with higher state spending so long as it is fully paid for in revenue. 

Of course, the fiscal policy of the government does not operate in isolation from the economy. Government spending can and does shape economic growth - the question is how we chose to use that power. In this sense, again, I broadly agree with the government. The need is for us to stop relying on central government to shuffle cash around the country and instead get people to generate their own wealth and take control of their own lives. Regional development, manufacturing and localism must be at the heart of our economic vision for the future. The governments’ wide ranging side supply reforms, many of which are laid out in the Plan for Growth from the Treasury and BIS, will go a long way to helping this. But they tend to take years, or even decades, to fully impact upon the economy and help raise growth levels. Whilst this is incredibly important - the UK must have long-term plans to ensure she remains competitive as the world economy continues to quicken and the world continues to shrink and flatten - the here and now cannot be neglected.

We need some more fiscal room to manoeuvre - some space to get the cash needed to generate an industrial policy, to give the government cards in its hand to play. Of course, we can do much work through massive reform of the banking sector - something I hope the Liberal Democrats can deliver on come the final report of the Independent Commission on Banking - designed to slash state subsidies, increase the number of competitors in the field and spook them into turning the taps back on. But there needs to be more money for the Green Investment Bank (GIB), a better funding settlement for higher education and capital to support industrial policies aimed at promoting regional manufacturing growth. At the same time, we cannot up sticks and abandon the plan to get the deficit and the debt under control by 2015. 

We could try and identify further spending reductions. This would be extremely painful - politically and more generally - and would likely provoke great antipathy within the Coalition, never mind more widely. Nevertheless, we can change priorities and shift around within the current spending review, I believe, to achieve further efficiencies. For example, as a letter to the Daily Telegraph highlighted earlier this year, recommissioning half the Harrier force and decommissioning half the Tornado force, as well as buying the F18 for the carriers, could save up to another £5 billion. This government has proven itself open to public ideas and pressure - welcome in my eyes - and these kind of issues can be brought up again to try and generate the room needed.

To me, though, new revenue sources are equally important. This is not simply about raising taxes - this is about opening new sources of revenue. Personally, I would look at the evidence and move to legalise a range of drugs - such as marijuana, ecstasy and LSD - placing them under the duty system and Trading Standards. This would have a two-edged impact on the budget - reducing costs from imprisoning and prosecuting users of these drugs, and driving up revenues from sales of them with duty on top.

We should also look again at the plan offered by Sir Menzies Campbell when he was leader of the Liberal Democrats in 2007, to shift to green taxes. Though this is revenue neutral (as certified at the time by the IFS), I believe a similar option would allow us to significantly cut National Insurance contributions in place of income tax cuts, giving employers more room to hire workers. If the extra capital was on hand, we could also reduce VAT from this plan, again instead of income tax cuts. Closing up loopholes and moving the tax burden onto destructive actions and recognising the unequal distribution of wealth in this country in the tax system are key.

Ultimately, these policies need to aim at giving the government cash in hand to top up existing commitments - such as the GIB, which needs more capital now if it is to make up for not being able to borrow for an extended period of its early operations - and to have some to spare to engage in other supportive measures. Infrastructure is important in all this; to that end, I would like to see a Future Investment Bank as well, paid for from measures such as that outlined above and from any profit we turn on our shares in the banks. This would focus on high speed broadband and railway projects, designed to expand the network of both - working with the GIB. This is a very statist policy, but the economy needs all the help it can get and we must not shirk the chance to make the most of what we have. 

The need for room to manoeuvre will require, in short, adventurous and bold policy making - beyond even that which the government has contemplated. Many of these policies tie into deep-seated liberal and Liberal Democrat thinking and convictions; in particular, that on drugs. This is about admitting that we can change the shape of the scheme to reduce the deficit without knocking the policy off course and still try and find the room to help the economy here and there.