David Cameron’s conference speech was a missed opportunity. He should have used it as an opportunity to move beyond the furore over child benefit and the grim talk about cuts, and lay out a positive, pro-growth agenda for the Coalition Government. Instead, we got more talk about the Big Society – an interesting and important issue, to be sure, but not one that gets to the heart of our immediate problem: how do we get the British economy moving again?
The funny thing is that a pro-growth agenda – a programme designed to boost the private sector, to create sustainable new jobs, and to drive an economic recovery – is a necessary counterpoint to so many other things the government wants to do. Take welfare reform. It is admirable that the Government is addressing the perverse incentives against work that riddle the current system, and it is great that the energy and expertise of independent organisations is to be harnessed to get people back into employment. But how successful can these reforms be if new jobs are not being created, and the economy continues to stagnate?
The same is true of the Coalition’s flagship policy – to eliminate the deficit by 2015-16. If you look at the numbers in the emergency budget, which are due to be fleshed out in the Comprehensive Spending Review tomorrow, there is just no way that the Government’s spending cuts will balance the books on their own. Without economic growth and correspondingly higher tax revenues, the Government won’t even get close to its target.
So where should they start? The tax system is the obvious place, and here at least there have been some positive moves. George Osborne’s pledge to progressively cut the headline rate of corporation tax, so that the UK has the lowest rate in the G7 and the fifth lowest in the G20, is an impressive one that should help Britain attract more investment and discourage footloose multinationals from fleeing to more business-friendly jurisdictions.
But cutting corporation tax is not the be-all and end-all of pro-growth policy.
Income tax and capital gains tax are even more important, and here the Coalition has taken us in decidedly the wrong direction. The CGT hike, from 18% to 28%, was not quite as bad as it might have been, but nevertheless sends a very bad message to investors and would-be entrepreneurs. Indeed, international evidence suggests that while the revenue-maximising rate of CGT is 10%, the optimal rate – the rate which would most encourage economic growth – is zero.
The higher rates of income tax also have clear behavioural effects, with lower rates strongly associated with faster growth and, in some cases, higher revenues. As such, the Government’s purely political decision to retain the 50p tax rate is as short-sighted as it is weak-willed. If growth is what they are going for, they should scrap the 50p rate immediately, and declare their intention to gradually lower the 40p rate. There could be no clearer sign that Britain is once again “open for business”.
Of course, a pro-growth agenda is not just about cutting tax. For many businesses – especially the small ones and the start-ups that so often drive job creation after a downturn – regulation is at least as big an issue. This is particularly true of employment legislation, which, coupled with employers’ national insurance contributions, is seen as the greatest hindrance to the operation and development of businesses in the UK today, according to the Institute of Chartered Accountants’ latest Enterprise Survey. Unless the Government commits itself to a sustained effort to liberalise and deregulate, businesses will continue to be strangled with red tape, and the economy will continue to suffer.
Another area where real commitment is needed is the financial sector. At the moment, we risk going the way of Japan, whose ‘zombie banks’ have done so much damage since their 1991 financial crisis. I’m not talking about lending targets, or bank levies, or any of Vince Cable’s populist banker bashing. The financial sector’s problems are structural and long-term, and they require structural, long-term solutions that get to the heart of our failed regulatory and monetary regimes. It won’t be an easy task, but it is a necessary one.
Overall, what the Government needs to understand – and I’m starting to fear that they don’t – is that a pro-growth agenda is not the same thing as an industrial policy. Setting up green investment banks, promoting big British businesses overseas, and attempting to ‘rebalance the economy’ all suggest a worrying attachment to 1970s-style dirigisme, which is unlikely to achieve anything more than a misallocation of capital. A real pro-growth agenda is about government letting go, and creating the conditions in which entrepreneurs can take risks, and new enterprises can spring up and develop.
So there it is: lower taxes, less regulation, and banking reform are the keys to re-energising the British economy. These objectives should be central to the Government’s policy agenda.
Published on ConservativeHome here.