Why the Chancellor must ignore the siren voices urging him to pull imaginary short-term levers for sustained growth
The Coalition has replaced its original deficit reduction plan with a “protection of government spending plans plan”, write Ryan Bourne and Tim Knox in Take the Long View: steps to improve productivity and growth. Both fiscal rules announced in the 2010 Emergency Budget have been abandoned.
Despite falling over the first two years of this Parliament, the deficit is now rising again. In the year to December 2012, the current budget was in deficit by £103 billion, £12 billion higher than it was in December 2011 for the previous 12 months.
With real GDP stagnant and the deficit rising, there have been siren calls for the Chancellor to change course. These suggestions have included:
- those who believe the Government should spend more to try to stimulate the economy;
- those who believe the Government should institute large tax cuts to stimulate the economy;
- those who believe the Government should implement a more interventionist growth agenda; and,
- those who want the Government to do more to cut the cost of living.
However, borrowing significantly more would be a mistake when the deficit is still over 8% of GDP. And while some departments are facing deep cuts, the overall level of government spending is hardly falling over the course of the Parliament: spending in 2014/15 will just be 3% smaller in real terms than spending in 2009/10 (after a 62% rise between 1997 and 2010 under New Labour).
Above all, the UK does not have a short-term growth problem which can be solved by short-term measures. The problems are deeper. The medium-term growth rate will be raised by reducing the burden of state spending and taxes while enhancing the productive potential of the UK economy through rigorous liberal supply-side policies.
The authors make 20 recommendations across three broad areas:
- ensuring cuts to current expenditure are seen through, alongside targeted tax cuts and a real programme of tax simplification;
- speeding up deregulatory and supply-side reforms; and
- adopting a robust pro-competition agenda in several major industries.
Ryan Bourne, Head of Economic Research comments:
“Sustained growth and rising living standards ultimately come from improvements in productivity. The Chancellor should ignore all the siren calls for quick fixes, and use the opportunity of the Budget to outline a coherent, principled set of policies which recognise the need to raise the UK’s medium-term growth rate and provide long-term ways of putting downward pressure on living costs. This means recognising the unsustainability of current ring-fencing arrangements and taking steps to cut spending and taxes. It means pushing further and faster on supply-side and tax reform. And it means a battle on a new front – adopting an aggressive pro-market approach in many industries where the lack of competition means low productivity and a bad deal for the UK public.”
Tim Knox, Director of the Centre for Policy Studies, comments
“In the 2012 Autumn Statement, the Chancellor allocated over £10 billion to various micro-initiatives (such as a £50 cut in water bills for families in the south-west of England, a Regional Growth regeneration fund and free childcare places for 260,000 two-year-olds). It would be refreshing if he now realised that the days of such taxpayer generosity are past; and that he concentrated exclusively on liberating the private sector economy so that we can see the return of growth and prosperity.”
On fiscal strategy
1. Announce the remit of the 2013/14 spending review. This should include:
- plans to cut government current expenditure substantially over the next five years with no ring-fences;
- a programme of reducing entitlement eligibility;
- a plan to raise retirement ages more rapidly than currently planned.
2. Widen the remit of the Office for Tax Simplification to establish tax reforms for the rest of this Parliament along the principles of base-broadening and lowering rates.
3. Pledge no new taxes or further net tax rate rises for the 2013/14 spending review period.
4. Set out a path to raise the threshold for the basic rate of Income Tax to the equivalent of the gross income of a full-time earner on the minimum wage.
5. Cut Capital Gains Tax immediately, as it is above the revenue maximising rate.
6. Commit to further reductions in Corporation Tax.
7. Re-open negotiations on public sector pensions.
8. Announce a Small Business Incentive Scheme to include a package of exemptions from regulations for very small businesses. This should include exemptions from: minimum wage legislation for those under 21; requests for time off for training; and pension auto-enrolment.
9. Adopt sunset clauses for all regulations with a post-implementation audit three years after enactment of each regulation; and bring more regulation into the scope of ‘One-In Two-Out’.
10. Adopt a Consolidated Planning Act and repeal all existing legislation with a single rationalised Act.
11. Encourage neighbouring local councils to co-operate in identifying sites for new Garden Cities.
12. Abolish national pay bargaining in the public sector.
13. Ensure that the recommendations of the Davies Review of airport capacity can be implemented swiftly.
An agenda for competition
14. Adopt the “Fair Shares” scheme for the re-privatisation of Lloyds and RBS.
15. Reduce the regulatory burden on new banks.
16. Give the Financial Conduct Authority a competition mandate.
17. Require the legal separation of retail and supply arms of water companies, paving the way for the extension of retail competition.
18. Encourage far greater competition between operators on the rail network.
19. Lift the bar on profit-making companies running academies and free schools.
20. Abandon the planned unilateral carbon price floor and phase out subsidies for renewable energies.