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Budget: 101 policies to boost productivity

    In the Budget tomorrow, the Chancellor will aim to carry out pro-growth reforms and ease the burden on households at the same time as sticking to the fiscal framework of deficit reduction that he has previously announced. It is therefore essential that he implements policies to improve the UK’s weak productivity which remains well below the pre-crisis peak and which is the key to sustained wage rises and economic growth. By improving the underlying growth capacity of the economy, policies which boost productivity increase long run aggregate supply relative to demand. Ultimately this would lead to a higher medium term growth rate, more scope for real wage growth, lower state expenditure and higher tax receipts.

    The Chancellor has already intimated that he intends to improve UK productivity by boosting growth in exports and investment; he is right to do so. Whilst growth in 2013 was strong and employment has continued to impress, there is no guarantee that the economic indicators will continue to improve. This is especially the case given that growth to now has been mostly driven by household consumption. Moreover, real wage growth has not yet picked up significantly and until it does, many of us won’t feel the full effects of the recovery. It is expected that the Chancellor will announce increases in the personal allowance as well as further policies to encourage people to work, hire, invest and build. We hope that the Chancellor will be as bold as the situation requires.

    Yesterday, we announced 101 policies that we would like to see to improve productivity and help to secure the recovery which when taken together are budget-neutral. Alongside this, we would like to see moves to increase the personal allowance which would help people on low and middle incomes.

    Our proposals involve a programme of deregulation to reduce business costs, increase flexibility and free capital for investment. This includes for example a tougher One-In-Two-Out rule, the adoption of sunset clauses and far-reaching reform of EU enforced regulation. Alongside this, we propose significant tax reform such as letting lower paid workers keep their performance related pay tax free which would promote innovation and creativity. Whilst we view the positive dynamic benefits of tax cuts to be both powerful and long lasting, we accept that tax cuts generally have a static cost to the Treasury at least in the short term. As such, we propose replacing short term extensions of some tax reliefs with earlier introductions of permanent tax reforms such as the abolishment of employer National Insurance contributions for under 21 year olds and the flat 20% corporation tax rate. We also call for a simplification of some taxes such as vehicle excise duty which would make life easier for motorists and businesses.

    In addition, we call for an improved competition policy to inject more dynamism and innovation in markets dominated by a few major players. For example, we want to free Challenger Banks to compete with the existing market participants, a faster introduction of retail sector competition in the water industry and an end to restrictions on upstream and retail services to boost water industry competition. Freezing the carbon price floor to help reduce the competitive disadvantage faced by British industry is something we would also like to see. We also want a refocussing on important infrastructure projects for example by making it easier to invest in superfast broadband as well as measures to increase aviation capacity.

    Skills reform and the promotion of innovation and exports are also areas where we would like to see action. Apprenticeships have been hugely successful and we want to see measures to increase the quality and quantity of new apprenticeships as well as reintroducing Young Apprenticeships. Schools and universities should be given more freedom to invest as well as be able to carry out radical innovation in the provision of their services. The simplification of visa processes for non-EU investors and businesses would also help drive productivity growth. Bold patent reform such as new accelerated patents and the extension of the patent box as well as swiftly enacting the Saatchi Bill would drive innovation. Pushing for improvements to EU public sector procurement reform alongside an improved UKTI and visa reform to promote British exports in private medical treatment would all also be welcome.

    We will publish the full paper outlining our views on the causes of the weakness in productivity and our proposals to restore growth in two weeks in “101 ways to crack the productivity puzzle and secure the recovery”.

    Adam joined the Centre for Policy Studies as Head of Economic Research in January 2014. 

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