Slow growth worsens the English problem

The English question is analysed today in a Think Tank Report, who warn that if the government does nothing to tackle the injustices to England the problem will worsen.

Part of the problem is economic, and the economics of the problem are worsening by the day. Between 1998 and 2006 the UK grew by 27%. London grew by 41% and Scotland by 16%. Throughout the Labour years the richer parts of the country in London and the South East increased the gap between their incomes per head and the incomes further away from the capital. A higher proportion of the population took jobs in London and the South-east, and a higher proportion of those jobs were well paid. London and the South-east attracted in talent from around the country, and grew more of its own talent, creating a virtuous circle of the kind the government would like everywhere – better achievement at school, more university graduates, more well paid jobs, more entrepreneurs creating jobs.

During the good years for the world economy London and the South-east grew quickly enough to accept the higher taxes it was required to pay to send money to the rest of the UK to help them. The combination of easy money around the world, with the relatively low interest rates and the Basel banking regulation which encouraged it, and the price cutting activities of the emerging giants in Asia meant people felt reasonably well off. Many taxpayers did not resent the taxes creeping up to pay for the rest, so they voted Labour or abstained.

In recent months this has all changed. As I warned in August last year in the Foreword to “Freeing Britain to compete”:

“We should not rely on these two very favourable trends (low interest rates and Asian competition) continuing to allow us an acceptable rate of growth…there is considerable uncertainty in world markets about how far the Fed, the ECB and the Bank of England may go in raising rates to squeeze inflation out of the system. They must know there are huge pyramids of debt throughout the system, and inflation will not be killed unless the appetite for more debt is blunted. They also know that if they push rates too high for too long they could bring the debt structures crashing down, as we have seen with the sub-prime mortgage collapse in the USA, leading to falling asset prices, rising unemployment and even recession. …. We should also recognise that China and India will not continue to exert strong downward pressure on prices to the extent that they have in the last ten years. Their workforces are now expecting better rewards. Raw material prices are being bid up by their large demands. The price of transport rises when capacity is stretched by their needs. “

Instead of reasonable growth, low interest rates and low inflation, we are entering a period of slow growth, relatively high interest rates in the UK and worrying inflation (the result of past monetary mistakes). In other words, people are feeling the pinch. This is exacerbated in the UK by the impact of higher taxes and more regulation, squeezing people’s income and time to earn money from serving customers and clients. Real incomes are going to fall.

The government seems to have targeted the very successful London economy to pay more tax in particular. The Non Doms (foreigners as some tax raisers see it) were a politically attractive target – a tax increase imposed on people who do not vote. The danger of the government’s approach is it might send lots of people and some businesses packing, to places with lower taxes or a less hostile Revenue service, which will take some of the gloss off London’s economic success. Council Taxes are set to go up by more than the CPI or wages, as the government heaps more public spending obligations on Councils without offering the funding to pay for them, and as some Councils join in the public sector spending spree.

Squeezing people with higher taxes, when they are already feeling the strain from higher fuel bills, high house prices, penal Stamp duties if they wish to move, congestion charges and higher Council taxes will only increase the feeling of English injustice. As people come to see they are worse off, they naturally resent waste in public spending, and look carefully to see what they are getting for the extra money they are paying tax. They ask where the money is being spent, and on what. The English see more money per head being spent in the UK outside England and ask Why? The Scots with their nationalist government claim the UK government is short changing them compared to past settlements. The worse performance of the economy, and growing imbalance between London and the rest and between England and the rest will cause more frictions.

Politically this will fuel demands for “English votes for English issues”, and for the more radical English Parliament proposal. This, however, will not tackle the underlying problem – that the UK is really three different economies. There is a successful London economy, growing quickly, open to the world, with huge talent. There is a moderately successful rest of the South-east economy – with similar performances in some other suburban areas in England – and there is a slow growth high public sector economy in Scotland, Wales, and parts of the north of England. Instead of improving the slow growth lower income areas, the Labour approach of sending more and more public money to these areas has not solved it. The gap has got bigger. All the time good world growth and easy money gave some momentum to all parts, it could work. Now there are strong headwinds from the global economy and growth will be slower, the injustices and the deep set problems will become more important to people.The Irish example (up 76% whilst the UK managed only 27% overall) shows that lower taxes provides the way to make an economy really motor.

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11 Comments

  1. Letters From A Tory
    Posted February 25, 2008 at 10:48 am | Permalink

    Anyone who thinks that a one-size-fits-all approach to taxation is nuts. Devolving more powers to local authorities should allow them to set their own local income tax level, allowing poorer regions to attract more businesses and stimulate their local areas.
    http://lettersfromatory.wordpress.com

  2. Neil Craig
    Posted February 25, 2008 at 3:52 pm | Permalink

    I'm not sure I would go with you on this. I am totally in favour of high growth but if we had it we still expect some parts to be growing faster than others. If we have an average 2.5% growth we can reasonably expect the differential between the fastest & slowest to be about 10%. If we had the world average of 5% we could expect a differential of about 4%. China, with an average of 10% has seen Guangdong province (inland of Hong Kong) growing at 20% annually for 3 decades whereas the remote inland provinces are up there with Burma or Hull.

    Success has its problems too.

    Reply: I would rather have the problems of success than of failure. The rest of Britain is not rich enough and is not growing quickly enough. The big public sector is holding it back.

  3. mikestallard
    Posted February 25, 2008 at 6:04 pm | Permalink

    One of Barak Obama's speeches was reported in the Telegraph today. Instead of dividing the country, he said that he wanted to unify it.
    If only we could have the same!
    This awful Labour mob have destroyed nearly everything: Civil Service, banking system, Police, Defence forces, Schools, 'Ospitals, Integrated and joined up (!!!) transport system.
    But the one thing that nobody can put right is the Independence of Scotland and perhaps Wales.
    Now the North of England is turning into a foreign country.
    If only they would just leave it alone.
    Pretty soon the various industries would realise that, since you can get a house in Manchester for £5,000, the trains work and, if you carry a gun, you can survive, it pays you to move up there. Leeds in 1997 was a bustling Conservative City.
    Adam Smith's unseen hand and all that.

    You are so right about taxes.
    But if anyone says it they have to go into hiding like the wretched Oliver Leftwing. Because which 'ospitals and schools are you going to close? OR which civil servants/people on incapacity benefit/social service victims are going to have their life lines cut?

    This government is heading in the wrong direction.

  4. Stuart Fairney
    Posted February 25, 2008 at 6:15 pm | Permalink

    May we have another referendum for the abolition of the Welsh assembly? It may not solve the West Lothian question completely, but it partially deals with it? (and bear in mind the result of the 97 Vote – 25% Yes, 25% No, 50% did not vote.)

  5. Matthew Reynolds
    Posted February 25, 2008 at 7:13 pm | Permalink

    My idea is to bring in a 10% corporate tx flat rate accross the UK plus a 10% CGT flat rate . Business investment , job creation , productivity and GDP growth would surge . Corporate tax revenues are far too high in the context of relatively weak profitability . If on the other hand profits are surging on the back of an Eire style boom caused by the UK adopting tax cuts a la the Irish Republic then revenues rising is great . To paraphrase the EVITA song : ‘ The money would indeed come rolling inton HM Treasury ! ‘ Just cuts taxes then you force the public sector to downsize to avoid a fiscal disaster and eventually the Laffer Curve kicks in with lower tax rates producing more revenue as productivity shoots up & avoidence falls . President Bush slashed taxes umpteen times & a 1.2% of GDP budget deficit is better than the UK’s PSBR that is 3% of GDP . Ronald Reagan was right tax cuts work ! He replaced 14 tax rates with 3 in his second term while cutting federal spending by more than any President before him and the federal deficit was halved in his second term . The first term 25% tax cut did the business ! Hence the strong economy , the defence build up and the defeat of communism in the Cold War …..

  6. Matthew Reynolds
    Posted February 25, 2008 at 7:13 pm | Permalink

    My idea is to bring in a 10% corporate tx flat rate accross the UK plus a 10% CGT flat rate . Business investment , job creation , productivity and GDP growth would surge . Corporate tax revenues are far too high in the context of relatively weak profitability . If on the other hand profits are surging on the back of an Eire style boom caused by the UK adopting tax cuts a la the Irish Republic then revenues rising is great . To paraphrase the EVITA song : ' The money would indeed come rolling inton HM Treasury ! ' Just cuts taxes then you force the public sector to downsize to avoid a fiscal disaster and eventually the Laffer Curve kicks in with lower tax rates producing more revenue as productivity shoots up & avoidence falls . President Bush slashed taxes umpteen times & a 1.2% of GDP budget deficit is better than the UK's PSBR that is 3% of GDP . Ronald Reagan was right tax cuts work ! He replaced 14 tax rates with 3 in his second term while cutting federal spending by more than any President before him and the federal deficit was halved in his second term . The first term 25% tax cut did the business ! Hence the strong economy , the defence build up and the defeat of communism in the Cold War …..

  7. APL
    Posted February 25, 2008 at 7:14 pm | Permalink

    MikeStallard: "You are so right about taxes.
    But if anyone says it they have to go into hiding like the wretched Oliver Leftwing. Because which ‘ospitals and schools are you going to close? OR which civil servants/people on incapacity benefit/social service victims are going to have their life lines cut?"

    £10Billion per year, just waiting for the taking. Why are we paying for the crooked MEPs? The CFP which has destroyed the british fishing industry? The fraudulent CAP?

  8. Keith McBurney
    Posted February 26, 2008 at 4:48 am | Permalink

    Moderator, please delete the foregoing and replace with this:
    John,
    Sorry to query your analysis if not conclusion were you to include all our countries of the state we presently are in. The centrifugal forces of centralisation of what was once a union state created the disparity between the areas which appear to be net contributors to our bank at the treasury and those who appear to be net beneficiaries. Without us all everywhere, there would be no net anything. Capiche?
    Centripetal forces spun off those who were not drawn in, either by their own or Hobson’s choice. Deportation accounted for the rest, starting i hazard with the original border reivers who got asbo’d out to Ulster rather than be allowed to disturb the then peace there, until a certain English king set about a crusade at home when he recognised Jerusalem could never be subdued, but those closer to home were better placed for enduring aggrandisement. His monument still stands isolated near where his leitmotif departed on his last attempt, gazing across the Solway Firth even as the tides of time undermine it. Daft that his eventual successors signed Palestine over to some of the people there rather than all. But hey, that’s the business of those with vested interests in lands they acquired but never belonged to them, the inheritors of Pax Rome, and Constantinople too had he truly got the messages from both prophets. And in Ulster too, now in the peace of our giving much so that we can move on, in marriage and birth rates no longer held back by their unleavened tribalism as in Africa.
    Moving on, i suggest that the motors of our economy are slowed by only having one which dominates the others which you acknowledge. It is the one which sets interests rates against a target of 2% inflation from an index which does not include house prices!!?? And the downfall was what? Repeat after me in self flagellation every morning until you need a blood transfusion: sub-prime financing led by sub-prime mortgages ignored by sub-prime so called governments of both rapidly declining voter persuasions.
    Along with declining membership both here and elsewhere in Europe, no party got more than 20% of the total registered electorate’s votes in the 2005 General Election for the UK parliament at Westminster: that mother of all which both major parties have sorely abused to our displeasure in your arrogance. That was not a mandate for anything they could muster between them, let alone the present half-hearted mafiosi deserting their sinking ship in the wake of their dear ducking-out departed leader and now anointed but yet to be and, i for one hope, never to be appointed to anything other than doctor.
    John mate, give up tackling the symptoms. Join us in deliberating and determining the resolution to the problem of the this the most centralised state in the West, and increasingly so since the 2nd World War ended with the fall of the Berlin Wall as both major parties exacerbated matters fighting a battle already won by we the people no longer waiting patiently for you to join us. The demos has never been absent. Our cratus is alive and swelling. Join it before you are swept aside. You would be welcome as one, i suspect, who already and always was one of us. I knew it when you tried to sing the Welsh anthym in seeming sudden recognition of our belonging together.
    Sovereignty and Confederacy: the antidote to Unions’ Blues. Not Unions v Independence. Not Devolution v Evolution. Not Home Rule v Self Rule. But rearrangement v a renewed arrangement. Top-down power retained to divide and in self-serving antagonistic fuelled, shakily ruled Federation v its antithesis in bottom-up truly decentralised equality of Confederation which uniquely accommodates pro-Union and pro-Independence preferences here and elsewhere.
    As to here, look up British-Irish Council, aka Council of the Isles, in Wikipedia. Get it?
    As to there, in an EU of nation states, get it too? All in the Europe of the EU need referenda on this Treaty before us. I suspect we would be satisfied if Westminster did ratify it – subject to a Referendum here as Holyrood recommended when Labour MSPs abstained rather than commit hari-kari ! There is plenty of time to bring in a new Confederate Constitutional Treaty before the 2009 EU Brussels/Strasbourg ‘parliament’ elections: what is sacrosanct about the date anyway if the body is so illegitimate that neither it nor the treaty would pass the Council of Europe’s tests of either?
    I really do not care that there is something in what you are fitfully and irrelevantly debating no thanks to Hoon’s machinations that has something in it for you all in leaving the federalists sans symbols to fight another day and GB of GB to leave the dirty work of sole competence in trojan-horsed fisheries management to the arguably extra-territorial grasping hands of the EU for all marine resources lest Moscow switch mainland Europes lights off and your mob makes what political capital you might harvest in staying togrther. But i do care that your party postures as he flounders to sink in the sea of his economic mismanagement when we might go down with the ship only to your party’s advantage in picking up the pieces. If you do, your party will find itself sadly dissappointed in us not voting for it in 2009/2010 whenever GB risks his first election as the last first past the post PM of the present UK that DC covets if it indulges such like self-serving cynicism as cherry-picked devolution.
    The Home Rule of Keir Hardie that Wendy Alexander reavowed in the fail-safe hope of inheriting John Smith’s and Donald Dewar’s hearts and heads aspirations when GB fails at his first hurdle was the one to a degree for England which recognised the elephant in the room could never have its own parliament. Those days are long gone. Time we shared our wealth in Confederation. Time for a true family of nations in our nations of families. Kith and kin reunited with our diaspora everywhere in this interdependent, globalised world.
    Would you like a ticket to Murrayfield to join in singing our anthems? No matter the score then, Confederation with its prerequisite Independence and shared sovereignty – not least in Defence & Security – is a win win all round.
    Regards, Keith

  9. Bazman
    Posted February 26, 2008 at 10:53 am | Permalink

    Many of the professional people who work in London will not leave the metropolis. They feel they will be in the provinces and their children will grow up with the wrong attitude and be out of touch where the real power is. If you are a doctor or some other proffesional paid by the state. You would be financially much better off in the north, larger house less traffic and so on, especially in my home town which is geographically isolated. However this is not the case. Many professionals do not want to work there for the reasons stated. The 'intangible' reasons
    Geography is a main factor in the division of Britain not just London being the capital city. The south being physically closer to Europe and companies need to be near there markets which in many cases is Europe.
    Tax is wrong in principle and if abolished a new dawn would come, or so it seems to many right wingers.
    The flat tax in many of the former soviet countries yields more because many of these people will go to the most ludicrous lengths to avoid any tax. Bin liner and carrier bags of money on top of the false price. Dangerous amounts of cash to avoid relatively small taxes. The Wild East. Do your business there big men you can do what you like, and so can everyone else. Bribery, corruption, theft and even murder is all in a days work. You do not get to be a multi billionaire by playing a straight game.
    Anyway, following this logic lets get rid of all company tax and income tax to be replaced with VAT on everything. This would put the tax burden right where it belongs. On the people who use the services, cowboy builders will not be able to avoid tax and the rich will avoid the injustices of paying for more than what they use. Freeing them to invest their wealth in future industries.
    Utopia.

    Reply: Much of our business is with the Anglosphere – access via the internet and Heathrow is crucial to our busienss model.

  10. Freeborn John
    Posted February 26, 2008 at 1:57 pm | Permalink

    There is too much self-congratulation in the UK on just being one step up economically on France or Germany. If your child was the 3rd worst in class would you congratulate him or encourage him to match the best? We need to study what the Irish are doing right and develop a point-by-point plan to provide a better business environment such that we attract their FDI.

  11. Michael Imperi
    Posted February 29, 2008 at 11:38 am | Permalink

    If Iam not wrong I think the OECD recently published a study which demonstrates how every 1% of GDP spent on Public Spending reduces growth by 0.6% . Our public spending has balooned in the last 10years , hence despite strong global growth we have massively underperformed as an economy . The solution is easy but difficult to sell to the UK electorate.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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