Month: June 2010

The government was right yesterday to say it would await the findings of the police investigation before discussing our gun laws. The Prime Minister was right to say we cannot legislate to prevent a madman going on a murderous rampage, much as we would like to. Of course we need to do everything in our power to make it less likely.

Alan Budd’s job at the Office of Budget Responsibility is to inject realism into the inherited forecasts from Mr Darling’s Treasury.

He inherits some racy forecasts for economic growth. The last government thought the UK economy would sprint to growth of 3-3.5% next year, and stay above 3% for the following two years. The average of independent forecasters think 2.1% is likely in 2011, followed by 2.4% in 2012 and 2.7% in 2013.

There’s a difference in the impact on the government deficit. If the economy grows by 1% more next year that will generate around £6 billion of extra tax revenue, and save maybe £1.5 billion of unemployment and other costs. If the following year the economy grows by another extra 1% roughly the same favourable improvements occurs, taking the cumulative total to £15 billion. Go on like that for long and you will be talking serious money.

Turn it round, and it means that the new government may have to say the prospective deficit in 2011 will be several billions higher, and the 2012 one worse still compared with the current forecast.

When I wrote the Economic Policy Review I commissioned a paper which looked at the long term growth rate of the UK economy. Labour had recently hiked it to an unbelievable 2.75%. We concluded it was more likely to be below 2% once the debt bubble was blown away. It is true there is a big downturn to recover from, but it seems very unlikely that the long term rate of growth is anything like 2.75%, which in turn makes it unlikely we can enjoy three years of growth above 3%.
The only thing that could change that is aggressively to set out to make the UK the best place for jobs and business in the developed world by following pro enterprise tax and regulatory policies.

In opposition the Conservatives were sympathetic to the idea that the Treasury needs a more dynamic model to forecast the consquences of changes in tax rates. Many in the debate over CGT rates seem to still believe that higher rates yield more revenue, when past experience suggests higher rates may reduce the revenue.Sales of properties and shares can be brought forward or delayed, depending on the tax rates.

There is a more general point at stake here. Sensible commentators agree that to remove the huge deficit we need to collect more tax as well as cut spending. Under the old Labour sketchy plans to halve the deficit in four years, they said 80% would come from spending cuts and 20% from tax rises. However, that was only part of the story. They also said a lot of the deficit reduction would be down to faster economic growth – another way of saying they would collect more in tax as well as some cyclical reductions in public spending. Under Labour plans the total amount of the deficit reduction to be achieved by extra tax was well above 20%.

Between 1979 and 1990 there were substantial cuts in Income Tax rates, and the abolition of several smaller taxes. Over this time period the total tax collected went up by by 170%. Under the last Labour government, following a self described policy of no Income tax rises for much of its tenure, revenue went up by 125%. The rate of increase in tax revenue was faster under the more overtly tax cutting Conservative government, even after allowing for inflation.

Government has a choice – higher tax rates or faster growth of revenue. It should be obvious which we need now.

Tonight I have been asked to talk to a group of Economists about the state of the UK economy.

I will start by praising David Cameron’s stated aim of creating conditions for a strong private sector led recovery. It is the best way to curb the deficit and raise living standards. It is no good cutting public spending without at the same time facilitating the growth of the economy and the provision of new jobs. The UK’s budget deficit has to be brought down. One of the main reasons it is so high is the large pool of unemployment with people sitting on benefits. We ned to tackle that as part of the deficit reduction policy.

So what should the government do to promote this recovery? They need to take action in four areas: tax, regulation, banking and public procurement.

Tax

If you want more of something you need to cut the rates of tax on it. The government is right to propose cutting National Insurance, the tax on jobs, and Corporation Tax, the tax on company profits. They also need to cut CGT, the tax on business success by entrepreneurs, and cut the higher rate of Income Tax, which is currently at a thoroughly unfriendly and uncompetitive 50%. We need to cut effective Income rates for the higher paid and for the lower paid.

Regulation

Regulation on Labour’s scale is another form of backdoor taxation and strangulation of enterprise. The British Chambers of Commerce have identified aorund £100 billion of extra burdens imposed on British business over the last 13 years. I have set out elsewhere how to start to bring this down. Mr Clegg’s Repeal Bill provides the mechanism to do so and must be used extensively to make an impact. We are driving business abroad to less regulated territories by our current stance. Much of the current regulation is the sledge hammer to miss the nut.

Banking

The banks do not currently have the capability to lend enough to fuel a good recovery. The government should tell the Regulator to become more counter cyclical. Relax the cash and capital requirements at this low point of the cycle and strengthen them as the recovery gets underway and as the banks make more profit.

PUblic procurement

Split up contracts and make sure specifications are friendly to UK based businesses bidding for public contracts. The public sector will still buy a lot even after the cuts. Make sure it buys British as often as possible at good prices which stand up to scrutiny.