Going for growth?

As we have seen, the government’s budget reduction strategy rests on growth in the economy to increase tax revenues. The Office of Budget responsibility forecasts growth of 2.3% in 2011, 2.8% in 2012, 2.9% in 2013, 2.7% in 2014 and 2.7% in 2015. These figures are all above the trend rate of growth the Office believes the Uk can sustain, and averages 2.7%.

When we published the Conservative Economic Policy Review we stated “Our economic study concludes that real national income per head may now only grow below 2% on averAge”. Subsequently the OBR has lowered the inherited official forecast of a 2.75% trend rate to just over 2%, closer to our view.

The Treasury and OBR may be right that the Uk can grow faster than its new lower trend rate for the next four years. It needs to in order to hit the target of an extra £176 billion a year of tax revenue by 2014-15 compared to last year. Higher VAT brings in £13 billion of that. The Treasury also thinks higher CGT will bring in £0.9 billion extra, but they may be disappointed once the flurry of extra tax from earlier this year is through the system.

So what should the government also be doing to make above trend growth more likely? What can they do to raise the trend rate again?

The UK needs a new generation of entrepreneurs. It also needs to tempt the older successful entrepreneurs back into buying and building businesses. That requires four things above all else. A favourable tax regime. Banks that work well and help finance new and growing ventures. Skilled and motivated people to work in the new businesses. A favourable climate for business, including good infrastructure and sensible regulations.

The sooner the governemnt gets the higher rate of Income Tax down from 50% the sooner it wil tempt more successful entrepreneurs and more foreign busiensses into job creation. The sooner it works out exactly where the Laffer curve peaks and where revenue is maximised on capital gains tax, the sooner it will send a better message to investors. I will look again at the banks tomorrow.

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6 Comments

  1. Lottery Balls
    Posted October 16, 2010 at 8:41 am | Permalink

    Agreed but there is not even the slightest sign that they understand this and many indications that they do not. No real hint that they are even intending to go in this direction.

    Put your investment in the UK and if you do badly you will loose it if you do well you most will end up with the government and your investment will struggle to beat inflation after all the taxes. Any when you die they will pinch a further 40%.

    Everyone knows they need: .

    Banks that lend to businesses

    Sensible tax rates to maximise growth (and revenues) maximum of about 35%

    Bonfire of the circa 90% of regulations that are at best pointless at worst mad.

    Reduction of the size of the state and try to ensure that it occasionally does something useful.

    General sense of pro business pro growth agenda and a sense of direction.

    Sensible energy policy so energy costs do not the UK uncompetitive do not support green technologies that do actually work or are not economic or competitive.

    Tax excessive state sector pensions so there is not the imbalance between the new £1.5M pot limit for the productive sector and the state sector. This is a good tax and very hard to avoid.

    Make it easy to hire and fire with maximum pay off's of say £5,000 in all cases.

    Get out of the EU

    Give shareholders more power to control excessive directors packages.

    Make legal systems (a good game theory approach) such that cost/benefit of litigation is generally to discourage most actions so more lawyers can do something more useful.

    Finally if something is "progressive" or promotes "equality" it is probably a bad idea – it usually means taking money of people who use it well, to generate wealth and jobs, and giving to people who do not. So it is rather unlikely to help the economy even if it makes the Liberals feel good inside.

  2. Stewart Knight
    Posted October 16, 2010 at 9:44 am | Permalink

    No, we don't need a 'new generation' of entrepreneurs, though they would be helpful, we need the old and middle generation to be given better chances yo exploit their entrepreneurial skills.

    We have 8 million self employed people in this country, at ALL ages, most of which would love the chance and opportunity to expand and grow their small enterprises, but which are held back by red tape and lack of chances to borrow or gain grants to expand. It is from the ranks of the self employed that growth will come, not some vacuous notion of a new generation.

  3. Lottery balls
    Posted October 16, 2010 at 9:51 am | Permalink

    In the case of a tax on excessive state sector/BBC/MP's/Quango pensions the Laffer curve must peak at about 100% as they cannot be avoided the state just needs to deduct the tax before paying them.

    Otherwise I think it does not exceed 35% and in the case of CGT it needs to allow for inflation otherwise you are just taxing income that has not even been made.

    Tax on some charities should also be increased as many do little real good and are just unfair competition for businesses. Many also just feed into the BBC's endless drip feed of left wing propaganda messages.

    • Lottery balls
      Posted October 16, 2010 at 10:14 am | Permalink

      The state pension tax should certainly include all house of commons speakers and perhaps Fred Goodwin and the likes by special extension.

  4. Brian Tomkinson
    Posted October 16, 2010 at 10:10 am | Permalink

    Hopefully we shall be able to see more clearly what the government is up to after next week's announcements after all the spin about cuts. I thought that spin was supposed to be a thing of the past. The media have totally ignored the detailed budget figures which you have highlighted showing more cash spending every year. It was interesting to see the Cabinet Office published departmental organograms yesterday. Presumably, if there are going to be significant departmental cuts, these will need to be re-written. We shall see. I would like to rid myself of the notion that the government's real intention is to reduce the deficit by a combination of taxation and inflation.

  5. Alan Wheatley
    Posted October 17, 2010 at 12:45 pm | Permalink

    To your four things needed for building business, I would add a fifth. The ever increasing legislation in favour of "employee's rights" is making employing people ever less attractive. This is especially so for small businesses.

    A couple of days ago I was at the engineering company who machine parts for me. They are busy, and really need to take on more staff. But they are concerned at the difficulties and costs they face should business turn down, or a recent starter turns out to be unsatisfactory.

    Also, in a small business, what would the employees think if the boss decided to take, say, paternity leave and let the rest of them get on with it without supervision? Those who own the business care about it, some who work there don't care a stuff, as long as they get their rights!

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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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