I was delighted to read in the Sunday Telegraph that George Osborne wishes to adopt the tax and deregulatory proposals from my Economic Competitiveness Report. They concentrated on offering the most attractive climate to entrepreneurs and businesses, old and new, domestic and foreign. If we do that, there will be more jobs, and higher tax revenues.
The problem for the government is that its own bad management of the public accounts in recent years has left us heavily overborrowed and short of cash at exactly the time when we need tax cuts to stimulate growth. The USA can afford tax cuts because its budget deficit has been coming down in recent years. The UK fears it cannot afford them, because the deficit is large and rising. As George has pointed out, we did not use the good times to get the public sector into shape, so now we need lower taxes the budget apparently does not allow it.
UK consumers are experiencing an unpleasant squeeze. UK companies are facing taxes higher than in leading competitors like China, Hong Kong, the USA and even now parts of the EU like Holland. We are facing much more intrusive and expensive regulation than many of the leading competitor nations. The Brown Chancellorship began relatively well, controlling public spending, leaving room for growth in business and consumer prosperity. Slashing capital gains tax to 10% for many business investments was great, giving us a competitive edge.
Unfortunately he then decided to go on a mad spending spree in the public sector, without asking how he would achieve value for the money spent. So much of it was blown on higher public sector pay, shorter hours of working, more quangoes, more civil servants, more problematic computerisation schemes and more management consultants. Productivity in the public services in many cases fell. As a result borrowing surged, consumers were squeezed, and the Chancellor sought many ways to increase taxes by stealth. We had an increase in the tax on employment, bigger taxes on pension funds, and a big increase in oil taxation.
So this week when the Bank of England Monetary Policy Committee meets they will not have the US luxury of being able to slash interest rates by 75 or even by 50 basis points, and they will not be able to work with a tax cutting government to stimulate growth in the way the Fed can. If they are truly independent they should make their 25 point cut â€“ or keep rates on hold â€“ and tell the government that more needs to be done, but can only be done if public spending is brought under better control.
The government should intensify its attempts to cut the growth rate in public spending by:
1. Introducing an immediate freeze on all civil service and quango recruitment, seeking to replace leavers from within the swollen ranks of employees. Only if a Minister agreed a special case should external recruitment be permitted. This would not apply to front line personnel in the armed forces or police, nor to teachers and social service staff recruited by local government.
2. Review all central and quango computerisation projects with a view to coming up with total savings of at least 20%.
3. Cancel large projects like the ID computer scheme.
4. Place a ban on all new consultancy contracts throughout central government, unless Treasury special permission is granted for a new one.
5. Reduce the advertising and communications budget by 20%.
6. Put in place proper banking controls over the Northern Rock lending and begin to obtain repayment of money advanced.
7. Implementing the new tougher approach to benefits to those who are out of work, withdrawing them where a person has turned down the offer of a job.
8. Announcing a freeze on the total annual allowances that MPs can claim for the rest of this Parliament.
9. Implementing green measures throughout the government estate to cut energy bills â€“ better heating controls, better insulation, systems to turn lights and heating off when buildings not in use etc.
10. Producing a plan to cut the size of the property estate in line with falling staff numbers as the staff freeze starts to bite.
If the government could achieve savings of around £10 billion a year from these measures over the next couple of years or so â€“ as it could do â€“ it would have more scope to live within its own borrowing controls. It could also, on the back of such better management, make the cuts in business tax needed to stimulate growth and enterprise. Some of these cuts would quite soon bring in more revenue form the increased volume of investment and business activity.
Unfortunately in the UK debate there are two myths which constrain sensible action. Myth number one is you can only cut public spending by having fewer teachers, nurses and police. We do not need to sack any of them â€“ we have far too many regulators and administrators that we do need to reduce by natural wastage.
Myth number two is that cutting tax rates always loses you revenue, when evidence abounds that after a gap revenue surges if you cut the right taxes by enough.
It is time to disprove both myths, by cutting spending and taxes at the same time, as soon as possible. I look forward to joining George Osborne in the lobby to vote against the damaging increase in Capital Gains Tax this government is still proposing.