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.
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 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.
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.
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.