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.