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Flight_howard_2
Howard Flight was MP for Arundel and South Downs between 1997 and 2005,
is a former Shadow Chief Secretary to the Treasury and Deputy Chairman
of the Conservative Party, and is now chairman of Flight & Partners
Recovery Fund.

John Llewellyn and Bimal Dharmasena have written an interesting CPS Paper reviewing what Government could do to create the conditions which will lead to an increase in the UK long term growth rate.  As it points out, avoiding bad policies is as important as promoting good policies – particularly relevant with regard to taxation.

While the political reasons for apportioning the restoration of sound public finances at around 33% increased tax and 67% cutting or freezing expenditure, are readily understood, it is also clear from an economic standpoint that an approach of 100% (or even 120%) cuts and no tax increases (or a reduction in tax) would be better for encouraging economic recovery.

Their proposals for labour market reforms are broadly sensible but they duck the crucial issues that in work tax credits are a major disincentive for individuals to increase their skills, where for the majority the differential in post tax-credit take home pay is small as between the more skilled and the less skilled: and, secondly, that faced with the growing competition from Asia, the minimum wage is now pricing large numbers of people out of work. 

Their most radical proposal is to increase the statutory age of retirement to 70 by 2020 which would result in the labour force growing on average by an extra 0.5% annually and could serve to increase GDP by 0.5% p.a.  Clearly this would also help to restore the public finances and sort out the pension mess (on which I propose to write next month).

Michael Geoghegan, CEO of HSBC, has also made important contributions to this subject.  He points out that the long, slow rebalancing of the global economy as between (largely) China’s surplus and the West’s deficit, is starting to move in the right directions as wage inflation takes hold in China and the Renminbi is on course to float.  China is set to re-import the inflation exported over the past 15 years.  While much production destined for the West is likely to move to cheaper economies in Asia, such as Indonesia and Vietnam, as China follows, increasingly, policies to stimulate consumption – as it must keep up growth – markets such as China will represent export potential for goods and services from the West. 

Here I would add that I particularly welcome the early Government trade mission to India.  Since I worked in Bombay in the late 1970s, setting up the Hong Kong Bank’s merchant bank, I have been a tireless supporter of closer British-Indian commercial and political co-operation.  The issue is, however, as to how we should retool our economy to provide jobs creating the value added goods and services which we could sell to Asia.  We have competitive advantages in technology engineering, education, entertainment and other creative industries, as well as financial services – although these will be challenged by China and India in due course.

It has become politically fashionable to talk about encouraging industry but the “what” and “how” are rarely pursued.  I was recently re-visiting the Worcester Porcelain Museum which contains amongst the finest china made between 1790 and 1840, when my family owned and ran the business.  Royal Worcester, like Wedgwood, has gone into administration and Royal Worcester has closed down completely.  High levels of skills handed down over several generations are lost and dissipated.  In the 18th Century the governments of Western Europe provided incentives and help to develop their porcelain industries to seek to reduce the outflow of gold (producing a fall in money supply) to China, resulting from the then massive import of porcelain from China.  Some German States even locked up individuals with particular skills in china manufacturing until they made them available!

I have asked myself how and why our wonderful china producing businesses, based on the skills developed over the last 250 years have gone bust.  Taste and demand have changed and management has sometimes clearly been inadequate; but the crucial point has been that we could not compete with Asia on costs.  Alas, this is, self-evidently, true for wide swathes of manufacturing industry.  While, as Michael Geoghegan points out, Chinese and Indian competitiveness is likely to reduce significantly with both wage inflation and strengthening currencies, there is a clear domestic message that we have to reduce our manufacturing costs.  While labour is the most important, we cannot compete with surcharges on electricity costs for business users of 70% by 2020, resulting from climate change policies, as the DBIS has warned.

For our leading industry, I hope the Government has realised that “bank bashing” is economically unwise.  JP Morgan has announced that they are exploring plans to move their back office operations out of the UK and are having serious doubts about building a new £1.5bn European Headquarters in Canary Wharf, because of what they perceive as a lack of Government support for the financial services industry in the UK.  International banks are certainly unlikely to transfer their Headquarters to the US in the wake of Obama’s business strangling legislation. 

But beyond Asia – where Singapore, with its welcoming policies, is fast gaining ground – watch out for competition from Germany, where for so long as it retains the Euro as its currency, is likely to become increasingly competitive.  A significant contraction in London’s financial services industry would cost thousands of jobs and weaken the ability of London and the South East to provide the massive subsidies to the rest of the UK which it has done over the last 20 years.

Finally, the UK has the problem that the risk/reward prospects for entrepreneurs establishing new businesses, deteriorated badly under the Labour Government.  There is a crying need for a more effective small company loan scheme, for improved fiscal incentives and more pro-competition policies to give enterprise a better chance of succeeding in the UK.

18 comments for: Howard Flight: Growing the (Private Sector) Economy

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