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
It is positive that the Coalition Government has cutting the deficit as its priority. But it would be a tragic lost opportunity if it does not use this financial necessity to “sort out” the public sector. Of course any Government cannot avoid being pragmatic to a certain extent, but what is needed is the “compass” of a political philosophy defining what the State should and should not be doing; what makes sense for the State to outsource and, equally, to do itself; what should be the target range of public spending as a proportion of GDP and how the activities of the State are best structured, organised and accountable.
In particular, where total welfare spending has risen to some £220 billion per annum while the problem of welfare dependency has increased, radical, principle based reform has become a social, financial and economic necessity. Welfare should be about a safety net with appropriate incentives and disincentives, and not a universal “disher out” of money and services. It is also worth remembering that Milton Friedman received his Nobel Prize in Economics for demonstrating that every “artificial” job created in the public sector at taxpayers’ expense destroys two real jobs in the wealth-producing economy.
In a related territory, it is apparent that Britain’s membership of the EU has become “the elephant in the room” too large to continue to ignore. At the heart of the EU is the philosophy of the “control state”, believing that making rules for every aspect of citizens’ and business’ behaviour is a good thing, while ignoring the economic damage this can inflict. There can be no UK economic renaissance under such a control regime. Indeed getting rid of it is rather more pressing than Clegg’s Great Repeal Bill.
Secondly, it is now apparent – as warned at the outset by many of us – that highly efficient and less competitive economies cannot share the same currency without causing massive economic and social problems. The fault line in the Euro is now there for all to see. It is also self-evident that the competitive European economies will not be willing to make transfer payments sufficient to provide the massive necessary subsidies for the less efficient – Greece alone will cost 7% per anum of German GDP.
In the more economically integrated USA, transfer payments are still some 20% of GDP. It is self-evident that the less competitive economies of Europe need a weaker currency and the more competitive a stronger currency. The sooner this is faced up to and addressed the better, otherwise there is the risk of government default and economic chaos where the potential levels of unemployment in the less competitive areas could lead to major social unrest and political instability. It is Germany which needs to take the lead here.
Looking to the UK economy, while there may be some political mileage left in “City bashing”, it would be economic masochism to set out to damage Britain’s strongest and largest industry – the Financial Services Sector. London and all its related geographic, satellite areas, effectively carry the rest of the UK economy and is the only part of the UK making a net positive contribution to the UK Exchequer. They account for a combined more than £200 billion of tax revenues and nearly 40% of total UK tax revenues; collectively they subsidise the rest of the country by approximately £50 billion per annum. Britain’s exports of international business services (mostly the City) also earn some £120 billion per annum.
What is needed is correct economic, monetary and regulatory policy. As HSBC has demonstrated, the largest bank in the world (based in the UK) was capable of coming through the banking crisis without incurring major problems threatening its solvency, or having to be bailed out by the Government. The services provided by the City are also considerably wider than just banking, including a leading international position in commercial law. As a leading “non British” international financier, based in London, commented to me recently, having so successfully rebuilt London as the financial capital of the world over the last 30 years, the Government must be mad if it now tries to damage this. Yes, we need other sectors of the economy to grow and succeed but there is no economic logic that for this to happen requires the “downsizing” of the Financial Services sector.
This territory, of course, relates back to the EU, whose financial regulation agenda is very clearly to damage the pre-eminent position of London. The AIFM is nakedly protectionist with the veiled objective of shifting the Hedge Fund management industry from London to Luxembourg. There will be more to come. Having transferred power to set regulatory law to the EU, by accident, over 20 years ago, I anticipate a major bust up with the EU in this territory will be unavoidable in the future, if the Government accepts the economic necessity of sustaining our leading industry. You only have to go to Hong Kong and Singapore, whose financial and business service industries are booming, to appreciate their inevitable challenge to London for largely geographic reasons. The increases in UK income tax and Capital Gains Tax and the coming potential tidal wave of red tape and regulation in finance can only make London less competitive and slow the UK’s economic recovery.
The Queen’s Speech contained some sensible and welcome, proposed measures but little or nothing specific relating to these three territories. In all three, the Government needs to have a position of political principle to sustain the right policies; from a politically pragmatic stance, doing the right thing in all three areas will determine significantly whether the Government (Conservatives) win the next General Election, as they embrace the fundamental ingredients of economic recovery.