Azeem Ibrahim is a Research Scholar at the Kennedy School of Government
at Harvard University, Member of the Board of Directors at the
Institute for Social Policy and Understanding and Chairman and CEO of
We are facing choppy economic waters. Low growth, a budget which many say is risky, and no obvious panacea on the horizon as was the case in the Seventies with the discovery of north sea oil, the Eighties with the financial big bang, or the Nineties with the boom which resulted from the growth of the internet.
At times like this, it is sometimes prudent to return to first principles. Over the long term, there is only one way that any country gets out of an economic slowdown, and that is by working its way out.
However necessary stimulus may have been in as a short-term solution to a crisis, there is simply nothing a government can do by way of stimulus which is a substitute for initiative, enterprise, and get-up-and-go from the grassroots up. Economies do not just revive, growth does not return, the public finances do not ease their way back into the black, by the efforts of bureaucrats moving money from A to B. They revive by companies making plans for the future, investing more capital, and taking on more workers.
It happens by individuals deciding to take the plunge and set up in business, from making that leap from conception to fully-formed business plan, and from business plan to investment and a first day at a new office which they chose themselves, rather than another day as in the old job as an employee. It works when people transfer ideas into plans, plans into businesses, and businesses into employment. That in turn increases the tax take, which in turn hauls the public finances back into health. It also acts as its own stimulus, putting more spending money into the pockets of more new employees, whose spending stimulates the economy even more.
The point is this: the private sector is the key. Economies and public finances return to health when companies start hiring and people start making use of their natural entrepreneurial flair to start new businesses.
The Government, I like to think, is aware of this. So you would think that in their last budget, they would have taken every possible measure to encourage the private sector, to show the small businessman and woman that it is on their side, and to leave no stone unturned in pursuit of the economic recovery which they know they need if the private sector is to take up the slack and produce the 2.5 million jobs over the next five years for those made redundant from the private sector to go to.
Certainly, there were some good measures in there. There was the sensible move to bring corporation tax down by 1% each year to 24% eventually, and to cut the rate for small companies to 20%. There was the extension of the 10% rate for entrepreneurs to cover the first £5m of gains, rather than the first £2m as before.
But there was so much more the Government could have done.
Firstly – what justifies keeping national insurance rates so high? Everyone knows that governments choose what to tax not just to raise money, but also to direct spending away from certain items and towards others. That, for example, is why taxes on alcohol and cigarettes rose so much over the last twenty years – they were two things which successive governments knew nobody would object to taxing. Even those who enjoy them don't think they are good for you.
So out of all the things the Government could have chosen to tax, how has it chosen jobs? Because that is what the National Insurance Contribution rise which Labour introduced is, in effect. It means that once you have indeed turned your business plan into a functioning business, with all the late-nights, early mornings, and twelve-hour days that that entails, you are taxed heavily for wanting to take on a new employee. Surely this sends exactly the wrong signal.
It's the same with the VAT rise. Big companies will be able to absorb the hit to their sales that that hike causes. But for many small businesses who do not have the capacity to do so, it will be fatal. Many small businesses run on tight margins, and the resulting sales decline from a 20% sales tax is not going to be something which they can just absorb without some real pain.
I hope the Government takes the earliest opportunity to reverse these decisions. It is going to need to do everything it can to make life easier for those who can provide the jobs and growth we need the choppy economic waters ahead.