Last week the headlines were all about economic bad news, from the million unemployed youngsters, to the Governor of the Bank of England halving the national growth forecast. Last Monday Prime Minister David Cameron admitted the Government is off in the pace in the race to eliminate the deficit by 2015.
Today, the Chancellor, George Osborne, will make his Autumn Statement. Most of the country understands only too well the parlous economic situation the government inherited, but it is waiting and hoping for a serious attack on the problem of low growth.
We are almost out of time, if we are to resolve it before the next election. Few economic measures bear fruit within two years, and almost nothing works in less than a year. The Government must act fast to get the British economy back on its feet. Osborne is right to reject the daft ideas of Ed Balls, but that is not to say that nothing can be done.
The problem is tough, but it is not insoluble. What is needed is a dramatic array of new policies that will both eradicate the handicaps to Britain’s economy and send an unmistakeable message to Britain’s business community that their economic world has changed for the better. To shock Britain out of its economic doldrums, the impact must be massive.
The biggest problem is employment. Since big business does not create jobs, the main focus of the government’s action therefore has to be small business. The measures must include radical reforms in our approach to tax, regulation, energy costs, inflation, and infrastructure.
Every single net new job created in the next decade will come from small business. Yet even fewer small businesses are planning to expand than were 18 months ago. That means that in all probability there will be no net new jobs created in the immediate future. That in turn means there will be little or no extra employment tax revenue, no extra VAT from new employees’ added spending, but a continuing drain on the state from welfare payments.
This is a clear argument for boldness. Frankly the government and the country have little to gain from a safety first approach, and much to lose.
The Autumn Statement must include drastic proposals to reform the tax system, along with tax policies which focus not just on raising revenue but on boosting growth.
The government likes to say it will not countenance any "unfunded tax cuts". It is far from clear what that means. When Margaret Thatcher cut the top rate of tax from 83% to 40% it more than doubled the top rate tax take. That was no doubt an "unfunded" tax cut, yet it yielded rich dividends in increased growth, increased earnings, and increased tax revenues.
Similarly, completely abolishing National Insurance on all new jobs in companies of less than 50 employees looks expensive, but actually it will cost next to nothing in lost extra NI (there won't be any for the next few years) and will save enormous amounts of money on unemployment costs.
A recent survey found almost a third of small businesses would take on more employees if national insurance liabilities were reduced even just for the first six months of their employment. I would make this a two or three year exemption, since the economic downturn will last at least that long.
We should cut taxes for individuals too, starting with the 50p top rate of income tax. It is as plain as a pikestaff that the 50p rate costs Britain tax revenues, talent, investment and jobs. Whilst supporters of the policy cheer the chance to soak the rich, the world’s most mobile, high income workers leave Britain in droves or never come here in the first place. Just ask yourself why Lewis Hamilton lives in Switzerland, and whether that is good for the economy.
The abolition of 50% income tax should be accompanied by lower capital gains tax. Forget the Lib Dem arguments about punishing the rich. The evidence shows the optimum rate for raising revenue from CGT is in the high teens. In the national financial interest we should immediately cut the main rate of CGT from 28% to under 20%. It would incidentally also create more jobs, albeit not in accounting firms.
Last year regulations cost British business over £80bn, an astonishing tenfold increase since the 90’s.
There are 4.5 million small businesses in Britain, providing jobs for almost 14 million people. The average small business has fewer than five employees. These are the companies, who cannot afford specialist personnel or health and safety departments, that are crippled by this avalanche of red tape.
We need a new, lighter regulatory framework for small businesses which reflects both their vulnerability and their vital importance to our future prosperity. That is why Britain should follow the example of those American States which have exemptions from large numbers of regulations for businesses with fewer than fifty employees. This cuts costs and encourages small businesses to expand.
We need policies that are pro market and pro enterprise without being in hock to corporate Britain. That means fewer gimmicks, like giving big businessmen the Permanent Secretary's phone number, and more encouragement of those small businessmen who would not dream of calling their local councillor, let alone the Perm Sec – and indeed are too busy keeping their heads above water to do so.
The Chancellor should also address the problem of rising energy prices. Millions of British households face higher electricity and gas bills as winter approaches, and high energy costs hurt businesses both big and small. Petrol costs are punitive.
Of course energy prices are partly dependent on global factors beyond our control. However, much of the economic harm caused by expensive energy is self-inflicted. Britain’s green policies have already increased businesses’ electricity bills by a fifth, and the effect is particularly severe on energy intensive industries – like chemicals, steel and ceramics – which employ over 200,000 in Britain. The average energy intensive business faces extra costs of £20 million by the end of the decade unless climate policies change. This is unsustainable.
If the Government wants to help manufacturers it should scrap Britain’s unilateral commitment to cut carbon emissions by 80% by 2050. There is no point imposing climate targets which send energy prices skywards unless the rest of the world follows suit. The result is predictable; manufacturers will leave these shores, taking jobs and investment with them. The emissions will not be eliminated, but simply relocated. That is why, for reasons both economic and environmental, we should not sacrifice Britain’s economic recovery on the altar of climate change.
More widely the government should worry more about inflation. A survey this week showed that the costs of petrol, food and fuel dominate people’s worries. The recovery is about confidence, and few things are more corrosive of both consumer and commercial confidence than the sort of creeping inflation that we are now facing. It destroys competitiveness and has dire effects on the living standards of those with low fixed incomes, none of which helps the economy. We should be wary of excessive reliance on the so-called QE policy. It is printing money by another name, it destroys the value of savings, it has about as much effect on growth as pushing on string, and it is storing up inflationary problems for the future.
Governments should be wary of big infrastructure schemes. Very few work. But if they do work, they do so by allowing our businesses to overtake their international competition, not just creep up on it. Only 1 in 500 UK households have a superfast broadband connection. In Japan the figure is 1 in 3. So we should cancel the blighted HS2 rail project, which will take us twenty years to work up to being second to France, and spend a small fraction of its bloated costs on a superfast broadband to every house in the country, allowing us to steal a march on the whole world, pushing Japan and Korea into second place.
So the Chancellor should be bold and sweeping today. The individual measures announced are of course important, but the psychological impact of seeing the Government taking bold and decisive action would be massive. Deficit reduction remains essential but cannot be achieved by cuts alone. The Government must go for growth. If the Government doesn’t take bold action, the economy will founder, and we will blight the lives and careers of a whole generation.