John O’Connell is COO of the TaxPayers’ Alliance.
Theresa May has a tough few years ahead as she leads the Government on extricating the UK from the EU. A hugely complex series of tasks awaits, involving simultaneous negotiations at domestic and international levels with competing interests holding opposing views on what should happen.
But Brexit must be seen as an exciting opportunity. Despite the best efforts of gloomy media outlets such as the Financial Times and The Economist, we are starting to hear more positive and encouraging news: a growing list of countries keen to start trade negotiations with the UK; markets adjusting, if not yet rallying, to a post-Brexit environment; and companies such as Siemens promising continued investment in the UK. But to fully seize the opportunity, we must adopt more liberal, open and competitive policies.
It is important to be aware of the big picture. A significant chunk of the Brexit vote was made up of those who have lost out from globalisation. It is easy to conclude, therefore, that globalisation itself hasn’t worked, with the narrative going that liberal, free market policies have let down too many people, so we must revert to protectionism and heavy intervention.
That would be a grave error. The blame for many of the problems faced by those on lower incomes – such as bad schools, a shortage of skills, poor housing and sub-par healthcare – can be laid squarely at the door of successive governments and years of bad policy. What is called for instead is genuine free market capitalism, which has shattered global poverty in just a few decades.
But ensuring that people are not left behind by globalisation is also an important goal. Theresa May wants to build a workers’ party, and that is a reasonable objective when one considers the big policy challenges facing those on low wages, such as automation. Reducing barriers to good schooling, job market entry and entrepreneurship will enhance productivity and lead to higher wages. Another way for politicians to make life easier for those on low wages is to help reduce living costs. That means cutting taxes.
In the immediate term, the government should consider a temporary cut to VAT. Given that the retail sector is highly competitive and technology has made price changes easier, much of this would likely be passed through to consumers, increasing spending power. Meanwhile, unnecessary and damaging distractions like the sugar tax must be binned. Corporation Tax should also be slashed to 10 per cent, to both demonstrate our intent to seize new opportunities in the global economy and also because we know the evidence shows that higher rates mean lower wages.
In the longer term, as we have argued before, Corporation Tax should be abolished. It is an analogue tax in the digital age, and along with it we should scrap Capital Gains Tax and other taxes on capital income. They should instead be replaced with a single tax on distributed income.
That should come as part of an overall plan for tax reform, which must be the big non-Brexit agenda for this Parliament and beyond. It is a golden opportunity not only to reduce living costs for those on the lowest incomes, but to restore trust in a system that is fundamentally broken. The Single Income Tax, the final report of the 2020 Tax Commission, is a good place to start.
Although many Conservative Party members were keen to cast their vote on the new leader, an upside of the short leadership campaign is that May will be allowed more time and flexibility. In the heat of a campaign battle, we may have seen policy pledges that were ill-thought-out and irreversible. Instead, we will hopefully see more considered ideas developed by the new Cabinet.
Free marketeers watching her speech on Monday no doubt winced on several occasions, and will be hoping some of that flexibility is exercised.
On housebuilding, May acknowledged the obvious in that more houses must be built. But in doing so, she also said that this will not be done on the Green Belt when responding to a question from the audience. This is a big mistake. The planning system is in dire need of meaningful reform, and that must include reclassifying sections of the Green Belt. Other supply-side changes to get houses built should also include a substantial relaxation of height restrictions and measures to accelerate the planning process. Furthermore, the government should put an end to fiddly demand-side interventions in the housing market. As Ryan Bourne of the IEA has noted previously, the prizes for liberalising planning are significant: it will bring down housing costs; reduce the cost of some goods and services where space and location are important, such as supermarkets and childcare services; improve labour mobility; and lead to higher productivity and wages.
May’s speech also contained worrying populist pledges on curbing executive pay. Some big businesses and their boards have made poor decisions on pay deals for their executives – few contest that. In many cases, shareholders have been ignored for too long by some companies, so there may be a debate to be had about making pay votes binding.
But instead, May proposed worker representation on company boards. As Sam Bowman of the ASI has argued in the Daily Telegraph, this has more than a whiff of Ed Miliband about it. For one thing, it fails to understand what boards are for: to provide objective direction, separate from – but mindful of – the everyday issues dealt with by staff. It is also completely at odds with what she said about companies being run in the interests of shareholders. Different countries have different established practices, of course. In Germany, for instance, large firms have worker representation on their boards. But this system of supervision didn’t prevent Volkswagen from being mired in an embarrassing emissions scandal. Furthermore, we should be wary of importing models from elsewhere wholesale, as it could cause unnecessary disruption and thus impose significant transitional costs.
Given that there is an exciting opportunity for a more liberal economy, protectionist and interventionist measures like those outlined on Monday should be reconsidered. The temptation to make offers to win over wavering Labour supporters must be great, but populist policies will cause more economic damage than the perceived political gain is worth.