Ruth Porter is Communications Manager at the Institute of Economic Affairs.
The latest edition of the Index of Economic Freedom has just been published, and for the second year in a row the UK has slipped down the rankings. Now with a score of only 74.5, two points less than last year, we sit five places lower on the table, in 16th place – below countries like Chile, the Netherlands and Estonia.
The Index is published by the Heritage Foundation and The Wall Street Journal, in association with the Institute of Economic Affairs; this is its 17th edition. Due to many developing economies scoring higher than last year, the overall global average score this year increased very slightly by 0.3 points.
Last year the UK fell out of the top ten for the first time in the Index’s history; this year we have fallen an additional five places. These measures are always imperfect indicators, but nonetheless the direction of travel is a warning we can’t afford to ignore.
This survey is based on data from 2009, so it addresses developments under the last government. The question then is: to what extent has the Coalition helped to address these problems, and will we be ranked higher next year?
Unsurprisingly the UK does particularly badly when ranked on fiscal freedom and government spending. Under Labour, government spending ballooned out of control, then the recession damaged growth. Responding to the slump, Labour continued to spend, pushing us to the heady heights of our current levels of national debt.
The Coalition seem to understand that they need to make changes. Last year’s cuts, limited though they were, were a start, and this year there has been plenty of talk about growth and creating a positive environment for business, even if so far the policy detail has been vague. But looking at the two main factors that have caused Britain to slip, it is not clear that enough action has being taken to change things significantly.
So far under the Coalition, public spending has continued to rise. In real terms, it will not level off until the next financial year and, even after all the cuts have been implemented, it will not be any lower than it was in 2007. To pay for this failure to reduce spending sufficiently, taxes are increasing through rises in VAT, fuel duty and CGT.
Yet if the Government wants to see significant economic growth, it needs to create a more economically free environment. Policies such as the Equality Act and the extension of maternity entitlements, are highly damaging to the UK economy. They place more burdens on business, instead of making it easier for those who create jobs and wealth.
The road to recovery for the UK is not an easy one. Levels of debt, both personal and public, are enormous. Even when public spending has been brought under control, it is only by serious reform of public services that the government will be able to cut more. If they are unwilling to do this then they will be unable to lower taxation. This would make it even harder to create an environment where growth is fostered and not hampered. On top of this there are still many questions that remain unanswered. What will be done about pensions, for example?
Growth is the way out of the UK’s current economic predicament, and the way we will achieve it at the levels we need is by allowing businesses to flourish. This means pulling back the state, by slashing spending and avoiding taxation, regulation and gimmicky intervention schemes.