Dear chancellor: Five steps to inject some life into a flatlining economy

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Mark Littlewood
Mark Littlewood is director-general of the Institute of Economic Affairs.

LAST week’s grim news that the economy is flatlining causes two headaches for the chancellor. First, his tentative deficit reduction plan is losing credibility by the day. Already he has postponed the date when he will balance the budget to the middle of the next Parliament. But his hopes of closing the UK’s unsustainable deficit are based on growth returning to the economy.

But secondly, growth is desirable on its own terms. Even without a colossal budget deficit, any government with a hope of survival seeks to ensure the population is richer on re-election day. The coalition should have thought through a strategy for growth in its first weeks of office. If growth is to be a centrepiece of its strategy, a much bolder approach is needed now. Here are five simple steps the chancellor could take with almost immediate effect.

First, he should increase the age range at which the youth-rate national minimum wage applies. With unemployment among young people hovering around 1m, there is a real fear of a “lost generation” which loses touch with the labour market. Regionalising the minimum wage or scrapping it altogether would be the best option. But if this is unpalatable for the coalition, it should extend the £4.98 minimum wage to cover those up to the age of 24, rather than allowing the higher rate of £6.19 to kick in at 21. Getting people onto the first rung of the career ladder is an urgent priority. No-one pretends someone in their early twenties can easily raise a family on an income of less than £5 an hour. But if the alternative is languishing on welfare, then the alternative is worse. Just like anything, if you decrease prices, people will consume more. We need people to consume more labour from our young people.

Secondly, we should look at exempting small businesses and start-ups from a swathe of regulations. Ideally, a full scale bonfire of red tape would be undertaken, rather than the feeble smouldering overseen by the coalition to date. But, at the very least, we must ensure that small business is given room to grow and breathe. Multinationals can cope with complex regulations with relative ease. It is smaller enterprises that feel the pain of state interference disproportionately. Companies with a turnover of under £5m should be able to employ up to a dozen employees on a self-employed consultancy basis, exempting them from the high risk and costs of stifling labour laws.

Rumours of the chancellor’s disappointment with some of his Cabinet colleagues over their failure to adopt pro-growth plans could perhaps be addressed through a third policy – the introduction of a formal growth test. If proposals can be shown to have even a modest likelihood of impeding economic activity, the Treasury should be able to swiftly intervene and ensure such proposals are shelved. Some of the ludicrous suggestions circulating around Whitehall – plain packaging for tobacco, a minimum price for alcohol or banning high stakes betting terminals, for example, are all signs of a government fiddling while the economy burns. The proponents of such patronising and disruptive policies should be told to desist from their pet campaigns – at the very least until the economy is booming again.

A fourth plank would be to make the life of regulators harder rather than easier. Many small businesses complain about the heavy-handed, officious demands for immediate compliance from a range of agencies. Tougher rules should be put in place to ensure that businesses are given clear guidance, not knocked off kilter by “on the spot” checks (unless there is an immediate threat to life and limb), and are granted a generous period of time in which to comply with any orders. The right of businesses to fight back against regulators needs to be strengthened.

Finally, the chancellor should make a pledge for the future. He should state that as soon as his delayed plans for closing the deficit are completed, any future “proceeds of growth” will be used to reduce taxes, not increase spending. This is a promise of tax cuts in five years’ time, but it would at least signal that government’s intention is to unleash enterprise rather than spending the practical maximum amount in the state sector.

Of course, the UK economy is to a considerable degree at the mercy of the global economy. Nevertheless, promoting growth can be a choice for this government, not merely an aspiration. Sadly, it is a choice it seems incapable of making with any conviction.

Mark Littlewood is director general of the Institute of Economic Affairs.

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