IT’S time for the UK to get real. The country is deeply in debt. The coalition made deficit reduction the prime aim of its governing agreement. It was a great idea then. It is a great idea now. It needs delivery.
First, let’s be bold with the banks. The UK private sector needs easier access to reasonably priced credit to fuel a private sector recovery. Good business plans and sound projects are difficult to fund. The broken banks are reluctant to lend because the regulators want them to be more solvent and liquid. Many companies and entrepreneurs do not think it even worthwhile asking.
I suggest the government makes a virtue of the continuing losses and low share price of its holdings in RBS. It should instruct management to prepare three new clearing banks in the UK for sale. These banks can be constructed from existing branches, staff, loans and liabilities of the RBS Group. They could be called Nat West, RBS and Coutts, or such other brand names as the management sees fit to give them. They should each be a sensible size, with good balance sheets. On flotation they should raise significant sums of new capital. We would then have three new banks with money to lend. The high street needs new challengers. Some of the UK state bank risk would go. More could follow if the government also sold Citizens, the US bank.
Second, get these new banks to help finance major new capital schemes with private money. We need new toll roads, new airport capacity, new water capacity, more broadband, new power stations and new gas sources and facilities. All these things can be commercial and can be privately financed.
Third, redouble efforts to curb public spending. The government could transfer more housing expenditure to private finance, curb increases in overseas aid, enforce a stricter natural wastage policy on non front line posts, and get rid of more quangos and regulatory activity. More public sector land, buildings and other assets should be sold, as they become surplus.
Fourth, negotiate firmly over pension entitlements. The government is right to protect the position of the low paid staff. It needs to be a strong defender of the taxpayers’ interest for others. The private sector has had to accept that low investment returns and longer lives means paying more for less when it comes to pensions. There needs to be a fairness between public and private sectors, to make public sector pensions more affordable for taxpayers.
Fifth, cut taxes on income, effort and enterprise. A 20 per cent CGT rate and a 40 per cent top income tax rate should raise more revenue and would take rates back to the levels Gordon Brown thought fair and appropriate for most of his time in office. Raising tax thresholds for the lower paid would lose revenue, and should be paid for by some of the public spending changes in the third proposal.
The aim is to show markets the government has made inroads into pension and bank debt as well as general state deficits, and to demonstrate its main goal is to cut public sector financial risks. The proposals would aim to get more tax from the rich by encouraging more enterprise, and to lessen tax on lower income earners to stimulate demand.
John Redwood is the chairman of the Conservative Economic Affairs Committee.