How this coalition can really govern in Britain’s interest

Ryan Bourne
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IN THE The Anatomy of Thatcherism, Shirley Letwin explained that Thatcherites in the 1980s saw the purpose of governing as doing “the right thing”. This was a different outlook to that of previous administrations, which saw governing as managing the demands of competing groups. Thatcherites had little interest in building consensus.

In contrast, coalition government entails horse-trading to forge agreement. Though the UK’s governing parties state they came together “in the national interest”, differing outlooks and political calculations mean that each has a different vision of what the national interest is. Policymaking can seem incoherent and contradictory.

The build-up to next week’s Budget has already brought a cacophony of suggestions. Lib Dems want more capital spending. Some Conservatives want shock-and-awe tax cuts, while others want the Budget to focus on the cost-of-living squeeze. The focus in almost all these cases is short-term – what can be done to improve the economy now. Yet sustained growth comes from productivity improvements in the private sector. Rather than address symptoms of our current malaise, the national interest requires taking steps to raise medium term growth and get debt-to-GDP back on a downward path.

A three pronged approach is required. On fiscal policy, rehabilitation of the public finances is absolutely necessary. Spending across all departments and entitlement eligibility must be examined to cut borrowing and free room for significant enterprise-enhancing tax cuts. Some taxes (capital gains tax, air passenger duty, stamp duty) could be cut now and actually increase revenues. Progrowth tax reform (broadening bases and lowering rates) seems a no brainer, and the chancellor should pledge that spending cuts will do all the remaining lifting in deficit reduction.

Supply-side reform to make the UK more competitive must supplement this. The government has taken steps to address the tide of new regulation, but to attack the stock the “One-In, Two-Out” rule should be broadened and small business granted exemptions. A comprehensive system of sunset clauses for new regulations should be rolled out with implementation audits after three years. And the unilateral carbon price floor, to be introduced in April, should be abandoned.

Finally, we need an aggressive premarket agenda in state services and heavily-regulated industries to enhance productivity and innovation. In banking, this could include portable accounts to facilitate switching, looser capital requirements for new entrants and the re-privatisation through share distribution of Lloyds and RBS. In energy, state subsidies for renewable technologies should be phased out. Legal separation of retail and supply arms of water companies could pave the way for the extension of retail competition. And in education, the bar on profit-making academies and free schools should be lifted.

This principled agenda to halt the debt burden and realise the gains of market discipline might not win the support of lobby groups or the politically minded. But should that be the aim of governing?

Ryan Bourne is head of economic research at the Centre for Policy Studies.