Osborne needs to target tax, spending, red tape and zombies

 
Allister Heath

LET’S dream a little, and assume that George Osborne is willing to do what it takes to kick-start the British economy at next week’s Budget. If so, he should take a look at the Canadian experience of the 1990s, a stunningly successful episode in resolving a fiscal crisis.

Brian Lee Crowley and Tim Knox have crunched the numbers for the Centre for Policy Studies. They discovered that all government spending excluding debt interest payments fell by 9.7 per cent in nominal terms between 1994-95 and 1996-97. The real terms decline, when inflation is taken account of, was much greater.

The results were stunning: in the ten years starting in 1997, Canadian GDP expanded at an average annual rate of 3.3 per cent a year, better than all of the other G7 economies; corporate capex jumped 5.4 per cent annually; employment grew by 2.1 per cent per annum; and the national debt collapsed from 68 per cent of GDP in 1995-96 to 29 per cent of GDP in 2008-09. Subsequently, Canada slashed its federal corporate and capital gains taxes, and slashed or eliminated other taxes too.

VIDEO: OSBORNE MUST TACKLE ZOMBIE FIRMS


Of course, there were big differences with the situation in the UK today: Canada’s immediate neighbour, the US, grew at a decent rate during the mid to late 1990s, the world economy was in a better state than it is today and Canada enjoys lots of commodity resources. There is no doubt that one reason for the UK’s stagnation is the Eurozone’s crisis, and the fact that it is buying fewer of our exports. North Sea oil’s decline is another reason, though this is partly due to tax.

But that hardly explains it all, and a sharp but relatively short shock is a better way of dealing with a budget deficit than the endless, drawn out austerity proposed by Osborne. The chancellor’s cuts are being dragged out – at least until 2017 – and will be worth just 1 per cent per year (roughly) of total managed expenditure in real terms. In nominal terms, cash spending is still going up (though this includes interest payments, and of course some departments and projects are being slashed). The cuts were drastically larger and took place dramatically faster in Canada; in the UK, they have focused on capital expenditure, rather than current spending, and some departments have been entirely exempt (or ringfenced, to use the jargon). In Canada, nobody was exempt and some parts of the state were slashed to the bone.

The other big difference is that the first years of UK austerity were focused on tax hikes (including national insurance, Vat, capital gains tax, stamp duty and much else) rather than spending cuts. Last year, public spending rose from 48.6 to 49 per cent of UK GDP on the OECD figures, and government revenues increased from 40.3 per cent to 42.4 per cent. Canada cut spending by £7 for every £1 raised in tax, right from the start.

Osborne’s only viable alternative right now would be to cut spending a little faster – perhaps by two per cent a year, while simultaneously cutting taxes on capital and income by around 1.5 per cent of GDP to boost incentives to work and invest. He would also need to genuinely deregulate to allow greater housebuilding and private infrastructure spending. Another policy would help: tackling zombie firms. These are companies kept alive by ultra-loose monetary policy and that would go bust were rates to increase. As we report on p1, Osborne is under pressure to set up a taskforce to identify and liquidate such firms, though whether such a strategy smacks of hubris remains to be seen. One thing is clear: radical action on tax, spending, regulation and bad debt is the only hope for our beleaguered nation.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath