Time to take drastic action to reboot Britain's feeble economy

 
Allister Heath

So what, exactly, could the chancellor do to boost growth? He is, of course, hamstrung by two conflicting realities: the fact that the budget deficit remains huge, and may even increase this year, as well as by the realities of coalition politics. But unless he changes course, and is willing to take a major risk, proper rates of growth are unlikely to return in the near future, which guarantees that the Tory party, already behind in the polls and facing an unreformed electoral system biased in favour of the Labour party, will face catastrophe at the 2015 general election.

For a given level of total demand, companies and individuals will invest more or less depending on their return on capital. There is a straight-forward way of boosting this: slash corporation tax and axe capital gains tax entirely. Whilst this sounds drastic, this would immediately up the retuns on capital from all UK investments; at a stroke, it would become significantly more profitable for firms to invest and operate in Britain. There is a catch, however: in the short term at least, this would increase the budget deficit. Unfortunately, there is no alternative: our rocketing national debt is reaching the sorts of levels where any chance of growth will soon be snuffed out; but without a drastic improvement to incentives, companies won't start investing. Regrettably, therefore, the deficit will need to go up to 1.5 per cent of GDP, though some of this would need to be cancelled out by accelerating Osborne's spending cuts. His deficit targets are toast anyway so he might as well go for it.

Before any changes in behaviour are accounted for, slashing corporation tax to a symbolically low level of 11 per cent, below Ireland's 12.5 per cent, would reduce tax revenues by around £20bn a year; when taking account of increased investment and jobs over time, the revenue loss would end up being significantly less. Repealing capital gains tax would reduce revenues by £4.6bn; that would need to be accompanied by stricter rules to define what is income, to prevent avoidance from spiralling out of control. Countries such as New Zealand, which don't have a CGT, have managed this, so there is no reason why we can't.

These reforms would transform the UK into the most competitive destination for company locations of any developed economy; it would eliminate at a stroke much of the avoidance issues. The psychological impact would be explosive; Britain would be truly open for business. Every business leader in the world would stand up and take notice.

The chancellor should also announce that he will, over time, increase the personal allowance much more significantly. Nobody who earns the minimum wage should pay national insurance or income tax. This will take years to achieve but would boost incentives for the low paid and be a job-friendly alternative a to compulsory living wage. He should also make it clear that he believes in across the board income tax cuts, albeit at a later date.

On top of these tax changes, we need to allow energy firms to kick-start a shale gas revolution; planning laws need to be torn up to allow a mass privately-financed housebuilding programme, with homes for owner occupiers, private investors but also for a new generation of professional, corporate landlords. We also need new roads and airports; the private sector would build many of these if it were allowed to do so. A lot more needs to be done; I haven't even touched on demand-side reforms. But that would be a great start to getting the economy moving again.

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