We need to take radical action to avoid a return to mediocrity

 
Allister Heath

SOMETIMES, we worry about the wrong things. The biggest issue facing the UK is not a triple-dip recession, or further downgrades, or yet another higher than expected budget deficit. All of these would be bitter, painful blows, especially the first, but they would also be of a temporary, short-term nature. Our real problems are structural, not cyclical: there is a growing possibility that Britain will face years of stagnation, the entrenchment of relative decline and a return to mediocrity.

Our country is increasingly uncompetitive; the cost of living, from the price of basics to that of middle class school fees, keeps on rising; taxes are far too high, and yet only cover £5 out of ever £6 spent by the state; public spending is worth over 49 per cent of GDP, according to the OECD; rules and red tape are killing initiative; housing is scarce and too expensive; our health service is below the international standard; we are crippling our most successful industries and failing to grow others; and an ugly politics of envy, emotionalism, intolerance and permanent outrage dominates the public discourse.

The good news, if one can call it that, is that there is still hope. Britain remains a wealthy nation, with world-class industries, companies and research. Many people are still able to enjoy prosperous lives here. It remains perfectly possible to turn the country around, with the right political leadership. But the danger is that any positive signs on the economy will be misinterpreted as suggesting that we are on the right tracks. Take today’s Ipsos Mori poll: just 15 per cent of people think it is very or extremely likely that they or someone close to them will loser their job in the next six months, down from 19 per cent in December and 24 per cent last year. This reflects the remarkable strength of the UK’s labour market but it camouflages our other structural problems.

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Far more worrying for the long-term are various stories in today’s paper: taxes and fees, combined with rents, now make London the world’s most expensive place to run a financial firm, according to Savills, not great given that we are supposedly trying to attract business. Or the news on p1 that the number of non-doms tumbled by 17 per cent from 140,000 in 2007-08 to 116,000 in 2010-11, according to figures uncovered by Pinsent Masons, following the introduction of a levy in 2008. Non-doms pay full UK taxes on income and capital gains generated in the UK, or brought into the UK – but they don’t pay tax on income earned abroad; the status was originally introduced to attract Greek ship owners – rich people spend a lot in the UK, creating jobs – and subsequently used to attract high earning foreigners. The fact that the levy raises just £168m a year suggests that its costs outweigh its benefits. Policy is hopelessly muddled: entrepreneur and investor visas are being used to boost the numbers of wealthy migrants; but others are being driven away by the non-dom levy, property taxes and other changes.

My last stat of the day: Europeans expats now make up 37 per cent of employees among the 912 companies registered in Dubai’s booming finance centre, as we report on p25. Some politicians realise we have a problem. Liam Fox, the former minister, will call for supply-side policies in an excellent speech this morning, including a suspension of capital gains tax and radical reform to tackle our crumbling, inefficient and punitive tax system. Unless the UK’s competitiveness radically improves, we stand no chance in the global race for talent and capital, and thus condemn ourselves to slow decline.

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