So we’ve had the cuts, now it’s time for the growth. That’s the message at today’s annual CBI conference and it’s the right one. George Osborne may have hinted at some pact with the Bank of England whereby more QE offsets the government’s austerity drive, but what we really need is a supply side transformation. Specifically, targeted tax policy encouraging business of all shapes and sizes to invest and individuals and funds to invest in business.
In a CBI survey of reasons for companies not to invest in the UK, tax comes pretty much at the top and this is despite the coalition government's pledge to reduce headline corporation tax. Other areas that need attention are capital allowances, intangibles like intellectual property, the treatment of R&D and especially the tax on profits of foreign holdings. And although the CBI doesn’t comment on personal tax policy, it’s about as close as I've seen them come to criticising the 50 per cent top rate of income tax. In the words of one survey respondent, “It’s impossible to attract staff to the UK”. That’s because of current personal tax rates on income, capital gains and changes in pension rules. And if you can’t attract staff you’re not going to invest here.
Not that I expect changes to personal tax, but we do need to encourage business investment with targeted fiscal policy. Investment-led growth is the only way we’re going to generate the higher tax receipts needed to pay down our debt but I fear the government will hope for more expansionist monetary policy instead. As far as the effectiveness and need for more QE is concerned I remain deeply unconvinced.
Tomorrow the first estimate of growth for the third quarter should show a rise of 0.4 per cent from the second. That’s hardly a number to cause panic, but plenty at the Bank of England believe things could look very different in two years time and that’s a reason to act soon. It’s this two-year time frame that former Deputy Bank of England Governor Sir John Gieve tells me could be used to explain more QE even if CPI inflation is still in letter writing territory at 3.1 per cent. Central to the view that inflation will eventually come down is the “output gap”. But as both Sir John and another former MPC member Kate Barker say, measuring this with a degree of accuracy is very difficult. In fact it’s so difficult, I believe it folly to focus too much on this whilst not giving enough attention to the impact of global inflation on British domestic prices. On its own inflation mandate it’s hard to see how the bank could justify more QE, let alone justify it as a tool to stimulate growth.
I’ve yet to hear why reflating assets through more QE leads to a chief executive hiring more people in this country. On the other hand some targeted tax policies, combined with liberalisation on things like regulation, might just do the trick.
Ross Westgate co-hosts Worldwide Exchange daily on CNBC and also anchors Strictly Money -- www.cnbc.com