Zombie firms, tax hikes and HS2 all dragging the UK down

Allister Heath
THERE is much that the coalition has done that is helping the economy. Its reforms to education and welfare will, over time, improve the workforce’s skills and reduce the number of people trapped in dependency. Cutting the top rate of tax, which kicks in in April, and the increases to the personal allowance, which have helped millions of lower earners, have both boosted incentives. But the coalition has also made too many mistakes that are preventing the UK from rebounding properly. Here are three examples, all featured in news stories in today’s paper.

An astonishing 299 separate tax rises – measures that have increased revenues, including changes in allowances, reliefs and rates – have been announced by the coalition . No fewer than 254 have already come into force, with another 45 due to kick in before May 2015. Needless to say, the number of tax cuts have been far smaller: 119 so far, with 109 having already taken effect and another 10 due by the next election, according to the TaxPayers’ Alliance.

There are two lessons: far too much of the austerity implemented by this government has taken the form of higher taxes, and a government that came to power promising to simplify the tax system is making it ever more complicated. The Tories used to describe Gordon Brown as the Grim Tinkerer when it came to the economy. Yet for all their criticisms at the time, the coalition has turned out to be equally bad. We need a flat, drastically simpler tax system that doesn’t double, triple or quadruple tax flows of income – instead, with a few important and positive exceptions, we are getting even more social engineering via the tax system.

The coalition’s second big error of the day is HS2, the new high speed railway which the government wants to build and finance over a very long period of time. In the same way that there is good austerity and bad austerity, there is good and bad capital spending. I’m very much in favour of new infrastructure projects but they need to be the right ones. The road on which I live has been dug up and then repaired five times in the past three years, mostly uselessly. Yet that counts as capex, which we are always supposed to love. French-style grand projets – grandiose, politically driven schemes whose primary purpose is to leave a legacy for the history books – are not the right way of picking infrastructure projects. A much better answer is to allow the market to lead and to make sure that as much of the spending as possible is financed privately. The government needs to be the enabler: it must allow the construction of railways, roads, airports and utilities that the private sector believes it can profitably provide. The economic costs of HS2 would always be greater than its benefits so it fails that test.

Last but not least, there are 75,000 zombie firms in the economy, according to the Institute for Turnaround, struggling to pay interest on their debts. Ultra-low rates, quantitative easing (which, until recently at least, had pushed down longer-term gilt yields) and massive pressure on banks have given them a stay of execution. This has temporarily saved jobs – but has also prevented bad businesses from being purged, capital from being reallocated to more productive uses and is cluttering up bank balance sheets. The zombie firm phenomenon is one reason why productivity has gone into reverse.

We need supply-side tax reforms, an enlightened market-driven infrastructure policy and – eventually – a more rational monetary policy. Easier said that done, I know, but a change of course is urgently required.