Think Tanks

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Here you go George; A Growth Manifesto from London's think tanks

By Tim Montgomerie
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On our Comment pages today Mark Field MP sets out the two great truths of the economic debate:

One: We must carry on with the Osborne deficit reduction programme. When you are in a worldwide debt crisis you have to get your debts under control.

Two: The Coalition hasn't got an adequate growth agenda.

Read Mark's piece.

So what can the Coalition do to achieve growth? I asked some of London's top think tanks to recommend some ideas. The list below is far from exhaustive. Missing, for example, are ideas to modernise trade union laws and the Civitas think tank's thinking on better procurement. I also dismiss the idea that a growth agenda cannot have immediate effects. While it's true that many supply side measures can take years to yield benefits (this is certainly true of the Coalition's excellent welfare and school reforms) some - such as tax reforms and deregulation - can produce immediate benefits. There is also the impact on confidence. If the government looks serious about long-term competitiveness then overseas and domestic investors are more likely to stay and expand in Britain.

"If the Government keeps living beyond the means of British taxpayers and businesses, then growth will continue to be limited.  By reducing the incentive to work and invest, high taxes diminish economic growth.  For some tax cuts, the economic effect is dramatic enough they can increase revenue.  That is the case with a lower corporate tax rate, the Government could cut a lot further and faster than they are, and abolishing the 50p rate of income tax.  But there are other tax cuts that would boost growth as well, such as a cut in National Insurance.  And more broadly the relationship between spending and growth shows that imposing too great a burden on taxpayers depresses growth.  European Central Bank estimates imply Brown’s increase in spending as a share of national income left GDP over £100 billion lower by 2010-11." - Matt Sinclair of The TaxPayers' Alliance

More: The TaxPayers' Alliance's Tax Reform Commission.

"In the current circumstances it is clear that the UK cannot afford, above all unilaterally, to move to a low carbon, let alone a zero carbon, economy. A low carbon economy means a high energy cost economy. At the very least, the Government should phase out all energy subsidies of all kinds, and suspend unilateral targets until such time as all other major nations have signed up to the same course. For the UK to go it alone is not merely suicidal but pointless. Decarbonisation requires growing subsidies from the taxpayer and sharply increased energy bills for business, industry, and households. At a time when painful cuts are unavoidable, it makes no sense to make British industry – and manufacturing in particular - uncompetitive, or to drive it overseas, and thus greatly weaken our economy, by ratuitously driving up energy costs." - Benny Peiser of the Global Warming Policy Forum

"The coalition needs to create an environment much more conducive to enterprise. A systematic programme of deregulation should be at the heart of this. The government should start by dismantling employment regulation. Legislation that makes it more expensive to hire workers, such as anti-discrimination legislation, should be repealed. The minimum wage should be regionalised. If the government has not got the courage for radical reform, wide-ranging exemptions for small firms would be a start." - Mark Littlewood of the Institute of Economic Affairs

More: Deregulating the labour market; deregulating energy and transport; deregulating financial sector; deregulating business; and deregulating business.

"Coherent reform of public services is a necessary part of the recovery. It will enable public spending to be restrained while meeting the demands for improved services and it will increase the productivity of the economy, raising living standards for everyone. Poor performing education, health and welfare systems already impose significant costs on the wider economy.  Demographic changes mean that the costs facing government in areas like pensions and healthcare are accelerating rapidly.  The Treasury has made the right call on the big question of deficit reduction, but has undermined the Government's commitment to value for money by ring-fencing certain public sector budgets.  The commitment to the National Curriculum is just one example of the fact that neither Health nor Education have dismantled central regulation and made services accountable to their users." - Andrew Haldenby of Reform

More: Reform's "It Can Be Done" report on public service reform.

“Any growth strategy has to deal with the problem of excessive employment law. According to the World Bank, UK labour market flexibility has slipped down the international league table – from 17th in 2007, to 21st in 2008, to 28th in 2009 and then to 35th in 2010. What was once a source of strength for the UK has become a source of weakness. A moratorium on new laws combined with some deregulation would boost business performance, job creation and restore the UK’s labour market competitiveness. For example, we need to deal with the fact that too many employers are being held to ransom in employment tribunals by vexatious employees and their ‘no win no fee’ lawyers.” - Alistair Tebbit of the Institute of Directors

"There are two fundamental requirements of competitive markets: first, the possibility of 'free entry' for new players and 'free exit' for those that fail; second, that cartels do not dominate a market. British banks fail on both points. That is why they are still not lending enough to small businesses. Why they are still paying senior staff huge bonuses (on top of salaries that were increased to make up for supposed cuts in bonuses). And how the top five banks control 80% of the market (a percentage that is climbing higher and higher). Deep seated banking reform must break up this cosy cartel. We need a new Financial Competition Commission to carry out investigations of individual firms or of product areas, with the power to make recommendations to the Bank of England to promote competition between banks; to remove barriers to entry (and promote new competition); to take steps to permit the orderly exit of failed institutions (break up institutions that are ‘too big to fail’); and to do more to ensure products and services offered are themselves subject to competition. Finally, state-owned banks must be returned to the private sector as soon as they are strong enough; and at the best possible price and greatest reward for the taxpayer (who took on all the risk when the shares were nationalised)." - Tim Knox of the Centre for Policy Studies

More: Niall Ferguson's Too Big To Live; Andrea Leadsom MP's Boost Bank Competition; and James Conway's Give Us our Fair Shares.

"Domestic competition is seen as good because it keeps producers sharp. So why resist it from abroad? Yet we slap import duties on shoes, cereals, electronics – there’s even a tariff of up to 48.5% on Chinese bicycles. Such protectionism allows our producers to coast along instead of becoming world class. It means less choice and value for consumers. And if we are buying less from abroad, people in other countries will have fewer pounds in their pockets to spend back here, so other UK exporters suffer. Let’s not wait for world agreement, but push for bilateral free trade treaties with any country we can – particularly the poorest, who have most to gain." - Eamonn Butler of the Adam Smith Institute

"Welfare reform should not go faster nor deeper than an £18 billion cut. It should, however, move beyond ‘making work pay’. This would mean: Increasing conditionality by asking more of individuals who spend as little as eight minutes a day looking for work; introducing welfare accounts that re-instate the link between what people contribute through national insurance and what they can get out; and privatising some functions of Jobcentre Plus and re-negotiating parts of Work Programme contracts to allow some claimants to get personalised support from day one of their claim. These reforms would provide a critical boost to growth: they would make the welfare system effective in matching claimants to jobs and make the best of the talent of the UK population." - Matt Oakley for Policy Exchange

"In terms of short term hindrances to growth, the total annual cost of family breakdown is £41.74 billion or £1,364 for every taxpayer. Reducing these direct costs would plug a big hole in national and local finances but there are other harder-to-measure indirect costs which hamper our long term economic prospects. The fallout from broken family relationships can hinder children’s educational achievement, dampen their self esteem and affect their physical and mental health - ultimately threatening their creativity, well-being and future productivity. We need to make sure the next spending review includes specific investment in universal credit to eliminate the couple penalty; local councils should collect data on relationship statuses and be set delivery outcomes by national government so they can demonstrate how their policies  are providing relationship support and stabilising relationships in their area; other initiatives that help families (such as Family Nurse Partnerships and Family Intervention Projects) should specifically include couple support - often most effectively delivered by the voluntary sector." - Samantha Callan of the Centre for Social Justice

More: Action on the family.

"The Government needs to push for a long-term solution to the eurozone debt crisis – bailouts aren’t working, debt restructuring will be needed. The longer the crisis goes on, the worse the prospects for eurozone growth and stability look and, as our biggest trading partner, this will have an impact on the UK economy. In the medium-term the UK needs to seek allies in pushing for a better-functioning single market, including deregulation, removing cross-border barriers to services and digital industries, and protecting the interests of the City of London from the EU’s new financial supervisory architecture. This includes securing the flexibility to apply capital requirements for banks as the UK sees fit. In the longer term, the UK should look to diversify its trade away from the eurozone, tapping into the growth potential of emerging markets, which will be necessary in any case but also provides a Plan B if the eurozone fails to get its act together. The UK also needs to continue to push for a reduction in EU external trade barriers and encourage the expansion of free trade agreements with other economies/trading blocs." - Stephen Booth of Open Europe

More from the Open Europe blog: Liberalising the Single Market, Greek debt restructuring, Financial regulation and Trade.

“The Competition Commission needs to be reformed so that it rewards, rather than punishes, firms who share their knowledge on product development and innovation with other UK firms. At present, the UK’s institutional approach encourages firms to compete with each other at every stage, rather than cooperate. Vital information for businesses tends to remain in a particular sector instead of spreading around the whole economy. This puts UK firms at a disadvantage compared to many of their international competitors. Through better knowledge transfer, they can share their ideas on the best strategies to increase revenues and, hence, economic growth.” - Ian Mulheirn of the Social Market Foundation

"Our Government should start by not making matters worse, which means cutting the 50p tax rate, reducing costly regulation, and reversing climate-change policies that are adding so much to the cost of electricity that our key industries will be forced overseas. It should also pursue our enlightened national interest through industrial policy. It should encourage local enterprise banks to restore the initiative to localities. People in the North East, for example, would rally to a local enterprise bank that provided a safe home for their savings and invested them in providing solid, sustainable jobs in the North East." - Dr David Green of Civitas

Read more about Civitas' ideas for a new industrial policy.

"The discussions about boosting the economic performance of UK economy lack clarity and focus. Everyone understands that entrepreneurship and innovation are important for growth, and also that the government has a formidable aptitude to discourage both by ill-advised tax and regulatory policies. We need to move beyond these truisms towards more specific proposals. While we subscribe to many of the views expressed by our colleagues from other London-based think tanks, we believe that any credible pro-growth policy needs to reflect the following two insights, which are conspicuously missing from our present-day discussions.

  • Incentives for private-sector employment for high-productivity individuals. In present times, highly skilled individuals are often likely to end up in professions with low social rate of return and in rent-seeking occupations, instead of going into the private sector and contributing to higher rates of innovation and entrepreneurship. Those occupations might include lobbying, tax advisory services, certain elements of legal counselling, and also the work for the underperforming branches of the public sector. Very often, government jobs bid away labour away from marginal private sector jobs. This is especially worrying in situations when the private sector jobs involve significant positive externalities, which are not reflected in employees' paycheck - such as jobs in private R&D. Tax changes, and removing many of the advantages of public-sector employment, as well as employment in some of the rent-seeking professions, could partly correct for this distortion. Also, a flat subsidy could be given to individuals who migrate into private occupations that can reasonably be seen as productive.
  • Restoring the approbation associated with entrepreneurship and innovation. This might just require a simple change of rhetoric on the part of the coalition. The government should be more vocal in praising succesful entrepreneurs and innovators as the true heros of our societies, instead of lambasting them for not paying their "fair share" in taxes."

- Dalibor Rohac of Legatum


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