It is now a truth universally acknowledged, or at least one hopes it is, that the best way for Britain to get on top of its horrendous public sector deficits is to return to a path of robust growth. The Budget forecasts, despite a modest downgrading of the GDP growth figure for 2011, are still remarkably upbeat. And it is argued in some quarters that after a sharp drop in output, recovery tends to be rapid. This indeed happened in the early to mid 1990s, aided by the post-ERM depreciation of the pound. But I doubt that this will happen this time - principally because of the unprecedented debt overhang in both the public and private sectors. My lack of optimism is, moreover, widely shared.
In addition to the indebtedness issue, there is no doubt that Britain’s international competitiveness has suffered during the “13 wasted years” (1997-2010) of Labour economic mismanagement. I’m old enough to remember the previous “13 wasted years” of 1951-64, by the way.
In 1997 the outgoing Conservative Government handed over one of the most competitive and best balanced economies in the world. This is no exaggeration. The Tories’ “supply side revolution” of the 1980s, covering tax-cutting, deregulation, trade union reform and privatisation, had been an amazing success. (Perhaps I should add that I attribute much of the appalling mess in the banking sector to the extraordinarily dysfunctional financial regulatory system introduced by Gordon Brown and not to the Conservative’s deregulatory programme.) By 1997, the public finances were heading for balance, the current account of the balance of payments was in balance, inflation was under control, growth was solid and balanced and unemployment was falling. Today’s economic situation, in contrast, is a train wreck with much of the “supply side revolution” in ruins.
One of the key issues now is whether we really can pursue another “supply side revolution” in order to get the country back onto a strong growth trajectory. I am not optimistic.
If we are to have buoyant growth, then it is evident that it has to come from a revitalised private sector which can claw back some of the lost competitiveness. This is going to be very difficult. Firstly, there is the cost of regulations which have been a growth industry during the “13 wasted years”. Open Europe reminded us earlier this week of the horrendous cost of regulations introduced since 1998. Based on over 2,300 of the Government’s own impact assessments, they estimated that these regulations had cost the economy a cumulative £178bn, £124bn (71%) of which had their origin in EU legislation. Of the total EU employment and environmental regulations alone represented 22% and 18% respectively.
There may be some scope for mitigating some of this regulatory burden but it is clearly limited by our membership of the EU and its Single Market. I have heard it said many times that the Single Market is the economic “jewel in the crown” of the EU and essential to our economic well-being. But membership of this highly regulated bloc comes at great cost as the Open Europe analysis suggests. I recall one-time Industry Commissioner Günter Verheugen saying (2006) that the Single Market regulations were costing the European economy some €600bn a year – equivalent to 5.5% of GDP. By comparison, the benefits could be little more than €200bn a year, again based on Commission estimates. This is a bad deal by any stretch of the imagination. And it will get worse. The global financial crisis has triggered the Commission into curbing the entrepreneurial spirits of the City of London. As I have written before, EU endeavours in this area seriously threaten the City’s competitiveness. The Single Market is more of a hindrance than a help . It stands in the way of a new-style “supply side revolution”.
Turning to taxation, there are two charges against the Labour Government. Firstly, it has squandered Britain’s competitive edge in terms of corporate taxation and, secondly, the endless fiddling to the tax regulations has vastly over-complicated the system. They are both valid. Britain has more unilateral scope to act here than with regulations. But the desired-for tax cuts will inevitably be constrained by the yawning public sector deficits. Having said that however, George Osborne is to be congratulated in announcing mitigation of next year’s damaging NICs increases and plans to reduce corporation tax. If only more could be done.
Finally, there are infrastructural issues including the vulnerabilities of the energy sector and the competitiveness-damaging impact of current climate change policies on energy prices. All consumers are paying a green surcharge as the country struggles to cut its carbon emissions and go “renewable”. In 2008 the then BERR estimated surcharges for electricity prices of 14% for domestic consumers and 21% for business. In July 2009, BERR suggested that these surcharges could be as high as 33% and 70% respectively by 2020. No other country, to my knowledge, is pursuing such costly policies – not in the EU and certainly not elsewhere. In the wake of Copenhagen and Climategate it is surely time to revisit these damaging policies.
The economy was a mess in the late 1970s but the 1980s “supply side revolution” resulted in economic transformation. This time I cannot see this happening. The EU interferes too much, and increasingly so, and the public finances overhang is simply dreadful with terrible implications for what an incoming Government can do about competitiveness-boosting tax cuts.
On the contrary, it is clear that the first priority of any incoming Government is to reassure the bond markets and the Ratings Agencies that the deficit will be brought under control. If this doesn’t happen confidence could be undermined, the “triple A rating” lost, gilt prices could fall significantly and yields rise – thus pushing up interest rates throughout the economy. The economic recovery would be much more likely to be derailed by these rising interest rates than the modest savings in planned public spending for 2010/11 suggested by George Osborne. Yet the Chancellor insists that such savings could wreck the recovery. It’s incredible.
