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Andrew Haldenby: The Growth Rule

Andrew_haldenby Andrew Haldenby is Director of Reform - which celebrates its fifth birthday today. The report "UK growth and opportunity, the need for a fundamental reassessment" is available online.

The most important political events of this Parliament are now only three or four months away. By August Tony Blair is expected to have stood down and Gordon Brown to have launched the Comprehensive Spending Review (CSR) which will be this Parliament’s defining policy statement.

The discussion around both events will centre on the best means for the UK to meet the key challenges of the next decade. Reform’s latest report – UK growth and opportunity, the need for a fundamental reassessment, published today – shows that our success as a country will rest above all on low taxation and education reform.

We agree with recent Treasury analysis that the key challenges for the next ten years are globalisation, technological change and an ageing population. Globalisation and an ageing population require low taxation, to meet international competition and to lift the economic pressure on young people (whom Reform has termed the IPOD generation – insecure, pressurised, over-taxed and debt-ridden). Technological change requires quality in education and training. The latest US research indicates that skill levels are already the key reason that different groups enjoy different levels of income growth.

Put simply, low taxation will strengthen economic growth and education reform will widen opportunity. These are the minimum requirements of a modern political agenda.

In these terms, the UK is very poorly placed for the next decade. Taxes are rising to their highest level for 25 years. On current trends, every child will achieve what Lord Adonis has described as the basic standard of education – five GCSEs at A*-C including English and maths – in 2062.

The policies under current discussion for the CSR would take the UK further backwards. The Treasury’s approach to public spending still favours quantity rather than quality; while the CSR period will see a small drop in spending as a share of GDP, this is because resources have dried up after a decade of heavy spending rather than because of a change of approach. The clear impression is that overall spending – and taxation – will track up again when resources allow.

On education and skills, what matters is quality. Extra schools spending in this decade has made no difference to the trend in GCSE performance; Whitehall-led skills drives since the late 1980s have made no difference to the earnings of the employees involved. But the centrepiece of the CSR is likely to be a targets-led approach to education and skills – extend compulsory education to 18 (at an estimated cost of £2 billion per year), increase per-pupil spending to the level of independent schools (at a cost of £18 billion per year), increase government-sponsored training massively following the Leith Review. This learns nothing from the repeated education policy mistakes over the last twenty years.

The Treasury’s current thinking would lead to slower growth and deeper division. Better off people would take a stronger grip on private schools and good state schools. Social mobility would fall. The regional divide would worsen, with falling populations in some regions and sharply increasing congestion in London and the South East. The Government’s basic objectives – economic efficiency and social justice – would recede.

A different policy direction is absolutely essential. It would build on different elements of the Government’s programme including the reductions in income tax and corporation tax rates in the first term, the public service reform pilots in the second and third terms; and the introduction of mixed funding in pensions and higher education.

The heart of the new programme should be a spending “Growth Rule”. The current fiscal rules have allowed a very large expansion in public spending, taxation and state activity. A “Growth Rule” – aiming to reduce public-spending-to-GDP to the levels of Ireland and Australia (around 35 per cent) in two Parliaments – would create the headroom for improvements in incentives. It would return UK public spending to the downward trend that it has followed since the early 1970s. For the next four years, it would mean a slightly smaller annual real terms spending increase than current Treasury plans.

The “Growth Rule” would be accompanied by a phased programme of tax reductions to increase incentives, and by reform of both public service reform and financing. Clinging to a tax-funded system for healthcare, for example, would increase rationing by waiting which penalises low income groups most of all. The Daily Telegraph was right to launch a full debate on the future of healthcare over the weekend.

For education, the focus must be improvements in quality – through choice and supply side reform – for the majority of pupils who do not reach the Adonis benchmark by age 16. The targets-led approach is best abandoned.

The Conservative Party has recently set out what could be the basis of a “Growth Rule” – George Osborne, the Shadow Chancellor, has said that the Party will increase spending over the economic cycle by less than economic growth. That does however leave open the question of how much discipline the Party wants to impose. Some might advocate a very small reduction in the spending share (say, 1 per cent of GDP over six years). Such a policy would prevent future spending increases but it would fail to deliver the gains to individuals of a lower tax take.  The UK economy should not be maintaining spending at over 40 per cent of GDP – a level associated with recession and the days of nationalised industries – into the next decade.

It is sometimes suggested that higher taxation is needed to help people on low incomes, but the Reform report shows that a low tax economy will promote equity as well as economic growth. Internationally, high tax countries have no better social outcomes; in the UK, lower income groups have benefited little from the expansion in public spending since 1999-00. The real gains for low income groups and to the economy have been due to deregulation, for example in employment, housing, travel and telecommunications.

The Opposition parties’ Policy Reviews will follow hard on the heels of the CSR; we are entering a period when policy becomes interesting to normal people as well as to wonks. I hope today’s report will benefit the review process in all parties and – ideally – begin the development of a new cross party consensus for change. I would hugely value any comments or criticism.


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