Ryan Streeter: One year on from the collapse of Lehman Brothers, Britain desperately needs a culture of enterprise to be fostered

Ryan Streeter is a Senior Fellow at the Legatum Institute in London. He was previously a domestic policy advisor to George W. Bush at the White House in Washington, DC.

On the one-year anniversary of the global financial meltdown, Great Britain faces a choice: do we continue to reinforce a culture of safety and stability, or do we begin anew to create a culture of enterprise? When people hear the word “enterprise,” they often think “business.” But enterprise has always been more about hope, innovation, and the ability to convert plans into jobs and opportunity for other people. Not all businesses, on the other hand, are of nature enterprising. Enterprise is a cultural phenomenon more than anything, and it needs advocates and representatives. It doesn’t happen on its own, and  Labour has done little to cultivate it.

Since the collapse of Lehman Brothers on 15th September 2008, Labour has responded with a programme of safety and stability: historically unprecedented non-wartime public debt, increased tax rates, intensified regulations on banks and investors, and other measures.

These actions are understandable in times of crisis, but Great Britain cannot regulate and tax its way back to a position of economic strength.  It cannot shame investors, bankers, and “the rich” enough to increase GDP and create new jobs. To be competitive in today’s dynamic and disruptive global arena, the UK needs to focus on rebuilding a culture of enterprise. Any government hoping to restore Britain to a path of growth needs to incorporate enterprise into its central message and portfolio of policies.

What is a culture of enterprise?  First, it is an environment in which the rewards are worth the risks one takes to start a business, experiment with a new idea, and pursue a well-planned vision. A culture of enterprise is a culture of opportunity.  Second, it is an environment in which the virtues of productivity do not go unrewarded.  Just as employers value employees who possess qualities such as thrift, hard work, and ingenuity, investors allocate capital to enterprises that likewise possess them.

A culture of safety and stability can extinguish enterprise or at least weaken its efficacy. Too much regulation, too much borrowing, too much undisciplined government spending, too many  taxes – all of these risk stifling a culture of opportunity and productivity. When risks are not worth taking and hard work not worth the effort, a nation is in trouble. Is Great Britain in trouble? One might think so.

Take the case of new and small businesses, which should thrive in a culture of enterprise. Secretary of State for Communities and Local Government, John Denham, said earlier this year, “The experience of the 1980s shows how small and medium enterprises actually help lead our economy out of recession.  Between 1980 and 1990, the number of self-employed people in Britain nearly trebled.”  Today, well over 90 percent of all businesses are small and medium enterprises, employing nearly 60 percent of all private sector workers and responsible for turning over £1.5 trillion, more than half of all private sector turnover.

Has Labour capitalised on this knowledge?  According to the Institute for Fiscal Studies, Labour has changed corporation tax rates 7 out of 11 years in office in a constant effort to tweak entrepreneurship and squeeze revenue out of entrepreneurs.  Playing around with business tax rates yields very little. In fact, the fastest-growing class of businesses over the past five years have been those with no employees, which signals that companies are being created for financial reasons rather than for entrepreneurial reasons. There is no evidence that entrepreneurs become more entrepreneurial if their government regards them as a “resource” from which to squeeze revenue.

What additional signals has the current government sent to enterprising individuals? For starters, it responded to a credit crisis by borrowing money on a scale unseen in the past. Ten years from now, 20 percent of the government’s budget will service the debt it has accumulated. Where will the government get the money to keep itself afloat? Entrepreneurs and other key generators of economic growth are an obvious target.

Next, Alistair Darling’s budget raised the top tax rate to 50 percent, instituting a politically popular policy sure to drive entrepreneurs away from Great Britain and doubtful – if the past is any guide – to raise public revenues in any significant way. If we look back over the past 30 years, we see that tax receipts have hovered around 35 percent of GDP regardless of the tax rate.  People launch enterprises hoping to succeed. If a government reduces their hopes of capitalising on opportunity, they go elsewhere or do something else. Given that entrepreneurs can expect an effective increase of 20 percent on their post-tax income under the new rate, according to a recent TaxPayers' Alliance report, the government can certainly expect to see them weaken as an economic force in the UK.

More than this, in the midst of the present recession, the government released a report on social mobility saying that Britain’s young people need to aim for professional jobs in order to increase the number of upwardly mobile families in the UK. Of the preferred professions listed in the report, 40 percent were government-funded jobs. The report is a good example of the government’s safety-and-stability agenda run amok. It is as if growth and enterprise – the engines by which government jobs can exist at all – are a faint afterthought, if a thought at all.

A wise government in Great Britain going forward will have to level with the public about the need to reduce the size and cost of government as a matter of ethical obligation more than mere fiscal policy. Conservatives should be focused upon connecting the subject of tax policy with a broader rhetorical framework about culture, hope, growth, and opportunity.  Lower, pro-enterprise rates are possible and consistent with meeting future public obligations. Without a fresh rhetorical framework and new policies on this front, public opinion will continue to favour “soaking the rich” even if at the expense of a better life for their children.

And speaking of children, nothing can support an enterprising culture more than an enterprising school environment, which makes Michael Gove’s New Schools a perfect centrepiece to a broader platform of hope and opportunity. His proposed reforms anchor any sensible set of policies aimed at creating growth through a more energized, responsible, and educated citizenry.

In addition, the government needs to promote a culture of enterprise in creative ways.  Because it is difficult to find the subject of entrepreneurship in economics textbooks over the past 50 years, we do not understand it as we should. The government should very publicly gather and disseminate data on new enterprises, patents, R&D investments, the percentage of GDP and the jobs created by enterprises under 5 and 10 years old, and so on. The U.S.-based Kauffman Foundation has aggressively produced and supported new research that has analyzed business growth by looking at the contribution not only of small businesses, but new businesses as well. Such data is scarcely available in the UK.  Economists, policymakers and thought leaders will not understand how to promote enterprise if we do not understand its key components.

It is time for the nation’s leadership to send a strong signal that the UK is friendly to, and cares about, the enterprising class once again.