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Ryan Bourne: Britain has been falling down the international competitiveness league tables and the Coalition must learn some urgent lessons if it is to reverse that decline

Picture 2Ryan Bourne is the Economic and Statistical Researcher at the Centre for Policy Studies and co-author of How to reverse the UK’s declining competitiveness, which is published today by the CPS.

On the day the IMF delivers its verdict on the UK economy, the words on everyone’s lips appear to be ‘economic growth’. Or rather, ‘lack of economic growth’. Many so-called economists are loudly voicing the opinion that current slow growth is due to government spending cuts. The cuts are, of course, likely to slow growth in the short-term, but an economic strategy based on more and more state spending is unsustainable. Let’s not forget that this year the state will still spend £122 billion more than it takes in tax revenue, with overall nominal spending increasing to £697 billion by the end of the Parliament.

But to state the bleedingly obvious, if we want sustainable growth then the UK must offer a competitive economic environment. Here at the Centre for Policy Studies, we have spent some time examining the three main competitiveness league tables: the World Economic Forum’s Global Competitiveness Report, the IMD’s World Competitiveness Yearbook, and the Index of World Economic Freedom by the Heritage Foundation, and seen that there has been a clear decline in the competitive position of the UK since 1997. The detailed sub-indices for each of these reports provide a good starting point for development of policies to stimulate growth, through attracting inward investment and allowing our businesses to flourish.

When New Labour first came into office the UK was 7th, 9th and 5th in the three indices respectively, now they are 12th, 22nd and 16th. But despite this evident decline, there are strengths to the economy which must be built upon. The WEF highlight the efficiency of our labour markets, the size of our economic market and the adeptness of our businesses in harnessing new technologies as key strengths, whilst the Heritage Foundation emphasise our investment and financial freedom. The problem for the UK is that in recent years these strengths have been undermined by the deteriorating state finances, state sector inefficiency and the burdens upon enterprise.

For example, in the WEF we are now ranked 72nd of 139 on the wastefulness of government spending, 89th for the burden of government regulation, 95th for the ‘effects and extent’ of taxation, and 117th for government budget balance. Whilst at the same time, the IMD has relegated us to 26th and 28th for ‘Government efficiency’ and ‘Business efficiency’ respectively.

Whilst these are indicators, they say a lot about how the UK is perceived internationally. The Coalition is attempting to go some way to improve the government finances by eliminating the budget deficit over the course of this Parliament. But their plan is dependent on growth. Whilst lowering corporation tax should make inward business investment to the UK more attractive, real growth can only be achieved when the lessons of our competitive decline have been learnt. As the indices have indicated, a prerequisite is government and business efficiency. This will require Cameron to stick to his guns and fundamentally open up public service provision. But it will also need a bonfire, rather than a moratorium, of regulation on businesses, and medium-term attempts to lower the burden of tax across the economy. Our fall down the league tables shows that these are steps we cannot afford not to take.


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