Growth is good

The interim report of John Redwood's Economic Competitiveness Policy Group has just been published.  It includes an interesting comparison of the recent economic histories of Scotland and Ireland and concludes that Ireland's low corporate tax rates are a key component of the Celtic Tiger's success.

The report notes how Brown's British economy has been sliding down the global competitiveness league and that Britain could be performing so much better.  The report includes a powerful restatement of the importance of economic growth:

"Just consider this: every extra one percent of growth would yield an additional £5,000 million a year of extra tax revenue to spend on public services, and an extra £7,000 million for individuals and families to spend. That is the equivalent of £400 extra for the average family to spend, and £320 extra per family on public services. If the UK had grown as quickly as Ireland in the period 1998-2004 families would have £4,800 extra to spend each year, and their public services would have £3,200 extra to spend on them."

In the Conservative Party's legitimate desire to protect the environment and promote a healthy family life balance we cannot afford to allow the economy to slow.  I've never been a fan of Edward Heath but this statement of his - in response to the extreme thinking of some 1970s environmentalists - was spot on:

"The alternative to expansion is not, as some occasionally seem to suppose, an England of quiet market towns linked only by steam trains puffing slowly and peacefully through green meadows. The alternative is slums, dangerous roads, old factories, cramped schools, stunted lives.”

At the end of this interim report there is a promise to focus on ten main barriers to higher UK growth:

1. "The shortage of transport capacity of all kinds. We are examining a range of options to raise the rate of investment in transport networks, particularly through private capital.
2. The high price of energy. We will offer regulatory changes which encourage the provision of more local energy schemes, and offer sufficient supply of gas for our needs.
3. The high and growing burden of regulation. We will offer proposals for cutting the volume and impact of regulation on business, and better processes to ensure proper control is kept over the cost of all regulation.
4. Taxation. We will examine options put forward by the Tax Reform Commission to restore the UK’s tax competitiveness as a location for people to create jobs, as opportunity presents to implement such a programme. We will show how raising the growth rate will itself swell public revenues.
5. Higher education. We will comment on the strength of UK universities compared with European continental ones, but will draw attention to the growing lead by the principal US institutions. We will provide options to make it easier and more attractive for UK universities to raise endowment money and to grow their asset base.
6. Skills. We will recommend ways of increasing the numbers taught physics, maths and chemistry to a reasonable standard, and ways to make the vocational strand of education more worthwhile. The UK lacks scientists and mathematicians at all levels of educational achievement, and has a shortage of good craftsmen and technicians.
7. Pensions and savings. We will propose means to make it more attractive for people to save for their retirement, and for the other big events of life.
8. Wider ownership. We will review the tax and regulatory framework, to enable more people to own their own home, to own shares in the business they work for, and to participate in the success of their employer’s business.
9. Intellectual property and knowledge transfer. We will offer means to strengthen the UK’s ability of transfer ideas from the laboratory and classroom to the factory and office.
10. Public sector efficiency. We will present a menu of ways that productivity and quality can be improved in the main public services."

Download John_Redwood_report.pdf

Comments

[Wat Tyler]

Good as far as it goes. At least tax cuts and public sector reform have made it through the first round- even if they are numbers 4 and 10.

Keep going John.

[Chad]

I look forward to the completed report. I'm sure John's work will interest many, not just inside the Tory party, particularly if Cameron does not adopt his key recommendations.

[David Belchamber]

8. Wider Ownership: the principle of encouraging home ownership is of course laudable. However the elementary economic principle of supply and demand will drive up property prices still further in response to any easing of the tax framework unless it is accompanied by some regulation as to the amount an individual can borrow.
Personal debt is now a major problem in this country; banks and building societies (not to mention credit card companies)should not be allowed to encourage people into imprudent borrowing.

[Dominic de Mariveles]

11. A Benefits system that encourages millions not to work and promotes and anti-business culture.

12. Unlimited immigration that fills jobs, not all taxpaying, faster than we can create them and then requires higher spending on public services.

Overall though spot on. Ireland has been successful because of a huge building and infrastructure programme, de-regulation and tax cuts. Scotland is a backwater because of excessive layers of government, a hatred of the business leading to excessive regulation and high taxes

[Mark Fulford]

Personal debt is now a major problem in this country; banks and building societies (not to mention credit card companies)should not be allowed to encourage people into imprudent borrowing.

I agree. I believe that we should legislate to give lenders

a) less protection from bad debt (greater risk) and

b) substantial penalties if their bad debt rate rises above a reasonable percentage of their business.

[Tanuki]

Regarding point [8] - I don't see it as the government's role to regulate the availability of credit [just look back at the couple of decades post-WWII where credit-controls were the major cause of 'boom-and-bust'.] I thought we were all meant to be free-marketeers these days?

And surely the answer to non-affordability of housing is to increase supply by removing the current baroque planning restrictions on development, particularly in rural/semi-rural areas.

[Jon Gale]

Instead of regulating the availability of credit, we could regulate the advertising of credit - Ads like "Debtbuster loans" etc. are dangerously misleading and plunge people further into debt.

[David Belchamber]

Regulating irresponsible advertising, as Jon at 16.47 suggests, would be a good start but an article in the Telegraph on 11 September featuring a personal debt adviser suggests stronger action might be needed. He points out that "with the average family's disposable income decreasingly dramatically the situation is likely to become more untenable for many more households". He states that it is not uncommon to see individuals owing in excess of £100,000 purely on credit cards, the largest amount he has seen being over £250,000 for somebody who had no assets.
I am certainly not suggesting stringent regulation of credit by government; I do feel though that allowing people to obtain borrowing on little or no evidence of means (self-certification) or on multiples of 5 or 6 times earnings or to have several credit cards when they can barely afford one are all practices that should be reined in. To me it is irresponsible lending and it is hardly surprising that banks are having to write off huge amounts.
The debt adviser states that there is currently about £200bn of unsecured lending on credit cards, personal loans and overdrafts in this country at the moment and that more than 55% of credit cards in western Europe are held by Britons.

[tired and emotional]

I don't believe that credit card debts of £100k are commonplace. I agree that some people are taking on too much but given the amount of equity in people's homes the £200bn is not excessive.

The savings rate is increasing as higher rates become more likely and it's only the really feckless and terribly unlucky who are falling foul. The rise in IVAs peddled by debt advisors and the attitude that it's someone else's problem when you can't manage your own borrowings are far more to blame than the temptations of lenders.

[Denis Cooper]

"4. Taxation. We will examine options put forward by the Tax Reform Commission to restore the UK’s tax competitiveness as a location for people to create jobs, as opportunity presents to implement such a programme. We will show how raising the growth rate will itself swell public revenues"

Taken as whole the UK is not an unattractive location for investment, but the attractions are not spread evenly with the result that some parts have been attracting too much capital - so much that it has outstripped the readily available local labour supply - and those parts provide public revenues which then have to be used to subsidise other parts which are less attractive to investors.

One solution would be to start by cutting business taxes in the lagging areas - not necessarily areas as large as "Scotland" or "the North of England", but smaller specifically targetted areas such as "Newcastle".

For example, companies located in an area with per capita GDP below 70% of the UK average could have a complete exemption from zero corporation tax for a number of years; between 70% and 80% it could be a two-thirds reduction; between 80% and 90% it could be a one-third reduction.

[Derek]

Are we allowed to have preferential tax rules under EU law?

[tapestry]

Ireland does.

[Mark]

Corporation Tax is totally counterproductive. Profit in a company can be used either for remuneration or for investment. Since the goal of a company is to remunerate, the only reason it would save (and thereby profit) is if it believes that savings will allow investment that will ultimately bring greater remuneration.

Britain would benefit from being a haven from corporation tax. We should recognize that profit employs people and people pay taxes. Instead, our tax system sees a pot of corporate cash that can be raided, with no thought about how it reduces the company’s ability to grow and employ. The current situation is so utterly stupid that while taxing companies on investment funds they manage to save, we simultaneously give tax relief on investment funds lent to them.

[Jamie]

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[Chad]

David Belchamber wrote:
"I am certainly not suggesting stringent regulation of credit by government; I do feel though..."

David, are you a conservative? I have to ask as you seem to regularly support increased nanny state intervention in our lives.

What's wrong with a little self-responsibility?

Sure, there are loads of ads, sure the government banged on about low rates etc (overlooking that small increases in the future would have a disproportionately large impact), but people really have to take responsibility for their own lives.

Of course schemes like IVA's are useful to help those in trouble, but it's about time we changed the mindset so people accept their own personal responsibility instead of expecting the state to do everything for them.

[Denis Cooper]

Derek @ 21:07 - "Are we allowed to have preferential tax rules under EU law?"

An interesting question. I thought I'd leave it to somebody else to ask it as I wouldn't want to "talk about Europe" all the time.

tapestry @ 21:40 - "Ireland does."

Ireland has been criticised over its low overall rates, but does it have differental rates of business taxes across the country?

Interestingly only last week the European Court of Justice ruled that Portugal could not allow the legislative body of the Azores to cut income and corporation tax rates below those on the mainland, upholding the Commission's case that this was prohibited state aid.

So an elected government sets an internal policy, that policy is challenged by unelected bureaucrats of an international organisation citing this or that article of a treaty, and a court made up of foreign judges appointed by some obscure mechanism over-rules the elected government. We must get away from this pernicious "government by international treaty", it's killing democracy.

http://today.reuters.com/news/articlebusiness.aspx?type=tnBusinessNews&storyID=nL06693202&pageNumber=0&imageid=&cap=&sz=13&WTModLoc=BizArt-C1-ArticlePage2

BRUSSELS, Sept 6 (Reuters) - Portugal cannot permit the legislative body of the Azores islands to cut income and corporate tax rates below those on the mainland, the European Union's highest court held on Wednesday.

"The court finds that the Portuguese government has not proved that the adoption of the measures at issue was necessary for the functioning and effectiveness of the general tax system," the European Court of Justice said in its ruling.

"Consequently, the court dismisses the action brought by Portugal."

The ruling was being closely watched for implications by Britain and Spain, which both intervened on the side of Portugal in the case.

Portugal had permitted the regional assembly of the remote, mid-Atlantic chain of nine volcanic islands to set their own income and corporate tax rates well below those of the mainland, with cuts of as much as 30 percent in corporate income tax.

Portugal argued that the tax cuts were a matter of sovereignty and motivated by the geographical isolation, difficult climate and economic dependence of the Azores on dairy farming, fishing and tourism.

The European Commission ruled in December 2002 that the tax cut was prohibited state aid -- the provision of government money to a region to give it a leg-up.

The Commission, the executive arm of the European Union, said this was so-called "operating aid" in that it was continuing, rather than being one-time aid to help an industry or region get ahead.

The Commission decided that the reductions were not justified by their contribution to regional development, holding "their level is not proportional to the handicaps they are intended to alleviate".

Britain has argued that if the Commission position were upheld it might endanger London's arrangement with Scotland, where parliament has the power to vary the basic British income tax rate.

Spain has said the decision could affect the special powers on tax granted to its northern Basque Country and Navarre regions, as stipulated in the Spanish constitution.

An adviser to the court, the advocate general, had previously sided with the Commission.

In October 2005, Advocate General Leendert Geelhoed of the Netherlands said the purpose of the tax reductions was to compensate for disadvantages of doing business in the Azores.

He said that did "not constitute a valid justification based on the nature and economy of the Portuguese tax system".

"The Portuguese Republic has not shown (or attempted to show) that the Azores receive no countervailing funding from state finances to compensate for the lower tax revenue," he wrote.

[Robert Isherwood]

An interesting sight. The only thin most people appear to have lost sight of is that they don't actually understand what Conservative means. It is all the more insulting to traditional Conservatives to see the word 'Tory' being used.

We have Simon heffer calling David Cameron the new Social Democratic leader of the Conservative Party and Claire Short saying that she can see no discernable difference between Blair & Cameron, New Labour and the conservatives.

[David Belchamber]

Good morning, Chad. You asked (quite reasonably) @08.19: "David, are you a conservative? I have to ask as you seem to regularly support increased nanny state intervention in our lives".
To answer your question, yes - instinctively - I am a conservative and generally I am against the nanny state. I am certainly against the micromanagement of our lives that we currently suffer from but there are certain social problems (the very high cost of housing and the irresponsible encouragement to borrow beyond a person's means) that IMV require some intervention by government.
These attitudes often arise from personal experiences; I have a son and two stepsons, who all have good jobs but none has any to spare for enjoying life, which I contrast with my young days.
There is a long, depressing article on debt in the most recent Telegraph magazine, basically about a woman whose husband committed suicide because of debt problems. It further states: "The signs are worrying many of the UK's leading economists. The Bank of England has also recently raised the alarm. Mervyn King, its governor, has warned that the level of personal debt is now a major social problem".
DC is a liberal conservative and he is - righly - concerned about general wellbeing. High housing costs and personal debt blight lives and are therefore a social problem. I don't want to be prescriptive about how government deals with the problem but I believe it is one that it must take on board.

[Chad]

I personally like the definition that appeared on the 'beliefs' page of the official Conservative site up until Dec 2005 (which led to me joining) which read from memory (but available via archive.org):

"We believe the person should be big, and the state should be small".

That clearly is no longer valid for the CamCons and with its creeping support for a larger state probably explains a lot of the criticism you list.

[Chad]

Thanks David. Explained clearly.

[David Belchamber]

Hi Chad again; nice to have a debate rather than a slanging match, as sometimes occurs on these posts.
There is another quotation for you from the Telegraph Magazine article I referred to:
"A recent study by the card information provider uSwitch revealed that 9 out of 10 credit card borrowers were issued cards without the lender checking to verify that they could afford to repay the debt.Up to 95% were not asked to show evidence of their outgoings in order to provide a true picture of affordability".
I rest my case.
But seriously, would you not agree that government has a responsibility to identify such social problems and then, if the problem is sufficiently important, to take some action?
In this particular case, I would come down hard on irresponsible lenders. Maybe only lenders that credit vet applicants properly should be regarded as preferential creditors; if the irresponsible ones had no legal recourse to the borrower, I think that problem might soon go away.
That principle might help the housing market as well.
What do you think?

[Chad]

Hi David,

If you trust a bank to do what's in your interests then you need locking up.

Of course they won't check properly, they rely on flow and setting a rate that is high enough to cover the defaults.

Banks are about making money and nothing else. I've spent most of my working life in banking and have a pretty good idea how they operate.

So, on this issue, I think it is none of the government's business to intervene as you have suggested, but I would encourage parents to teach their kids more about the dangers of debt for the longterm and also ensure that schemes like IVA's are readily available to those who can't cope right now.

Other than that, for me, I think people should take more responsibility for their own behaviour, as the more we expect the government to solve our problems, the more the gov will tax us to pay for it, then spend and waste it, and thus the less we will have anyway through high taxation.

And no, I'm not rolling in cash. I have five kids to pay for and like many others, my pay is fine but always three or four days too late leading to breath holding etc!

[Chad]

"That principle might help the housing market as well. What do you think?"

On this I support moving residential house prices into the inflation target managed by the BoE

This Labour gov has let house prices runaway to create a "wealth illusion" whilst actually making people poorer with higher taxation.

[David Belchamber]

Hi Chad
I agree with a lot you say, particularly about people taking responsibility for their own lives, telling children about debt etc but you know, as well as I do, that in any society - especially one like ours that has had a nanny state for over 9 years - there are a number of people who can't help themselves. I also agree with you about banks but to lend irresponsibly is not, to me, the acceptable face of capitalism.
Anyway, let us move on now to some other point. You must let me know sometime where else you think I support the nanny state. I must be going soft in my old age!

[Patsy Sergeant]

David Belchamber and Chad, your conversation is interesting, especially about irresponsible lenders, yesterday I got a 'cold call' from something called 'alternative loans'!!! I was so angry that I said very coldly 'I'm not interested in loans' and the girl rather glumly said 'OK then'. I don't normally get involved in 'cold calls' at all, but as the voice was English I asked what she wanted! That is the first time I have been 'accosted' in my home to, presumably get into debt!

[TomTom]

I don't see it as the government's role to regulate the availability of credit [just look back at the couple of decades post-WWII where credit-controls were the major cause of 'boom-and-bust'.] I thought we were all meant to be free-marketeers these days?

That is someone who does not believe in the nation-state.

Who does not believe in Monetary Policy.

Who does not believe in retaining the Pound Sterling.

Who does not have any basic understanding of Economics or of Public Finances.

If this person really believes this he should be disowned by any serious political party as demented, it is the antithesis of any notion of nation-state and central bank.

[David Belchamber]

Patsy @ 19.20, you make me feel a bit guilty at adding even more to what I have already said about irresponsible lenders. From time to time, I get very fed up with credit card companies that increase my credit limit without any request from me to do so.
On the same topic, today's Telegraph has one article headed "Retirement debt crisis faces credit card pensioners" and another on the same page "First-time buyers warned against oversize mortgages".
Those of us who have ever been caught up in a chain should remember that it often needs a successful first-time buyer to complete it, so that our transaction can go ahead.
The present debt situation is a matter of great concern and can only get worse if interest rates go up again.
I believe that, if it is not a matter for government intervention as Chad and others maintain, then at the very least there should be a code of conduct laid down by the BoE for banks and other lenders to adhere to.