making the case for free enterprise

Policy Bites: Seven Shots in the Arm of Britain By MP, Therese Coffey MP, MP, MP, MP, David Ruffley MP, MP and Elizabeth Truss MP Executive summary

Jobs and Growth

1. National Insurance for Over 65s in Work, Helping Their Grandchildren – Older workers who continue to work should pay National Insurance contributions on their earned income. Extra NIC income could be banked or used to give NIC holidays (employee and employer) to young low paid workers.

2. Growing Britain’s Micro Businesses – Businesses with up to 3 employees and less than £75k annual turnover (the threshold for VAT registration) should be exempt from employment regulation.

3. Reform the Treasury – The Treasury should be reformed to place more emphasis on supply side reform across government, both positively and by preventing spending ministries from fostering anti-competitive practices.

Infrastructure

4. Fourth Runway – The Government should provide planning permission for both a third and fourth runway at Heathrow.

5. Ministry of Infrastructure – The Government should create a new Ministry of Infrastructure which covers transport, communications and utilities. This ministry would package infrastructure projects and offer concessions to the private sector, as in Canada and Portugal. Financial Products and Regulation

6. Care ISAs – The Government should create ‘Care ISAs’, tax-free savings allowances to spend on care services within a family.

7. Simpler Regulation for Financial Products – Consumer paperwork for financial products should be limited to one page of big, bold print, signed by buyer and seller. Introduction

In autumn 2011, the Free Enterprise Group was established by a group of Conservative MPs and launched at the Conservative Party conference in Manchester. We were concerned that Britain had moved away from its commercial trading roots to becoming a country suspicious about enterprise. Our productivity lags behind the performance of competitors. There are also critical weaknesses in skills and infrastructure, while more taxes and regulations have increased the burden on our businesses. The wider public in Britain today is more wary than ever about wealth creators.

Through a series of papers and events, the Free Enterprise Group seeks to change the terms of debate. We have published specific market reform proposals in industries like aviation and banking, as well as more generally on issues relating to the culture of capitalism. The Group’s approach to politics is robustly international. We want to learn from successful turnaround stories abroad, such as the labour market reforms in Germany and individual wage bargaining in Sweden.

As Britain faces great economic uncertainty, the Free Enterprise Group is publishing a new series of ideas to meet that challenge. We have called the paper Policy Bites: Seven Shots in the Arm of Britain. Each proposal has been restricted to no more than 400 words. They are starting points rather than fully formed proposals. They are not necessarily supported by all the authors. These ideas, we hope, indicate the scale of ambition required, if Britain is to transform its attitude towards enterprise and start competing with the emerging nations. Jobs and Growth

1) National Insurance for Over 65s, Helping Their Grandchildren

Proposition: Over 65s who continue to work should pay National Insurance contributions on their earned income, just like anyone else they work with. Extra NIC income could be used to give NIC holidays (employee and employer) to young low-paid workers.

Traditionally, National Insurance payments have been required to receive certain benefits and a state pension. This is why older employees are not required to pay national insurance contributions though employers still must pay their 13.8% NIC. The Chancellor has already indicated he wishes to merge NI and Income Tax. With the removal of the default retirement age, we do expect more people to continue working for longer. Just because someone turns 65 but chooses to continue working, should he or she get a significant increase in take-home pay? The IFS estimates this would generate an extra £7 billion, if this applied to all income (source: FT 22 March 2012) or £1bn, if applied to earned income only. Estimates based on Treasury PAYE figures indicate possible income of just under £2bn.

Additional income could be redirected to young low earners through national insurance holidays for both the employees and employers. Consider an 18 year old, working 40 hours per week on the minimum wage rate of £4.98 – removing NIC would give the young person an extra £375 per year and cost the employer £450 per year less. For a 21 year old, it would be £675 more per year and cost the employer £800 per year less.

2) Growing Britain’s Micro Businesses

Proposition: Businesses with up to 3 employees and less than £75k annual turnover (the threshold for VAT registration) should be exempt from employment regulation. Private sector growth is the best way to rebuild our economy. So let’s get government out of the way of budding entrepreneurs. Whether in website design, weeding gardens, window cleaning or widget production, we’ve got to help our smallest businesses to get started and thrive. The government should remove the regulatory burden.

Micro businesses with up to 3 employees and less than £75k annual turnover (the threshold for VAT registration) should be exempt from employment regulation including unfair dismissal, auto-enrolment of pensions, paternity and maternity leave (these could be paid direct), and the minimum wage. This would be a supply side boost to the economy.

At present, low income workers are mostly employed exclusively on a cash basis. This deregulation would allow them to enter the mainstream economy.

Of course, going above the £75k turnover threshold or taking on a fourth employee would then become a big decision, because business regulations would kick in. The ‘cliff edge’ effect would be real, but a business at this level has been given the chance to become well-established. The perfect should not be the enemy of the good.

3) Reform the Treasury

Proposition: The Treasury should be reformed to place more emphasis on supply side reform across government, both positively and by preventing spending ministries from fostering anticompetitive practices.

Historically, the Treasury’s principal function has been as a ministry of finance. For centuries, the Treasury’s role was simply to ensure that money could be found for the tasks of Government, and that amounts could be borrowed to meet any shortfall in revenue. Its primary focus has been financial. With the development of economics as a subject, the Treasury adopted a more “economic” role. Yet this secondary responsibility, as an economics department, has only been partially fulfilled. As an economics ministry, the Treasury has recently tried to take the lead on supply side reform across Government. This has been undertaken both by positive steps to increase competition and by preventing anti-competitive practices fostered by other, typically high spending, departments.

The economic functions of the Department have been curtailed as a consequence of the financial crisis. The financial turmoil which followed the collapse of Lehman Brothers in 2008 has diverted much of the best talent in the Treasury to debt control and managing the ongoing Euro crisis.

The economic function needs to be bolstered. Many of the economic impact assessments of policies are conducted within other departments, for example, the childcare market is largely the responsibility of the Department for Education, the energy market is the responsibility of Department of Energy and Climate Change, the financial framework for the train operating companies is a matter for the .

Yet this division of labour often creates un-joined up thinking, as there is little strategic grasp of how these different policy areas affect the overall economy. We need to boost the quality of personnel within the Treasury whose responsibility is to focus on the economic outcomes of policy. We would, as a consequence, invest more in the Treasury and, correspondingly, cut back on other departments such as the Department for Business, Innovation and Skills to compensate. In this way, a restructuring of the Treasury can be made to be revenue neutral. Infrastructure

4) Fourth Runway

Proposition: The Government should grant planning permission for both a third and fourth runway at Heathrow.

Britain’s hub airport Heathrow is currently at 99% capacity, and ’s other airports are nearly as full. Demand is predicted to double over the next few decades. If new aviation capacity is not found, London’s position as a world business hub will be damaged. Heathrow is almost unique among major world airports in only having two runways, with no plans for further construction.

Two proposals for increasing capacity have dominated the debate: expanding Heathrow and building a new airport. The first, a third runway at Heathrow has the advantage of private funding, industry support, and already existing infrastructure. However, critics argue that it would only provide a stopgap solution. Britain needs in the order of at least three new runways to accommodate demand. Concentrating these runways in the same location allows the facility to enjoy the benefits of a hub airport.

One solution is to grant planning permission for both a third and fourth runway at the same time, allowing Heathrow to upgrade itself to a truly world class hub. A fourth runway could be located either north of the airport by the M4, or to the south at the current locations of the villages of Bedfont and Stanwell. A fourth runway to the south would be situated A30 (the Staines Road) and incorporate Ashford Football Club.

Another possible location could be to place the two extra runways alongside, to the west, of the existing runways. This would mean placing the runways through Poyle (next to the north runway), south of the A4, the Colnbrook by- pass, and just north of Stanwell Moor (next to the south runway). Compensation would have to be commensurate to the upheaval. While Britons whose houses are compulsorily purchased by the government get market value, the French get another 25% on top of that. We should pay such a premium to facilitate these developments in Britain. The rapid expansion of Charles de Gaulle airport at Roissy, 14 miles (23 km) to the north-east of Paris, was also eased through the help of large grants for community facilities and improved transport links.

No option for aviation expansion is perfect, but this option would allow Britain to rapidly build on its strengths, rather than take the speculative risk of a completely new facility. BAA would have the option either to build both runways simultaneously, if this proved cost efficient, or to stagger the construction. This would both give the industry more strategic certainty about its future, and be more honest with locals about what to expect.

5) Ministry of Infrastructure

Proposition: The Government should create a Ministry of Infrastructure which would be responsible for identifying strategic infrastructure projects and arranging finance for them. This would incorporate the current Department for Transport with energy networks from Department of Energy and Climate Change and communications networks from Department for Culture, Media and Sport as well as water and waste from Department for Environment, Food and Rural Affairs.

The last National Infrastructure Plan published in November 2011 claimed the need for a £250 billion infrastructure pipeline of over 500 projects in energy, transport, communications, water and waste. Two thirds of the investment between 2011 and 2014 are expected to be privately funded. The current low interest rates offer an opportunity to borrow cheaply. There is a huge demand in the private sector for safe, long term assets. There should be proactive identification about which projects have the greatest economic return. Thus a list should show projects in order of economic priority and outline planning permission could be arranged speedily. There should be a more liberal approach to compensation (as in France) to ensure local communities benefit.

Many opportunities could be entirely privately financed, passing on risk and control wherever possible to the private sector. These could be offered as concessions for example building a new road in exchange for a 25 year regulated toll or a regional broadband network. The advantage over the current situation where the private sector is expected to put together the scheme, is that these projects would be “shovel ready”. Thus international capital looking for schemes would find these simple to invest in.

This is exactly the approach taken in countries like Portugal and Canada. In particular, Canada’s simple procedures have been very successful at attracting a large amount of domestic and international investment. In 1999 the Ontarian Government awarded a 99 year concession for Highway 407 in Toronto for C$3.1 billion to a consortium of international and Canadian firms. Highway 407 has proved a valuable asset with a 10% stake sold to Canada Pension Plan Investment Board by Ferrovial for C$894 million.

Portugal has transferred its entire road network into a 75 year concession under the new road regulator, InIR. InIR, in turn, lets its own sub-concessions to a mix of private and public operators. The agency has the flexibility to either transfer traffic risk to the private operators, or keep it itself, relying on central Government to support it if traffic revenue proves insufficient. In the latter case, operators are paid through fixed availability payments, varying only with an agreed set of performance indicators that are in the operator’s control. Financial Products and Regulation

6) Create Care ISAs

Proposition: Create ‘Care ISAs’, tax-free savings allowances to spend on care services within a family.

Our ageing population, with its rising care costs, poses many questions with too few answers. One stands out above all – How will we afford to pay? By 2030, the total annual spending on long-term care for people will have risen from £20.6 billion today to £44.8 billion.

Yet who really saves for their elderly care? In a 2008 survey, 3% of people claimed that they were already saving for their long-term care, 32% that they had plans to do so, and 64% that they had not. For people aged 16-35, 73% claimed that they had no plans to pay for their future social care – an unsurprising yet worrying proportion.

We will all end up having to contribute more to our future care needs: the time to begin cannot be delayed inevitably. At present it is the tax paid by people of working age that funds a great deal of care. This is unsustainable when you consider that by 2030, the ratio of working people to those aged 70 and over may well have fallen from 5.3:1 (as in 2010) to around 3.7:1.

State provision of social care does not encourage personal responsibility, nor is it sustainable in the long term. Instead we must argue that planning for potential care needs is every bit as important as planning for a pension. A primary concern must be to incentivise a savings culture, particularly for elderly care. To do this, a ‘Care ISA’ could be created, a tax-free investment much like an ISA. This would work like a regular ISA, except that the maximum investment could be far larger, to the value of the cap on care costs for example. Access to the ISA could then only be spent on care services within a family. Clearly there would need to be registered care services or providers who could then access funds within the ISA, ensuring that the system could not be open to abuse. Above all, it must be clear that money saved is money for care and nothing else.

Possibly returns on investment could be index linked to the age of the participant, similar to life insurance maturity. Perhaps most importantly, a growth in Care ISAs would ensure that an insurance market was able to grow effectively in the knowledge that a care savings culture had finally been created – indeed, possession of a Care ISA might become a prerequisite for accessing care insurance.

7) Simpler Regulation for Financial Products

Proposition: Consumer paperwork for financial products should be limited to one page of big, bold print, signed by buyer and seller.

Those of us who believe in free markets and free enterprise are faced with a big challenge when it comes to the market for consumer financial products. Human beings are generally bad at making decisions about money. In addition, the sellers of financial products almost inevitably know a great deal more about them than the buyer.

This has led regulators to get more and more involved in the markets. The idea of “Caveat Emptor” or “Buyer Beware” has been abandoned. New regulations announced in just the one year to October 2011 add over £1 billion in costs to the financial industry. Ultimately it is the consumer who pays for all of this regulation.

The Financial Services Authority has been an overly bloated failure. We should be careful to limit costly mission creep at the new Financial Conduct Authority. The FCA should be ruthless with crooks and insider traders, working with the police to deliver zero tolerance for scams. But consumer paperwork should be limited to a maximum of 600 words in one page of big, bold print, signed by buyer and seller. The regulatory savings should be passed on to the consumer in lower charges. It would be similar to key facts documents for mortgages. Conclusion

The financial crisis of 2008 and the subsequent lack of economic growth have created a climate of uncertainty. Yet this uncertainty is stimulating policy ideas, and real intellectual engagement with politics, to a remarkable extent. We hope the ideas we have presented can contribute to this process of political debate in Britain. About the Free Enterprise Group

Objectives

• Encourage a competitive and free economic environment

• Raise the global economic standing of the

• Challenge monopolies and oligopolies

• Free individuals to create, innovate and take risks

Supporters MP Kwasi Kwarteng MP Harriett Baldwin MP Andrea Leadsom MP Nick de Bois MP MP MP Brooks Newmark MP MP Jesse Norman MP Aidan Burley MP Guy Opperman MP MP MP Therese Coffey MP Mark Pritchard MP MP MP MP David Ruffley MP MP MP MP Laura Sandys MP Ben Gummer MP Chris Skidmore MP MP Julian Smith MP Matthew Hancock MP MP Richard Harrington MP Elizabeth Truss MP Chris Heaton-Harris MP Andrew Tyrie MP Margot James MP Mike Weatherley MP MP MP Chris Kelly MP www.freeenterprise.org.uk

Contact: Elizabeth Truss MP on 020 7219 7151 or [email protected] Kwasi Kwarteng MP on 020 7219 7000 or [email protected]

DISCLAIMER: All supporters subscribe to the aims of the group. However, articles written under the auspices of the group reflect the author’s own views and not necessarily those of all group members.