Growing Pains How to Restore Economic Growth and Rebalance the UK Economy
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Growing Pains How to restore economic growth and rebalance the UK economy Glyn Gaskarth December 2012 © Civitas 2012 55 Tufton Street London SW1P 3QL Civitas is a registered charity (no. 1085494) and a company limited by guarantee, registered in England and Wales (no. 04023541) email: [email protected] Independence: Civitas: Institute for the Study of Civil Society is a registered educational charity (No. 1085494) and a company limited by guarantee (No. 04023541). Civitas is financed from a variety of private sources to avoid over-reliance on any single or small group of donors. All the Institute’s publications seek to further its objective of promoting the advancement of learning. The views expressed are those of the authors, not of the Institute. 3 Contents Acknowledgements 4 Executive Summary 5 Introduction 10 Section One: The growth review explored 11 Section Two: Routes out of stagnation—Westminster wise ideas 43 Section Three: Back to growth—countries that are growing 96 Section Four: What we must do 114 Conclusion 119 Bibliography 120 4 Acknowledgements I would like to thank Tamara Chehayeb Makarem and Susan Gaskarth for their support during the compilation of this paper. Please Note: None of the groups featured in this report have been asked to give their support to any of the proposals contained within and their inclusion does not indicate such support. Some of the think tanks operate a policy of not having official positions on the issues explored here. Though for ease of use we shall refer to the ‘centre for policy studies policy recommendations’ etc the reader should not consider the proposals contained in reports released by each think tank as the official line of the organization that released them and the organizations featured should be contacted directly to establish their official position on each policy issue. In the case of the section on proposals by the Unite and Unison trade unions this has been compiled from a series of bulletins, campaign materials and one report and is featured to reflect their differing stance on the issues of debt reduction and public spending reductions. A more full exploration of a trade union position on how to increase economic growth has been included in the German section due to the Trade Union Congress’s concentration on that nation’s industrial policy as an example to be followed. It could easily have been included as a separate growth proposal by a policy organization. Each report review is a summary of the points made by the author that I view as most relevant to the subject of increasing UK economic growth. This has clearly involved summarizing the author’s positions and therefore I direct the reader to the bibliography to consult the original reports to gain a fuller knowledge of the arguments made if they wish to quote or describe a reports proposals. 5 Executive Summary The UK growth review does not fully address the structural problems the UK economy faces. Both the Growth Review and the Trade and Investment White Paper prioritize measures which directly harm UK growth and exports. Diplomatically supporting Less Developed Countries (LDCs) defence of their domestic protectionism restricts the market for British goods in those countries. Environmental measures such as the soon to be introduced carbon price floor make energy more expensive for UK firms and export UK jobs to countries which often have much lower environmental standards. The retention of the anti bribery rules make it very difficult for UK firms to trade in high growth emerging markets many of which have very high levels of domestic corruption. Attempts to reduce regulation exist more in rhetoric than in practice. Rules such as the one in one out rule for new regulation are not universally enforced. Additional business costs are being imposed by the coalition government. Efforts to increase UK airport capacity are being blocked. Energy policy is not delivering sufficient capacity to meet projected demand. The benchmarks in the Growth Review seem to be set deliberately low and/or general so that they may be easily achieved. The Government gives the impression that deficit reduction alone will solve the UK’s problems, it will not. Britain needs to develop a clear plan which does not affect the rate of reduction in UK public expenditure but does increase the long term growth rate of the UK economy. To discover how we looked at proposals made by fourteen groups from across the political spectrum. The Confederation of British Industry proposes making equity finance tax deductable, establishing an aggregation platform for small businesses to raise bond finance and introducing a National Exports Strategy with an export enabling test for all regulation. The Federation of Small Businesses urge the government to bypass the existing banks, create a Post Bank to lend to local businesses and introduce a Community Reinvestment Act to direct bank funding to poorer communities. UNITE and UNISON urge a clamp down on tax avoidance and the introduction of a Robin Hood tax on financial transactions to end public spending reductions and provide financial assistance to repair the balance sheets of indebted households. Reform advocate reductions in health and welfare expenditure and a broadening of the tax base to fund tax simplification and reduction. The British Chambers of Commerce proposes a long term manufacturing strategy for the UK, the formation of a British Business Bank and a government procurement strategy which recognizes the costs of UK regulation when selecting government suppliers. Policy Exchange want increases in the ISA allowance to encourage private investors to invest in small firms debt, the abolition of national pay bargaining to increase public sector efficiency and planning reform to allow the construction of new ‘Garden Cities.’ The Institute of Public Policy Research seeks to increase aggregate demand and the long term growth potential of the economy by increasing quantitative easing and additional infrastructure spending funded by tax increases such as a mansion tax. NESTA in cooperation with 6 the Work Foundation identify six barriers to growth that potential high growth firms and existing high growth firms say need to be overcome to convert more of the former into the latter. The Social Market Foundation believe the government should increase the efficiency of public spending and boost demand by spending less on items with a low fiscal multiplier such as the winter fuel allowance and more on items with a high fiscal multiplier such as infrastructure investment. The Centre for Policy Studies advocate measures to increase house building, which helped Britain’s economy perform well in the 1930’s, suspending the National Minimum Wage for under 21 year olds to tackle youth unemployment and more rapid increases in the personal tax free allowance. The TaxPayers’ Alliance and the Institute of Directors urge the adoption of a programme of tax reduction and simplification by introducing spending targeting to reduce public expenditure, which would fund the abolition of eight taxes, the merger of national insurance and income tax and the greater localization of taxation and expenditure to increase public sector efficiency. The IMF supports the targeting of funds to the most indebted households to help them to repair their balance sheets and resume consumption levels. The OECD propose structural reforms including reducing welfare payments, controlling health expenditure, reforming planning regulations and targeting resources at improving the education of the poorest to reduce education inequality in the UK. Civitas recommend a British industrial policy to aid British firms to develop comparative advantages in the marketplace and to build a stronger UK manufacturing sector. To ascertain how other countries are dealing with the Great Recession I chose three countries which have each returned to economic growth. The United States has experienced high productivity growth and more rapid bank deleveraging than similarly indebted states. German labour market reform and industrial policy are analyzed to consider how this nation has increased its proportion of world exports while the UK’s has declined. Israeli success at innovation is considered to identify how that small country became a world leader in ICT with greater Venture Capital Investment per capita than America and more countries on the NASDAQ than the whole of Europe combined. Each of these case studies helped inform the fifteen proposals I have identified for immediate adoption by the Government which are listed below. Fifteen steps back to growth 1 The UK should not exceed international regulatory standards unless the enhanced UK regulation can be shown to not damage UK economic growth. This rule should apply not merely to the scope of the regulation but also to whether competitor nations are effectively enforcing the rules they have signed up to. Areas requiring immediate reform include: The Bribery Laws which should be amended to exclude application to countries not in the OECD. Bank capital requirements which should be reduced to the internationally agreed standards to allow more lending. The Carbon Price Floor which should not be introduced. 7 2 Cease UK diplomatic support for trade protectionism against UK goods by Less Developed Countries and push for full market access as a condition of opening the EU market to these countries. 3 Cease the subsidy for green industry and develop a comprehensive energy policy to exploit the UK potential in shale gas. 4 A British Business Bank should be launched using the funds from the Green Investment Bank, which should be abolished, and the sale of shares in UK state owned banks. This new entity should be given the explicit function of providing funds to small and medium sized enterprises denied access to private bank finance with private institutions being given the right of first refusal. 5 International development aid should be eliminated and the funds used to endow a UK infrastructure bank with a set charter instructing it to finance enhancements in UK road, rail and energy infrastructure.