Even with several days to go, we can guess the script for this year’s Conservative Party Conference. As the politicians gather in Manchester, the economic news will be grim.
The global economy is slowing down. The euro is on the brink of collapse and may take the banking system down with it. A double-dip in this country looks a near certainty. Even if by some miracle it is avoided, growth in the early part of 2012 will be as close to zero as makes no difference.
So when the chancellor, George Osborne, gets up to speak on Monday morning, everyone will be looking to him to come up with a Plan B for the economy: go easy on the deficit, stop cutting public spending and start spending more money on infrastructure to stimulate the economy. But while I agree that Osborne should announce a change of course on the economy, it shouldn’t be the one that everyone is talking about.
There is no shortage of voices urging the chancellor to change course. Ed Balls, the shadow chancellor, skilfully sidestepping his own starring role in creating the crisis, accuses the government of cutting too far, too fast. Alex Salmond, leader of the Scottish Nationalists, has been trumpeting the way his government north of the border has accelerated capital spending to create jobs as the rest of the economy turns down. The Liberal Democrats, junior partners in the coalition, are making noises off-stage about easing up on the cuts. Even the usually sober International Monetary Fund has argued this may not be the time to make major reductions in the deficit.
And there is, of course, a window of opportunity. The crisis within the eurozone has made Britain a relatively safe haven, even though, ironically, our own deficit is worse than the peripheral nations within the single currency. The bond markets appear happy to lend the British government unlimited sums. The Debt Management Office plans to sell around £150bn of gilts this year, and seems to have no problem finding homes for all that paper.
To say our national debt has exploded is an under-statement: it’s gone nuclear. By this year, there were £1,033bn in gilts in issue. Back in 2000, the total was just £290bn and even in 2008 it was less than £500bn. In less than three years the government has racked up more debt than it managed in the whole of the last century. Even so, the yield on ten-year British debt is touching record lows. It might be crazy, and it might blow up one day, but for now markets just can’t get enough of the stuff.
So Osborne could borrow more in the next couple of years, or ease up on the planned reductions in borrowing, without facing any serious risk of a backlash from the bond markets. The argument that we have to keep cutting the deficit hard or end up like Greece doesn’t have much credibility right now. But there’s no point in using the money to slow the cuts or spend more on infrastructure. There’s noevidence to suggest that (a few crowded roads aside) Britain’s infrastructure is a barrier to growth. Nor, despite what people suggest, do we need a huge investment in skills. True, Britain has relatively poor training compared with Germany or France. But that has been true for over a century and hasn’t stopped us growing before. There is little reason it should hold us back now.
No, Britain’s main structural economic problem right now is the vast size of its inefficient state sector and the taxes needed to support it. The government accounts for more than 50% of GDP, the highest level ever. According to the World Economic Forum, Britain now ranks 95th out of 135 countries for the “effect and extent of taxation”.
Our corporation tax rate is the 12th highest out of 31 countries in the Organisation for Economic Co-operation and Development. A Cato Institute study concluded that Britain’s effective tax rate on investment by business was 27%, the 11th-highest of 83 countries it studied. And that’s just business tax. Personal taxes, due to the 50% top rate, are among the highest in the developed world, and VAT isn’t low either.
That is crazy. Britain has always thrived as a low-tax, entrepreneurial economy. It doesn’t have German industrial skills, or French infrastructure. Instead it has lots of bright, ambitious entrepreneurs with the ability to create new industries fast. That is where our growth has come from. But right now it is being stifled by a vast and inefficient public sector.
So, here’s Plan B. Borrow while debt is cheap. Keep hacking away at the public sector – the hard work on that has hardly begun. Use the extra borrowed money to cut taxes. What Britain needs to stimulate jobs, growth and investment is a more competitive tax system. Relaxing on the deficit for a couple of years to achieve that would be worthwhile, and would pay for itself in higher tax revenues later. Just increasing public spending would be a waste of more money. If Osborne announces that next week, he’ll have a growth strategy that might actually work and he’ll have shown some flexibility too.