This is George Osborne’s last opportunity. Unless he takes drastic action at next month’s Budget, with shock and awe policies to jolt the private sector back into action, he stands no chance of rebooting Britain’s crippled, downgraded economy.
Contrary to what the Chancellor’s allies like to claim, perhaps to make themselves feel better about Britain’s appalling stagnation, there are actually some levers that can be pulled to kickstart growth.
Ministers often accuse their critics of speaking in generalities, or refusing to present detailed alternatives to their steady as she goes technocratic agenda. I agree, so here is my 10-point plan for a supply-side revolution, focusing on unleashing producers firms small and large, entrepreneurs and workers and making it easier or more profitable for companies to invest, spend more on factories, offices or infrastructure and recruit staff.
First (Other OTC: FSTC - news) , and most dramatically, the Coalition should immediately slash corporation tax to 11pc, below Ireland’s 12.5pc. Osborne should also eliminate capital gains tax. Together, these tax cuts would transform the UK into the most attractive global centre for business and finance. These measures would dramatically increase the returns on investing in Britain, encouraging companies to spend their money here. This policy would reduce government revenues by £25bn or 1.5pc of GDP in the first instance, but a good chunk would soon be recouped as a result of the extra jobs, investment and profits.
Second, Osborne needs to cut more heavily, targeting current spending, not capital expenditure. No department should be ring-fenced. The Government’s size is well above the optimal, growth-maximising level, as determined by economic studies that show that larger states reduce growth rates. Rather than cutting expenditures by about 1pc in the coming year, the Chancellor should cut by 2pc. External consultants should trawl through the public sector, eliminating unnecessary functions and positions. Departments should be merged: Energy and Climate Change, International Development and Culture, Media and Sport should all be subsumed into others. There should be no sacred cows: rich pensioners shouldn’t be protected. Average wages in the public sector rose 2pc over the past year; there should be a genuine nominal freeze. Subsidies to business, the arts and foreign aid should be slashed; all departments should have to contribute. Billions more in savings can be found.
Next (Other OTC: NXGPF - news) , we need a war on zombie firms and the remaining malinvestments from the bubble years, many of which are still being propped up by cheap money and lenient banks. Hidden dud loans continue to clutter up balance sheets and are preventing a reallocation of credit to new, viable projects. Capital requirements should be temporarily loosened to reduce the reserves banks need to hold against new loans, the main reason for scarcer, costlier credit. Payouts for mis-selling of payment protection insurance need to be time-limited: claimants should be given another three months. In return, banks need to pull the plug on zombie firms, and be forced to write off many billions more in losses. They should accelerate the liquidation of assets, including property. Doing this will also make it easier to reprivatise RBS (LSE: RBS.L - news) and Lloyds.
Also, the labour market needs reforming. Employers continue to be put off from recruiting because of legal risk, and some of the migration restrictions are backfiring. The Government needs to dust off Adrian Beechcroft’s plan and replace the current regime with a new system of generously compensated, no-fault dismissals. Companies and universities should be allowed to recruit overseas staff or students they need without oppressive paperwork.
Another change urgently needed is to allow the private sector to start financing a new transport infrastructure; the money is there, the problem is political will and our nightmarish planning system. The committee investigating airport expansion should be ditched. The Government should either allow Heathrow to start expanding immediately; or it should rush through a Bill authorising the expansion of Stansted or the creation of a new, Boris Island-style airport. The Coalition should legislate directly for a long list of transport projects, including new tolled motorways, all to be run and financed privately; in extremis, the legislation should contain provisions to override rules on consultation or anything delaying projects. There should be proper compensation for all affected parties.
Housing is equally in crisis. We are building fewer than 100,000 mostly small homes a year; we need at least 300,000, often large ones. Change needs to be rammed through and the private sector unleashed. Lengthy planning pipelines, plus the fact that developable land prices keep going up because of artificial scarcity, generating automatic accounting profits, encourages land-banking and hoarding from developers. A vast increase in the supply of buildable land, combined with faster planning, would break this ridiculous state of affairs, force down land prices and encourage builders to start developing. To kick this off, the Government should hand over vast amounts of its own land for building; councils should also be forced to sell off their own land.
Another quick fix would be to force councils that fail to meet their local development plans to make up the difference with self-build, whereby private individuals commission builders themselves, as on the Continent. This could double house building within 18 months, according to Policy Exchange. Councils should also be instructed to sell off expensive social housing as and when tenants move on, with the proceeds used to pay for the construction of new, high-quality homes in cheaper areas. In the longer run, the planning system needs to be liberalised, with rules swept away and a new arbitration system set up to allow winners from new developments to compensate losers.
We also need a supply-side revolution in energy. The renewable energy target, which is making new gas plants unviable, needs to be scrapped, as does the insane, regulatory-driven phasing out of coal plants. Shale gas applications need to be rushed through; we need a national policy statement for onshore gas. Locals should be incentivised with massively discounted energy; they should be clamouring for the new black gold that is shale, and the jobs that will go with it, not dreading its arrival.
My last three policies are short, sweet but no less revolutionary. To accelerate welfare reform, we need to create temporary, German-style mini-jobs for welfare recipients, allowing them to take on more paid work before they lose benefits. To bolster school capacity, private, for-profit firms should be allowed to open free schools. Finally, we need greater power for consumers to switch supplier in banking and utilities.
This agenda is at odds with the usual pseudo-Keynesian obsession with demand management: yes, the deficit would rise, but only as a regrettable by-product of improving incentives. There is no contradiction in calling for spending cuts as well as tax cuts; the aim is to unleash the private sector and shrink the state to boost the sustainable growth rate, not to fine-tune demand. The Coalition’s private sector austerity has failed; only an urgent supply-side revolution can now rescue the UK economy.
Allister Heath is editor of City AM
= The Supply-Side Manifesto: My ten point plan =
1. Cut corporation tax to 11pc; abolish capital gains tax
2. Cut current government spending by 2pc this year
3. Wage war on zombie firms
4. Reform the labour market
5. Allow private sector to finance big transport projects
6. Build 300,000 homes a year
7. Scrap renewable energy targets
8. Create mini-jobs for welfare recipients
9. Allow for-profit firms to run schools
10. Make it easier for consumers to switch suppliers