Government and Institutions

Six policies Prime Minister May should embrace to revitalise growth

Predictably, those who demand more government spending both when the economy is doing well and badly are calling for increases to see off any potential post-Brexit slowdown. “Infrastructure spending” is the call of the day, with masses of supposed “shovel-ready projects” with high returns apparently lying around for the government to undertake.

Unfortunately, in the real world we know that public investment works better in theory than in practice. Planning laws mean projects take years to get going; politicians often pick prestige or uneconomic projects when smaller schemes with higher returns are available; and government actually holds up genuinely worthwhile private sector projects, such as airport expansion and new housing developments.

Rather than reaching for the same old playbook, the new Prime Minister Theresa May should be using this opportunity for a reset in domestic economic policy: recognising that times of huge change provide an opportunity for major reforms. Rather than focusing on populist corporate governance measures to curb executive pay, she should be thinking about how the UK’s productive growth potential could be greatly enhanced. Here are six major areas she should consider:

1) Overhaul property taxation: the government should abolish both council tax and stamp duty entirely and replace them with a single tax on the “consumption” of property – i.e. a tax on imputed rent. It is well known among economists that taxes on transactions like stamp duty are highly damaging, and we have already seen the high top rates significantly slow transactions since April.

2) Abolish corporation tax entirely: profit taxes discourage capital investment by lowering returns, which makes workers less productive and results in lower wage growth. In a globalised world, profits taxation also encourages capital to move elsewhere, both because it makes the UK less attractive as a location for “real” economic activity and because it creates incentives for avoidance through complex business structures. Rather than continuing this goose chase, let’s abolish it entirely and tax dividends at an individual level, as Estonia does.

3) Planning liberalisation: if you ask anyone to name the UK’s main economic problems, you’ll probably hear “poor productivity performance”, “a high cost of living” and “entrenched economic difficulties in some areas”. Constraining development through artificial boundaries and regulations is acknowledged to be a key driver of high house price inflation. Less acknowledged is that, for sectors like childcare, social care, restaurants and even many office-based industries, high rents and property prices raise other prices for consumers, with a dynamic strain on our growth prospects brought about by a reduction in competition and innovation. That’s not to mention the impact on labour mobility. Liberalisation of planning, including greenbelt reform – which May has sadly already seemingly ruled out – is probably the closest thing to a silver bullet as far as productivity improvements are concerned.

4) Sensible energy policy: the UK government has gone further than many EU countries on the “green agenda”. But the EU’s framework, with binding targets for renewables, has certainly helped shape policy in the direction of subsidies and subsidy-like obligations and interventions. Even if one accepts the need to reduce carbon emissions, an economist would suggest the implementation of either a straight carbon tax or, less optimally, a cap-and-trade scheme, rather than the current raft of interventions which make energy more expensive than it need be.

5) Agricultural liberalisation: exiting the EU Common Agricultural Policy gives us the opportunity to reassess agricultural policy. The UK should gradually phase out all subsidies, as New Zealand did, opening up the sector to global competition. This improved agricultural productivity in that country significantly. Combined with a policy of unilateral free trade, it would deliver substantially lower food prices for consumers too.

6) Deregulation: in the long term, Britain should extricate itself from the Single Market and May should set up a new Office for Deregulation, tasked with examining all existing EU laws and directives, with the clear aim of removing unnecessary burdens and lowering costs. In particular, this should focus on labour market regulation, financial services, banking and transport.

This article was first published in City AM.

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

2 thoughts on “Six policies Prime Minister May should embrace to revitalise growth”

  1. Posted 12/07/2016 at 13:22 | Permalink

    OMG sensible policies. I do hope you write to Mrs May regarding this.

  2. Posted 14/07/2016 at 11:03 | Permalink

    1. Because it is fixed into bands, the incidence of Council Tax falls almost entirely onto land, making it the most efficient tax we have in the UK. While a tax on imputed rent would be more progressive, unless it is structured correctly it will also tax capital improvements. Far better a tax on imputed land rents, which would be even more “progressive”.

    It would therefore be best to modify Council Tax to make it reflect the underlying rental value of land. Quite simple to do in practice.

    Why stop at scrapping SDLT or CGT? Land rents can get rid of around £250bn of bad taxes right now, increasing as land rents absorb increases in the discretionary incomes of renters.

    2. High Corp Tax and low sales taxes seem to be of more benefit than the other way around ie North America vs Europe. It would be better to have one flat tax on all income/profit, whether that is from individuals or firms. Consumption/production/sales are the very life of an economy. If economists think taxing that is less harmful they may well have got another “theory” completely wrong.

    3. Planning is not to blame for affordability issues regarding housing for large parts of our society. Ryan Bourne’s colleague Dr Andrew Lilico showed we do not have a physical shortage of housing in the UK.

    What we do have is high demand for locations with the better wages and amenities. This is made worse by a tax system that massively distorts the economy in favour of London/SE by taxing wealth creation rather than using land rents as public revenue. Because of this, regions outside London/SE are currently overtaxed by around £100bn per year.

    A 100% tax on the rental value of land would reduce the selling price of an average UK home from £260K to £100K, meaning new buyers saving around £9K on mortgage interest on a property of that value.

    The redistributional effects in individuals would result in disposable income for typical working households rising by around £10K per year, making housing for both owner occupiers and renters 3-4 times more affordable as ratios of discretionary incomes.

    4. Totally agree. It’s not that Cap and Trade is less efficient, in theory its better. Only in practice it is a vehicle for rent extraction, fraud and bureaucracy.

    All costs for all energy sources should be internalized, and all subsidies ended. For fossil fuels a straight up carbon tax does the trick nicely.

    5. Ending agricultural subsidies would certainly be beneficial. We could also scrap foreign aid as a result. Countries (like regions outside London in the UK) just need a level playing field, the best hand up we can give.

    6. We could do with a radical simplification of our tax code and by shifting taxes off wealth creation, as the deadweight losses we suffer from this are truly massive.

Comments are closed.