Nine Zero-Cost Policies the UK Government can Implement to Encourage Economic Growth

Posted on 16/09/2010


Economists know that long-term economic growth is driven by fixed capital accumulation (ie. of manufacturing plant & equipment and communications & utility infrastructure) and increases in factor productivity (ie technological

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innovation which is a consequence of research and education). Economists also know that lower tax rates lead to higher levels of GDP growth. However, with the UK government currently in deficit-reduction mode at present, the state is unable to allocate additional financial resources to any of these policy prescriptions at present. This leaves the question of what the UK coalition government should be doing to encourage economic growth. The answer lies in laws & regulations, or the overall legal, political, business and cultural climate of the country. The World Economic Forum (of Davos conference fame) measures the competitive positioning of nations, and recently placed the UK at a ranking of 12 – just behind Hong Kong and ahead of Taiwan – in its recent report. By analysing the components that determined the UK’s ranking, the factors on which the UK has most scope to improve upon are easily observable. I’ve chosen the ten factors that I feel would be the cheapest (financially, not politically) for the coalition government to implement.

  1. Simplify the tax system. The UK ranks 54th for the total tax rate but 95th for the extent and effect of taxation. Given the fiscal situation, we know that the government is in no position to reduce taxes at present, but it could engage in a serious assault on the complexity of the tax system, reducing the cost of compliance for business and individuals. The Government has made a start on this by setting-up the Office of Tax Simplification, employing John Whiting as Director, who stated: “Simpler tax laws would mean an easing of the administrative burden on business, individual taxpayers – especially the unrepresented – and tax collectors. They would make the tax system more transparent and more comprehensible, and therefore more likely to command public and business confidence. They would also mean fewer loopholes and distortions, leading to fewer unintended consequences and fewer opportunities for tax avoidance.” There really is no excuse for not following through with this policy.
  2. Reduce the number of procedures and length of time required to start a business. On these measures the UK ranks 34th and 45th, respectively. Research has found that it takes six separate legal/regulatory procedures, thirteen days and administrative costs of 0.7% of average annual income to start a business in the UK. If the UK moved into line with the best of class (New Zealand in this case) this could be reduced to one procedure, one day and 0.4% of average annual income. Like tax simplification, I can’t see how anyone could argue with this policy prescription, all it requires is the political will.
  3. Deregulate the labour market. This is perhaps the most controversial item on the list, given the extent to which those on the left of our political spectrum cherish labour market regulations as “workers rights”. However, we know that employment regulation leads to lower labour force participation and higher levels of unemployment (see The Regulation of Labor by Juan C. Botero, Simeon Djankov, Rafael La Porta, Florencio Lopez-De-Silanes and Andrei Shleifer if you don’t believe me) and that the World Economic Forum currently ranks the UK 49th for hiring and firing practices and 40th for redundancy costs. Such reform policies should include reducing the consultation period on redundancies from 90 days, capping discrimination awards from employment tribunals, reduced compulsion on diversity policies (discrimination on the basis of age, sex, religion and gender is already against the law), removing “gold-plating” of EU legislation, simplifying the rules governing agency workers and excluding casual/temporary workers from part-time working regulations.
  4. Fast-track planning permission for new runways at Gatwick, Heathrow and Stansted. The linkage between transport infrastructure and economic growth is well-understood by economists – faster and cheaper communications links lead to higher levels of long-term economic growth. However, the World Economic Forum currently ranks the UK ranks 34th for the quality of air transport infrastructure. Heathrow, Gatwick and Stansted airports are all operating close to capacity. As capacity is reached, the supply of flights will become limited, leading to the airport operators to raise prices in order to manage demand. This will reduce the scope the UK businesses to travel and increase the costs for them to do so, impacting the profitability of UK businesses, but also creating supernormal profits for the airport and airline operators. The owners of Heathrow, Gatwick and Stansted are all keen to expand, and have the capital to do so. The government should allow them to get on with it – job creation and GDP growth would be given a significant boost.
  5. Increase the time devoted to maths and science in the national curriculum. All political parties have recently spoken of their desired to rebalance the economy away from financial services and towards manufacturing. However, for a high-wage advanced economy such as ours, the only way the UK can compete is if the technologies used are cutting-edge. To this end we need a large supply of school-leavers, graduates and post-graduates with a strong grounding in maths and science. However, the UK currently ranks 55th worldwide for the quality of science and maths education (below Jordan, Vietnam, Sri Lanka and Iran), not a position that can help foster the growth of advanced manufacturing industries. The coalition government should seek to counter this by increasing the quantity of science and maths training in school’s national curriculum which should in turn lead to more students taking science-based university courses.
  6. Reduce government waste. The World Economic Forum currently ranks the UK 72nd for the wastefulness of government spending, based on a survey of business executives. This report from the self-styled “Department of Government Waste” – actually an astroturf group backed by the Conservative Party – lists a series of mind-boggling examples of government wastefulness over the last thirteen years. These include: employing 4,567 ‘staff without posts’ in the civil service at a cost of £161 million a year; overseeing 1,148 quangos which employ 534,000 staff and cost the taxpayer £90 billion a year; and spending £540 million on government advertising and PR a year. Again, there is no excuse for this, so it must be significantly reduced.
  7. Reduce red-tape on business. The World Economic Forum currently ranks the UK 89th for the burden of government regulation on business, with the top two places on the list being taken by Singapore and Hong Kong. A report by the National Audit Office showed that UK businesses found that having to keep up-to-date with new and changing regulations are the most burdensome activities, suggesting a do-nothing approach from government could be very effective. Businesses also cited finding information on regulations & compliance to be an issue, as was having to provide the same information to multiple government agencies, suggesting that better management at the regulatory bodies could have a big positive effect.
  8. Take steps to encourage the venture capital industry. Access to finance provides one a the most significant challenges for small and medium-sized enterprises, and the venture capital industry is one of the major sources of such funding. The World Economic Forum currently ranks the UK 38th for the availability of venture capital, below such countries as Chile, Panama and Kuwait. A fact that I think is misunderstood by many on the left of the political spectrum is that the venture capital industry is a subset of the private equity industry. Consequently, all the rules and regulations being put forward (including the EU’s AIFM Directive) to rein-in the big hedge funds and leveraged-buy-out houses will also impact negatively upon the much smaller (and arguably more important) venture capital industry. The UK government should do all it can to water-down to AIFM directive.
  9. Clamp-down on the trade unions. Like many of the other concepts discussed in this article, economists are aware of a linkage between trade unions, unemployment and economic growth. In this case, economists know that levels of unionisation are positively associated with the level of structural unemployment in an economy (see report). The UK currently ranks 26th for co-operation in labour market relations, something that could be improved with greater restrictions on union power. Such restrictions could include requiring that votes to strike have the backing of the majority of workers in a particular workplace, not just a majority amongst those who vote; and requiring a workplace vote before a union can form a statutory bargaining unit (unions can declare automatic recognition in certain circumstances at present).
Posted in: Economy, My Thoughts