While the execution of the mini-budget was a disaster, radical measures are still needed to improve the long-term performance of the UK, writes Ian Rickwood, CEO at Henley Investment Management.
The shambolic execution of the mini-budget will inevitably loom large in the history of Liz Truss’s disastrous 45-day period in office, the shortest for any UK prime minister. As Rishi Sunak settles into the role, his chancellor, Jeremy Hunt, will need to focus on restoring some order and sanity to government economic policy and its communication with financial markets.
I actually agreed with the analysis behind the mini-budget – that some radical measures are required to improve the long-term performance of the UK.The economy is unbalanced, unemployment is too low to allow for sustainable growth, inflation is too high, the tax burden the highest in modern history, productivity gains remain allusive. We are going nowhere slowly with the highest debt to GDP since the 1950s. As it stands, we are permanently locked into a low growth, high tax economy.
For some perspective on how badly Britain has under-performed consider this as a benchmark: in 1980 the UK was approximately 19% the size of the US economy (GDP), but by the end of 2020 it was just 12.9%. Had it kept pace with the US, we would be nearly 50% larger in GDP terms today than we are.
Continental Europe has fared no better and arguably even worse. In 1980 Germany’s GDP was 32% the size of US GDP and by in 2020 it was just 18%, France was 24% in 1980 and today is just above 12%.
Addressing the malaise
I think this clearly demonstrates that pro-business light regulation, low tax and flexible labour markets are what drive growth and prosperity. Even if you look within the United States you see the same debate playing between states. The states that support business, low tax, low regulation and small government are prospering; those that are large state, high tax and more regulation are floundering.
Given the embarrassment and damage of the last few weeks the UK will need to remain firmly in the pack of other western economic policy for a while. But after the damage has been repaired, here are some actions which I believe would address the malaise:
• Increase the supply of labour by providing meaningful incentive to the underemployed. Put the starting rate of tax up to £20,000 or even £25,000 (for basic rate taxpayers) – this would attract many who have left the workplace to come back to it and earn tax-free. It would act as a further incentive to move from benefits to work (along with other transitioning relief required in the benefits system).
We have near-record low unemployment and a record adult inactive cohort – we need workers in all areas of industry, there are millions of potential, well-qualified workers who could be incentivised back to work. In the long term it is absolutely right to lower taxes, but not by borrowing to do so.
• I like the idea of levelling up and building a more balanced geographic economy. Outside of the EU the government is free to provide subsidies and incentives that it used to be prevented (in many cases) from exercising. Let’s have hub cities across the UK with expertise in technology, healthcare and infrastructure.
The creation of Investment Zones is exciting (if they survive) but the details will be key. Public servants who oversee such projects need to be interested in delivering these successfully and with the ability to act swiftly and decisively. Private capital needs to be incentivised to deliver the projects given the state of public finance.
Stoke on Trent has expressed interest in becoming an investment zone.
The lack of new stock must be addressed to provide more affordable housing.
• Stamp Duty on homes is a tax on mobility and growth, and the government can go further than the reforms announced. Before 1990 people moved house on average every seven years and today it is every 15 years. This does not help create a fluid responsive labour market and resultant strong economy.
Back in the 1980s stamp duty was a flat 1% on all purchases over £30,000 and today it can goes as high as 12% (and even 15% for some second home owners). Get people moving, and the multiplier impact of this will creates billion in other taxes and economic activity. Abolish the rate below £1m altogether and halve the rate above £1m.
Losses to stamp duty tax in quantum per trade will be more than offset by the volume of transactions and the vat and corporation tax created from activity related to moving. It will also make the labour market more dynamic. Of course the sheer lack of housing stock in the UK must be addressed as well to provide more affordable housing.
”“Let’s have timetables that are stuck to in the planning process with automatic consent if a local authority fails to meet the timetable.“
- The state is too big and there is too much regulation. This really needs to be tackled if growth is to improve. Cuts may be inevitable and efficiency is to be applauded but there are more than cuts that can improve the economy. For example, planning decisions are too slow and political. Let’s have timetables that are stuck to in the planning process with the automatic consent if a local authority fails to meet the timetable (with balancing penalties for developers who game the system).
Central government should let the authority and its community share in the profits of development more – incentivise the authority to approve planning faster, bigger, more proactively. Limit the time for other bodies that object to planning applications. Too many are held up because of slow progress by some regulators who have completely uncommercial response times. I appreciate the balance between local decisions on “my area” with the national need. The gap between the two can be narrowed though if the local community share more in the benefits from development, for example through low council tax and better services.
The big idea for the UK is to move growth from an average of just 1.6% to 2.5%, which will mean our children will be better off than we are rather than poorer, which is where we are headed. The government cannot deliver that growth alone but it can prevent it. Bold moves on the supply side of the economy are the right way to reinvent the UK, but the political capital has gone to get the changes required, at least for now.