Can the budget breathe life into the economy?
It is worth remembering that no chancellor, however enlightened, can really be said to breathe life into the economy. Believing otherwise gives rise to all kinds of hubristic policies, which do little more than redistribute wealth from one area of the economy to another. In fact, all the chancellor can do is create the conditions in which the wealth-creating private sector can grow and prosper. This is the yardstick by which the forthcoming budget should be judged.
So what can we hope for from the chancellor? What can he do to help Britain’s beleaguered wealth-creators? Step one is to cut taxes. And here, perhaps we can be more optimistic than usual. All the indications are that the 50p tax rate is set to be cut to 45 percent. The chancellor ought to go further and faster, since cutting marginal rates for higher-earners has a history of boosting growth without significantly impacting revenues. But this is a start, and it sends a clear message that Britain is open for business. Raising the personal allowance, and leaving a bit more cash in every worker’s pocket, is a good move too.
Combined with the gradual reductions in corporation tax that we already know about, these moves make for an encouraging pro-growth tax agenda. But more needs to be done. Firstly, the chancellor must avoid the temptation to give with one hand and take with the other – so no new stealth taxes, and no more populist assualts on ‘the rich’. More importantly, the chancellor needs to realize that Britain’s treatment of capital and investment is uncompetitive and economically damaging. Taxes on savings, dividends and capital gains should be reduced immediately, and ultimately eliminated altogether.
That is likely too much to hope for now. But there are other, politically easier things the chancellor could announce on Wednesday. Chief among these is a concerted effort to deregulate the UK economy, systematically reducing barriers to market entry, cutting costly red-tape, and boosting competition. The trouble is such campaigns have been announced countless times before, but the regulatory burden has just kept growing. This time, we need more than rhetoric.
Two areas are worth particular attention. Firstly, it is rumoured that the budget will contain early details of a new regulatory framework for the flourishing internet and technology industries. It is vital that this framework is the very epitome of ‘light-touch’ and does not stand in the way of innovation, growth and job creation. Sadly there are already indications the chancellor’s announcements will fail this test. Secondly, the chancellor ought to build on David Cameron’s recent call for more private investment in the road network by signalling the government’s intention to radically liberalize the planning system and free the private sector to invest in (and charge for) new infrastructure.
Cutting taxes, reducing regulation, and encouraging investment – these are the three most crucial things the chancellor’s budget can do to help the private sector breathe life into the UK economy. But there is also a broader point to be made. Britain’s financial crisis and recession was no random event – it was the product of the credit-fuelled boom that preceded it. Years of easy money distorted the economy, creating unsustainable booms in finance, property and the public sector, and left us weighed down with debt. Thanks to bailouts, quantitative easing, and record-breaking budget deficits, those problems are still with us. We haven’t allowed the economy to adjust, and that is significantly damaging our growth prospects. Such problems will take time to unwind, but for now, the chancellor must find the strength to eschew popular but counter-productive policies like credit easing and housing market stimulus. Doing otherwise risks the long-term zombification of the British economy – the very opposite of what the chancellor wants to achieve.
