Grand designs?
The Government's recent announcements on changes to planning are to be welcomed, but they represent a very half-hearted attempt to reduce the disincentives to construction (it's a shame that they also came with dollops of more spending as well). Contra the Local Government Association's propaganda, it is quite clear that it is the planning system which is the principal contributor to Britain's dire shortage of housing. As I recently pointed out, it is this shortage which explains the lack of affordability of housing - both for purchase and rentals, not to mention the vast economic distortions which this constrained supply creates. These initiatives - where they are not entirely misdirected - are tiny compared to the scale of the problems.
But what government giveth, government also taketh away. This take away is in the form of the Communities Infrastructure Levy, which was introduced in 2010 (stemming from the Labour Government's 2008 Planning Act) and is gradually being implemented. The CIL permits local councils to levy an infrastructure charge on developers in order to fund the demand for new infrastructure created by their development. Unfortunately, CIL does not replace the pre-existing Section 106 Agreements under the Town and Country Planning Act (1990) - often used to subsidise 'affordable housing' - but instead is supplementary. The Section 106 Agreements were rather arbitrary whereas the CIL will at least have the benefit of transparency as it is simply levied on a pre-determined rate per m2.
According to the Department of Communities and Local Government's information: 'Under the system of planning obligations only 6 per cent of all planning permissions brought any contribution to the cost of supporting infrastructure, when even small developments can create a need for new services. The levy creates a fairer system, with all but the smallest building projects making a contribution towards additional infrastructure that is needed as a result of their development.' Immediately we should observe an issue; if the CIL intends to increase the amount of contributions derived from developers then this can only represent a further disincentive to developers to build housing. Whilst there is great stress laid upon the need for Councils to balance the CIL - the rate of which is determined by the individual Councils themselves - with the economic viability of development, this effectively means that Councils can determine how much profit any developer can make. The CIL is expected to derive an extra £1billion p.a. by 2016 for spending on infrastructure - which must represent an additional tax of £1billion on development. This hardly seems likely to encourage something that is in short supply and seems to run contrary to the Government's own stated policy aims.
There are also some rather more unforeseen and pernicious effects of the CIL, as recently reported in the Sunday Times [Homes section 2/9/2012]. Firstly, certain councils appear to be using the CIL and Section 106 to raise revenues in the face of tightening from central government and the decline of the volume of housebuilding, especially as the rates are discretionary. However, like most regulation and taxation the CIL will hit the small man the hardest - in this case, self-builders. As the CIL is levied on any building over 100m2 it may render many self-builds financially unviable according to the postcode lottery of charges. In the worst instance Wandsworth has set rates at over £500/m2 - given that the average self-build is 200m2 the additional costs are hugely disproportionate to the infrastructure demands of any one household. Again, encouraging self-build was encouraged by the Government, particularly by out-going Housing Minister Grant Shapps. Whilst self-builds account for less than 10% of UK house build, disincentivising them is hardly going to help our dire housing situation.
Of course, there is much more that could be said here regarding the distortionary impacts of government control of infrastructure and planning on the housing market and the resultant difficulties the UK experiences in providing sufficient supply of housing. In this limited space it is sufficient to say that this is an ill-conceived policy that should have been scrapped by the incoming Coalition Government. Instead, it is being turned into a means of making up the shortfalls in council funding at the expense of further residential construction. What we have here is a classic but all-too-typical case of Governments advocating and attempting to stimulate via spending a desired behaviour in one area whilst at the same time Government is disincentivising the very same behaviour by another method. Additional infrastructure construction - if it must come from Government - should instead come from existing budgets by eliminating the vast amount of wasteful spending that local Government currently engages in.
Would a third runway be 'good value' for the taxpayer?
The Department for Transport has stated that without new runways, London’s airports will be at capacity by 2030. This could put Britain at a disadvantage from not being able to deal internationally at its full potential, especially with fast-growing markets in the Far East. Heathrow, as Britain’s only hub airport, is almost at capacity already and there has been pressure on the PM from businesses, media and backbenchers supporting the building of a third runway there. It is important that government does not prevent international businesses from operating in Britain, yet it is equally important that it allows investment decisions and funding to come from private interests and that it does not encroach on the rights it is designated to protect.
The building of a third runway is all very well if BAA Ltd (or a consortium of businesses and airlines) can afford to do so itself, but it is quite another if the £10bn funding required is going to come from the taxpayer. Against the official line of his party, George Osborne said on Sunday on the Andrew Marr show that a third runway at Heathrow is an option for government funding through the Infrastructure (Financial Assistance) Bill. This Bill will come into effect in October and promises £40-50bn of state finance to go to private schemes approved by the government, can start within 12 months and, supposedly, offer good value for the taxpayer (in other words, more government welfare for private companies that offer ‘good value for the taxpayer’).
If it is decided that a third runway is to go ahead, even if it is privately funded by BAA, additional costs may hit the taxpayer. The Free Enterprise Group, made up of Conservative MPs, has supported a move to give up to £40,000 compensation to those who would be affected by noise created by the new runway. This presumably would come out of government pockets rather than being enforced on BAA.
The best solution would be to grant a private company permission to build an airport around existing transport links and infrastructure located in an area where no or minimal noise compensation would be needed. The Mayor of London has stated his support for a new hub built in the Thames Estuary. One such proposal by Foster and Partners is to build a £20bn four runway airport on an artificial island near the Isle of Grain. It would be entirely privately funded, allocating £4bn towards improving existing infrastructure. Arguably, however, demand in the area isn’t high enough and the government would end up diverting much more infrastructural spending to this to increase demand, by creating transport links and provide public services for new workers. For the same reason, building a hub airport in the north when demand is predominantly centred around London may be good politics, but would be a great risk economically. The ‘build it and they will come’ strategy is a risk that should not be taken on something as crucial as international transport links, especially if the public purse is involved.
Another possibility arises from the currently anonymous ‘world-leading infrastructure firm’ made up of a consortium of British businesses, who are currently scouting sites for a new four runway airport that they hope could rival and perhaps even replace Heathrow as Britain’s key link between domestic regions and international airports, especially in the Far East. The firm has been looking at sites to the west and north-west of London and is now in talks with Chinese sovereign wealth funds over raising the necessary capital.
With a self-appointed monopoly on the decision of where something as crucial as an airport can be built, the government has a responsibility to make a decision that will involve minimal public expenditure, follow demand and protect the citizens who elected it from having their property devalued without compensation, whichever option that may be.
No war on motorists? Tell that to the world outside Central London
“Left wing think tank wants higher taxes” is a bit of a “dog bites man” story, but the IPPR’s call of higher fuel duty was spiced up by some eye-catching facts about the costs of getting about. Contrary to popular perception, they found that the price of motoring has fallen slightly in real terms in the last ten years. Ipso facto, they conclude, the “war on motorists” is a myth. “Compared to users of public transport,” says the think tank’s associate director, Will Straw, “there is no war on motorists.”
This rather depends on how you define a war and who you think is the aggressor. A breakdown of the figures (see graph below) reveals that bus and train passengers have seen fares increase well above the rate of inflation since 1987, but the costs of taxing, insuring and fueling a car have gone up by even more. If average motoring costs have not risen in real terms, it is thanks to the impressive decline in the cost of buying a vehicle which has consistently beaten inflation and is now lower in both real terms and—quite remarkably—also lower in nominal terms (as of 2010). Globalisation, a genuinely competitive free market and a relative lack of state interference have reduced prices and brought some rare good cheer to drivers.
The same cannot be said of the other costs shown, all of which are dictated by the state (in the case of fuel duty and car tax), or by cartels (OPEC), or by the half-state/half-cartel hybrid of the public transport industry. Fuel and car taxes have gone through the roof by any standard, and while motorists could be forgiven for viewing cheaper cars as a small mercy to take their minds off the looting, the IPPR sees it as justification for taking a little more.
There is no doubt that the pockets of bus and rail passengers have also been systematically picked over the past 25 years, but as high as the prices of bus and train tickets are, they do not represent the true cost of public transport. Local public transport was subsidised by the taxpayer to the tune of almost £5 billion in 2010/11, and close to £8 billion was taken from the public purse to spend on the railways (IPPR, p. 14). No government has yet come to terms with the fundamental problem that public transport is inherently expensive and can only be sustained by forcing those who don’t use it to cough up while making their customers pay twice.
The IPPR helpfully points out that motorists can reduce their expenditure by driving less. As a piece of advice, this is rather like telling commuters to save money by not travelling at peak times; technically true so long as one ignores the essential nature of the journey. They appear to be of the belief that motoring is still the preserve of wealthy Mr Toads, pootling around for fun on a Sunday afternoon, whereas private cars are by some distance the nation’s primary mode of transport.
This metropolitan bias is in evidence when the report notes that 25 per cent of the population do not have access to a car. The IPPR describes this figure as “surprisingly low”. Out here in The Provinces, we might regard it as surprisingly high. A look at the numbers reveals just how marginal public transport is to much of the population outside central London. Nationally, the average household spends £21.60 a week on petrol, diesel and motor oils, but only £2.80 a week on rail and tube fares. The average household spends more on spare parts and accessories for their cars or vans (£1.80) than they do on bus and coach tickets (£1.50). To put it still more starkly, we spend more money on lease cars than we do on bus journeys. As should be obvious, this is not because bus and train fares are especially cheap, but because the average household is considerably less likely to buy them than they are to fill up their tank. (If all these figures seem low, it is because many people use only public OR private transport, and some may not use either very much.)
For the majority of the population who rely on their cars to get about, the miracle of consumer capitalism has alleviated the pain of escalating taxes by providing cheaper vehicles, but it strains credibility to suggest that they enjoy favoured status in government policy. Whether one looks at fuel tax, car tax, bus fares or train tickets, no one escapes from the squeeze. I would be tempted to say that war is being waged on us all were it not for the fact that the cost of motoring is kept artificially high while the cost of public transport is kept artificially low thanks to the way it is subsidised by everyone—motorist, cyclist and pedestrian—whether we like it or not.
The mirage of 'affordable housing'
The publication of the Montague Report into the barriers to institutional investment in private rented homes threw up some interesting headlines. Most of the debate over the report actually seemed to concentrate on a proposal to relax local government requirements on developers to build ‘affordable housing’, as this is imposing higher costs on them as they are forced to sell at below market rates. That local government are free to do so if they wish to suggests that there may actually be some interesting reasons why they have not been doing so, perhaps related to Public Choice dynamics at work – for instance, do local governments have a vested interest in reducing development?
The housing market is a hugely complex area – the Montague Report itself is only examining a particular aspect of how to expand availability in the private rented sector. In many respects it is actually quite a sound report which, apart from this recommendation also rejects such terrible ideas as rent controls and Government guarantee schemes. As the ASI’s Ayn Rand lecture by John Allison of the Cato Institute pointed out, the latter is the route the US has gone down and it has proven disastrous. Similarly, rent controls and stricter regulation of landlords leads to less choice of housing and more landlords operating outside of the law altogether.
Confusingly, however, is what is actually meant by the term ‘affordable housing’ in the UK. In an economic sense, affordable housing usually means a comparison of house or rental prices to median incomes in a particular area. There is no doubt that the UK faces a huge problem of affordability in this sense as this report shows. However, in UK Government-speak, affordable housing actually refers to ‘social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market’. What is meant, therefore, by affordable housing is nothing to do with its affordability but instead the term simply refers to availability of socialised housing. There is no doubt that this confuses the debate: when we hear the term affordable housing, it has nothing to do with affordability of that housing.
For the record, the UK has a high proportion of socially-owned housing by international standards (20%). It must also be said, however, that even a description of affordable housing related to income is arbitrary and flawed because it carries a value judgment as to how much income any particular individual ought to spend on housing as opposed to other items of expenditure or saving, as well as an arbitrary assessment of quality of housing.
It quite clear that many government efforts to provide less expensive housing (to avoid confusion) are actually not merely failing to do so but are actually counter-productive. As the Montague Report itself shows, by forcing developers to build ‘affordable housing’, local governments are hampering supply and are thus making housing less affordable! Unfortunately, the Montague Report also argues for restrictive covenants on build-to-rent housing, noting that rental and owner-occupied housing are competing for the same land. This is treating the symptoms rather than the cause, which is shortage of land for development.
A free market definition of affordable housing must ultimately be the price that consumers are willing to pay for housing. Only consumers should ultimately decide where they want to live, in what kind of dwelling and by what financial arrangement – constrained by the supply of course. Putting it simply, if a million houses were rapidly built around London, it is pretty clear that house prices would fall generally and that this would increase affordability. Even if these were a million mansions, this would still increase the affordability of housing in general. Such building cannot occur, however, due to planning constraint. As the Hilber and Vermuelen report concludes ‘Regulatory constraints imposed by the British planning system can to a large extent explain the high house prices ‘.
The real, long-term problem in the UK housing market – rental or owned – is huge-scale government intervention and distortion of the market. Whilst this has occurred in a number of areas, the constriction of the supply of housing and huge manipulation via the planning system is the most serious cause of the UK’s housing shortage, as this IEA report shows. Even relatively sensible interventions to solve this problem, such as the Montague Report and the National Planning Policy Framework are unlikely to have any substantial impact without major planning liberalisation.
Will HS2 be kicked into the long grass?
The much criticised flagship HS2 rail project, which seeks eventually to build a new £50+ billion high-speed rail route between London and Scotland, has had a difficult few months.
Phase 1 from London Euston to Birmingham is due for completion by 2026, whilst the construction of Phase 2 – a Y-configured route from Birmingham to take in both Manchester and Leeds - is scheduled to operate from 2033.
Recent confirmation of heavy investment in several much smaller rail projects in the North and the Midlands, a series of legal challenges to HS2 and even bureaucratic foul-ups at the Department for Transport (DfT) have all been negative for the project’s future. And, at the macro-economic level, the UK economy is basically flat-lining thereby substantially deferring the year when the UK’s public sector net debt (PSND) will eventually start to fall – it recently passed through the previously unimaginable £1 trillion threshold.
As such, further deep public expenditure cuts seem certain as the UK seeks to protect its treasured AAA sovereign debt rating. Whilst the HS2 project has many flaws, such as its environmental impact, its weakest case remains financial. Quite simply, the numbers don’t stack up. And, even assuming that the optimistic passenger growth projections until 2033 are accurate, it is difficult to discern how a decent commercial return can be generated. A Tory minister was quoted in the Spectator recently as saying that the project was 'effectively dead'.
Compared with other EU countries, HS2’s projected Phase 1 capital costs per mile are way higher, whilst its claimed financial benefits are seriously inadequate. A Benefit-Cost Ratio (BCR) analysis by the DfT for Phase 1 barely shows a positive return, even before many risk factors. Not surprisingly, the DfT prefers to focus on the various contentious non-commercial benefits. In times of economic crisis, previous Governments have axed major projects. Within the next three years, the highly uneconomic HS2 project is a strong candidate to be shunted into the sidings.
Behold the Dartford Olympics
Hopefully, David Cameron’s summer vacation takes him over the Dartford Crossing over the Thames River downstream from London. With luck, the toll queue on the Queen Elizabeth II Bridge will let the Prime Minister take in the stunning views in all directions - the panorama will instil more pride in the nation and inspiration for new policies than the opening ceremony of the Olympic Games.
That ceremony might have encouraged Mr Cameron to return us to a rural idyll that never was, to imprison all wealth-generating industrialists, to beatify the NHS as the country’s official religion and to ban all culture except pop. The Dartford Crossing, though, is the real-world antidote to that view of Britain and suggests some good ideas to restore the economic growth needed to pay for the flights of fancy on show at the Olympic Stadium.
Start with the sheer volume of traffic that is utterly breath-taking – thousands upon thousands of cars, vans and trucks streaming across in both directions heading to all points of the compass. Mr Cameron should take pride in the fact that the majority of the world’s major carmakers – Ford, General Motors, Toyota, Honda, Nissan, BMW, Tata - continue to make their cars in this land and that those cars are good enough to export anywhere. And he should be proud that so many of the lorries are registered in lands as far away as Turkey, hauling goods to and from every nook and cranny of the nation.
However, Mr Cameron should also recognize that Britain’s roads are far more critical to the economy’s health than any prestige rail projects like the high speed link from London to Birmingham and Manchester. A crowded Britain will live or die by an efficient road network where the vast majority of economic traffic isn’t between the centres of big cities. Road infrastructure offers many opportunities for creative thinking - privatisation of major trunk routes, tolls and road pricing where the money stays within the industry for consistent upkeep, modernisation, expansion and even dismantling as required by a dynamically changing economy. Handle this right and little taxpayer funding will be required.
Mr Cameron should also recognize that Britain’s historic economic success is so clearly underscored by those foreign-registered lorries – foreign trade. At every summit, at every meeting with every foreign dignitary, at every trade show on every continent, Mr Cameron must shout out the virtues of trade, starting with the EU’s own reluctance to implement the directive on free trade in services. Conveniently, such evangelism doesn’t need any additional taxpayer funding.
Just upstream from the Dartford Crossing is the sprawling Littlebrook Power Station and another testament to Britain’s strengths and weaknesses. The nation has a proud history of energy innovation and development with its skills in the field exported around the world. Littlebrook is oil-fired, though, and incessant dithering about long-term energy supply is bordering on the criminal. So let’s cut through the crap and dash for gas to exploit the nation’s skills, significantly reduce if not eliminate carbon emissions and secure energy supplies for the foreseeable future. It’s another opportunity to enhance growth prospects without hitting up taxpayers.
Downstream from the Dartford Crossing is the Thames Estuary, the proposed dream site of a new futuristic airport for London and there’s no escaping the need for more airport capacity in the southeast if Britain has any intention of sustaining economic growth in the decades ahead. An airport in the Estuary would be a huge challenge but Britain’s engineering industry is second to none in the world. The country’s problem isn’t building things – it’s being unable to decide to build anything. So, Mr Cameron, push the button for this airport if you want a real legacy, especially if you can finally get Whitehall to negotiate proper public-private financing initiatives.
Let’s hope the Olympics opening ceremony was the last hurrah of New Labour’s delusions and that Mr Cameron can recognise it as such. For a sense of the real world, he should spend £1.50 for the adrenalin rush of the Dartford Crossing.
The economic case for HS 2 is dead
Having lots of shiny new infrastructure sounds like a really cool idea. Put the unemployed to work and get some asset that will enrich us all for the next 50 years or so. However, whatever it is that we do we do have to do a cost benefit analysis. How much is it going to cost us to do something and what is the benefit we get from having done so? And it is here that the case for HS 2 fails I'm afraid.
Such a cost benefit analysis was done for the train line. As is normal in these things it is the saving of time that contributes the greatest benefit. The assumption is that if you're locked up in a train carriage you cannot be doing productive things like meeting people, working, talking. Thus the time spent on a train is valued as a cost, a cost equal to the value of your time when you are working. This has the obvious effect of making the time of some senior businessman sitting in first class worth more than the kiddies on awayday tickets in cattle: but so be it, that's just the way the sums are done.
It is on this basis that the case for HS 2 rests. No, really, it does, the great girt chunk of the benefits to set against the costs is this calculation that getting people there faster means they spend less time unproductive and more time productive: less time in carriages unable to work and more time outside them able to do so.
Unfortunately for this case technology has changed:
On-train wireless internet connectivity is growing fast in Europe - but even faster in the UK, which now has more than 2,000 Wi-Fi equipped carriages.
If people are productive while in a train then the benefit of getting them there faster disappears.
That's bad news for High Speed Rail though, as the justification for HS2 (the £17bn high-speed London/Birmingham connection) assumes all travellers are entirely unproductive during transit and thus the 30 minute reduction in travelling time benefits the economy.
At minimum it is necessary to do the sums again so as to take account of that change in the world and the value of time. Then we need to change the basic method of calculation used on all such projects: time that can be spent online is not unproductive these days thus we have to change the way that we do all such sums.
Amusingly this will affect the relative merits of train and car transport. Time spent stuck in a car really is unproductive: on a train not. So we have greater benefits from making car transport faster than we used to, fewer benefits from making train transport faster than we used to. But we also have greater benefits from having more trains (not faster ones) as this pulls people out of that unproductive time in the car and into productive time on the train.
I have a feeling that doing these calculations properly will lead to something of a change in how we think about rail transport. It could well be that this all makes more local, regional, commuter, lines vible while reducing the case for high speed long distance passenger lines.
Transport for whom?
In this month's Reason Magazine (whose parent, the Reason Foundation, is now home to our own Tom Clougherty), Tim Cavanaugh writes that rail screws the poor:
Since 2009 the MTA has added eight miles of train service, at a capital cost of about $2 billion. These new trains, the Expo Line and an extension of the east-county Gold Line, carry a total of about 39,000 people a day.
In the meantime, the cash-strapped authority radically reduced bus service twice: It cut bus lines by 4 percent in 2010 and 12 percent in 2011. These cuts were made even though buses move more than four times as many Angelenos as trains do. In 2009 MTA buses carried about 1.2 million riders a day. Multiplying that by 16 percent, we can estimate more than 180,000 people had their service canceled while fewer than 40,000 had service introduced.
Not surprisingly, the result is that fewer people are using mass transit overall in Los Angeles than in 2009 (about 5 percent fewer, according to MTA statistics).This is a continuation of a long-term trend. Since the MTA began rail construction in 1985, more than 80 miles of railroads have been built, but mass transit ridership as a percentage of county population is lower than it was in 1985....
Bus riders are overwhelmingly poor and working class. As a regular rider I can attest that often the only English spoken on an L.A. bus is the robotic voice that announces upcoming stops Bus riders are overwhelmingly poor and working class. As a regular rider I can attest that often the only English spoken on an L.A. bus is the robotic voice that announces upcoming stops.
This rings some bells here in London, where the government is cutting back on bus funding while driving £100m into suburban rail and a whopping £16bn into Crossrail (not to mention the money-sink that is HS2, though that may be being kicked into the long grass). While Crossrail will serve the East as well as the West, it's hard not to wonder if we're going to see exactly the same thing here as happened in L.A..
This may be unsurprising — the 'donut voters' in London's suburbs are the key swing votes in London's elections, and bus services are less useful for them than train lines into the capital. There's not much to say, in this case. Politics is politics. But maybe that's the point: government, especially local government, doesn't always act with the needs of the bottom in mind. Votes and politicians' pride can matter, and it's a risky endeavour to entrust the interests of the bottom to the whims of the voting majority, who may simply be ignorant of the importance of, say, bus routes instead of suburban rail.
The UK's experience with bus deregulation has, so far, been mixed, but certainly not a failure. If the government is going to follow L.A.'s lead, the best alternative might be to take these decisions out of the hands of government altogether, and try to create an environment where it's possible for private firms to compete and try to offer something for everyone.
Something to strike about
It's probably been the most shambolic week in the government's history. "Pastygate" was fun, but Francis Maude has nearly sparked a fuel crisis by warning people to stock up before an impending strike by fuel lorry drivers.
I don't have much sympathy for the striking fuel drivers' demands. The regulations they want "minimum standards covering pay, hours, holiday and redundancy for fuel tanker drivers", essentially a way of entrenching existing lorry drivers in their jobs, driving up costs for consumers and creating barriers to entry for prospective drivers. It's a private dispute, and the drivers have the right to strike if they wish (although I don't think the state should stop employers from sacking them if they do so), but it's not really something the government should be getting involved with.
On the other hand, there is a legitimate fuel that the rest of us should be getting a lot angrier about. Petrol prices are at an all-time high, and even adjusted for inflation things are tough. The immediate cause of this spike may be things like demand from China and turbulence in the Middle East, but all this is only actually hurting consumers because of the taxman. Here's a breakdown of the cost of a £1.38 litre of petrol:
Product: 47.8p
Retailer: 5p
VAT: 22.15p
Excise duty: 57.95p
In other words, around 64% of the price of petrol at the pump is down to tax.
What's more, the only real reason that this fuel strike would cause so much disorder is because of "anti-hoarding" laws that ban people from keeping more than 10 litres of petrol in their garages. Panic-buying petrol may be stupid, but it's not surprising when people are blocked from building up a private reserve in normal times. [Update: The story this morning of a woman catching fire trying to decant petrol in her kitchen underlines this point: If private stockpiling were legal, there would be a market for safer containers and equipment that would help to avoid this kind of accident.]
Transport costs make up a signficant proportion of a lot of food and other essential goods. So fuel taxes don't just hurt people at the petrol pump, they also make up a signficant proportion of the cost of everything else we buy. If there's something worth striking about, it's that.
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.
