A new paper from the neoliberal think tank the Adam Smith Institute argues that only boosting growth by cutting taxes and barriers to trade will ensure Britain’s economy bounces back from COVID19

• Government is now loosening the public health restrictions that have undermined economic activity through a phased plan. The focus must now turn to how to successfully unfreeze the British economy.

• As the lockdown eases, focus must shift from redistributing a shrinking economic pie to expanding the economy by embracing private sector entrepreneurship and innovation, and earned success to get people back to work.

• Ongoing welfare should be broad-based and focused on helping individuals, not on bailouts to politically favoured companies.

• Extraordinary emergency measures to “freeze” the economy that undermine long-run prosperity must not be allowed to become permanent.

• The ASI has produced 30 policies to help boost transactions, investment, employment and access to goods and services

UK Government pandemic measures rightly focused on reducing the level of physical contact between people, while fiscal measures have focused on dialling down and switching off in parts for the duration of this crisis, with the corresponding logic being that when lockdown restrictions end that we can simply “switch the economy back on.” It is hoped that the economy will experience a “V-shape” recession.

The Adam Smith Institute argues that, while this would be ideal, it is by no means guaranteed with the risks of mass firm failure and an economic recession turning into a debt laden depression growing week by week. 

This lockdown marks not only the first time countries have actively tried to freeze an economy for a long unplanned period of time, but also the first time trying to unfreeze. This will raise many unforeseen challenges.

The think tank argues that the UK must change attitude from economic lockdown to delivering on future prosperity now. In line with social distancing measures, this will mean withdrawing temporary corporate welfare measures, being flexible and not excessively prescriptive, and supporting people not failing businesses. Ultimately, they argue, it will be economic growth that delivers prosperity. 

People who become jobless during a recession find it difficult to find future employment, as their skills and professional networks weaken. Young people, particularly those with higher skills, who enter the workforce during a recession have been found to have lower long-run lower earnings. This is what causes the “scarring” effect of lockdown. 

In order to reduce the economic costs to wider society from the effects of the lockdown’s restrictions on private enterprise, the government must look now at how, as restrictions are lifted the government can boost:

1. Transactions — the ability of private individuals and firms to buy and sell;

2. Investment — the purchase of goods and services that to enable future growth;

3. Employment — the ability to enter contacts between employers and an employees; and

4. Access to goods and services — the availability and the liberty to consume products.

The free market think tanks says that the next stage of the recovery will require a new approach guided by following six principles:

• Prosperity: The focus must shift from redistributing a shrinking economic pie to expanding the pie by embracing private sector entrepreneurship and innovation, and earned success to get people back to work.

• Temporariness: Extraordinary emergency measures to “freeze” the economy that undermine long-run prosperity must not be allowed to become permanent.

• Flexibility: Existing ways of thinking will not suffice, it is necessary to be adaptive to circumstance, pursue industry-specific measures and implement radical policies.

• Common sense, not micro-management: The state should not seek to micromanage the reopening of the economy, but rather encourage businesses to adapt to new circumstances.

• Supporting people, not businesses: Support should be broad-based and focused on helping individuals, not on bailouts to politically favoured companies.

• Accepting failure: The economic structure and businesses must adapt to new circumstances; this will mean accepting some previously viable firms are no longer sustainable.

The free market think tank makes 30 recommendations including scrapping transactions taxes like Stamp Duty to restart the housing market, extending permitted development rights to ensure empty office space is turned into homes in inner city areas, reduced taxes on bringing in capital from overseas, scrapping investment taxes to encourage inward investment in manufacturing to rebalance the UK economy, and allowing Britain’s pubs and cafes to operate in the country’s parks. 

With new figures out showing those claiming unemployment benefit has increased to 2.1m even with the furlough scheme, the think tank says employment taxes should be scrapped with the employers’ National Insurance threshold raised to £12,500 (employers currently pay 13.8% on every pound an employee earns over £7,488, with no cap). 

While the UK is better placed than many economies with more rigid labour markets and investment environments, recovery is by no means guaranteed. Private enterprises need stronger trading conditions to begin recouping revenue lost during the lockdown and to do this, the authors argue, British enterprises will need a concerted campaign by the government to reduce red tape and slash taxes reducing economic activity.

Matthew Kilcoyne, Deputy Director of Adam Smith Institute and co-author of the paper, says:

“If there’s ever been a moment to be bold, now is that time. British businesses have been held back from generating revenue but have been taking on debt throughout the lockdown. As we remove short-term restrictions we also need to remove the long-run burdens of government on transactions, investment, employment and our access to goods and services. Only by freeing the economy up will Boris be able to ensure that the country bounces back.”

Matthew Lesh, Head of Research at the Adam Smith Institute and co-author of the paper, says:

“The Government must now focus on how to unfreeze the economy and a return to prosperity. This will be no easy task. We have never tried to freeze an economy before in response to a pandemic, and nor have we tried to unfreeze one. To do so successfully will mean unleashing Britain's entrepreneurs and innovators with a radical agenda of tax and red tape cuts.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne: matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.