Thursday 26 April 2012

Britain back in recession: The key to growth that the coalition is missing


So the UK is technically back in recession, not as worrying as it sounds but nevertheless remains concerning and alludes to the government’s failure to generate wealth and therefore growth.

The key to this is not to reverse austerity measures. They are necessary in order to lower the absurd debt run up over past years. What the government need to do is something about the policies that obstruct growth and enterprise which deter business coming into the UK.

Firstly the government need to lower corporation tax. Osborne lowered this in the Budget earlier this year from 26% to 24% but as I argued in my post on the Budget, this is not competitive enough. Corporations are essential for economic growth, therefore we must work with them, and not against, in order to alleviate us out of recession.  Director of the Centre for Policy Studies Tim Knox is one of numerous business voices who make a compelling argument to lower corporation tax to something nearer 10-15p. What a much lower rate of corporation tax will do is ensure that the UK is one of the fastest growers in the world. We need to attract the business confidence of foreign wealth generators.

Another crucial area of policy that needs to be addressed is employment legislation. The power of Trade Unions over political life may have substantially curbed thanks to Thatcher, but whilst Labour did not reverse this trend, they instead committed to statute the regressive will of the Unions. The rise in compensation culture and other disproportionate legislation has had the knock on effect of deterring businesses from expanding their work force. Whilst public sector employment is largely due to the impact of sector cuts, unemployment has become such a problem due to the lack of jobs generated in the private sector. Attracting and supporting business in these areas is the only way of resolving this unemployment.

The minimum wage also needs to be examined. In theory this protects workers from exploitation but actually in practice the policy has failed to do this. Labour neglected to link the minimum wage in line with inflation, therefore it contributed to the depression of wages, making the policy meaningless. Leaving this to the market is a way of resolving this. Many would pay more competitively if not for the government endorsement of a low minimum wage. The market knows best when dictating wage levels.

And what about retail? One of the least business-friendly policies in the Budget was rise in business rates to 5.8pc. This is no way to grow an economy as it burdens all businesses on the high street, especially small and local businesses yet was not addressed in the Budget. Business rates are a means used by local councils to generate funding, but what the state are in practice achieving with this policy is first and foremost, obstructing business from generating wealth which then has a knock-on consequence of ensuring that councils collect less taxation, due to lower profits. A lower business rate would, in reality see Councils collect more taxation from a larger pool of profit. This would also contribute massively to the overall national economy. Business rates must be addressed.

There is a common theme running through these problems with government economic policy.  That is when the government does less, they are in fact doing more. My concern with what the coalition is doing in respect to the economy is not with what they aren’t doing, but with what they are doing too much of.

This has even permeated to their austerity measures in the form of VAT. VAT is impacting disproportionately on ordinary people whom make up the majority of consumers. The rise of VAT to 20% has hit people and businesses alike very hard. High VAT by the government is a lazy, short-termist measure of generating revenue when in fact what the government needs to do is assist business in generating wealth. They can do this through addressing the obstructive policies that I have talked about. The state deterring consumers from purchasing in this respect is indicative of too much government in the day-to-day lives of citizens. Government must not  put the breaks on prosperity. This clearly is not in consumer interests, neither is it a policy conducive to business.

The government therefore must do less, if they want to do more. Very simple in theory, but is evidently politically challenging to a coalition. The government can’t afford to be afraid of making unpopular decisions. What the public need from the government is the will to generate growth and concern themselves less with  shaking off the image of being “posh boys”.  The public will be forgiving in the long term if the government takes the tough decisions in order to sort out the economy. That is the mandate from which Cameron was elected. But what the public won’t accept is pain without a clear end goal in sight which promises better times. Cameron can afford to be unpopular, but he can’t afford to fail.

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