Some politicians are known by just a single name. It’s the big golden prize to be one of them. For most, the most likely name to be known by will be their surname. But for a gilded few, the country knows them by their first name.
Winston, Maggie, Boris.
It’s a special club with few members. The status it confers onto its bearer is one of inevitable power. You may have noticed, but there’s one more being added to the list: Rishi.
The Chancellor has become a household name during the pandemic — in large part because he’s the man portrayed as paying the bills of millions (using our money), kept thousands of businesses from going over the brink, and has been a calm and resolute figure throughout. Twitter tells me there is an attractiveness element to the recognition too (“dishy Rishi”, some call him, apparently) but I’ll leave that particular strand of thought to the imagination. When you’re seen as the one doling out the cash it’s easy to be the most popular person in Cabinet (by quite some margin among Tory members).
After sticking up the scaffolding to support the economy, now comes the hard part: it’s time to remove it. In order to do that without the house collapsing, we need to make sure the foundations are secure. To shore them up, the Chancellor must make sure that what makes the economy run in good times is maximised in this bad one. That means allocating scarce resources efficiently, and making it cheaper and easier to transact, employ, and invest.
In order to do this, we at the Adam Smith Institute have got a few ideas Rishi might want to implement if he wants to be seen to be Winning the Peace after the war against Covid.
The first may be surprising – he should do relatively little. The Government is now an enormous amount of our economy, it will be even more as a percentage of GDP as companies have gone bust, and economic activity remains lower than it was going into the crisis. The public sector has carried on spending while we’ve restricted the private sector’s activities. What we need to do as we lift restrictions on revenue raising is free up the private sector.
If we don’t put away those giant white elephant infrastructure projects, or the pork barrel political purchases, then we’re going to end up with a structural deficit. Money markets can take an emergency spend on the nation’s credit card, but if you live beyond your means consistently the cost of your credit is going to start racking up. State spending or tax cuts, if not matched by spending reductions, are inevitably funded with debt. All borrowing is a form of deferred taxation.
The simple but harsh truth could be that in the coming years we may need fewer restaurants, less commercial real estate and fewer airlines. Taxpayers should not subsidise industries or individual businesses that produce something the public no longer demands. It will be essential that workers and resources are put to other uses, supporting things that people do want. Project Birch should be scrapped, or at least become less arbitrary. Debts incurred under Covid could be sold off at preferential rates to a ‘bad bank’ with a set of criteria, rather than taxpayer funds doled out to corporates with big PR budgets and good Whitehall connections.
Now, if you are going to fund some tax cuts with debt, they’d best be the ones with the most bang for their buck. VAT cuts are an expensive and blunt instrument which will do little to actually solve the underlying issues in the economy, while adding extra administrative burdens to those involved.
So instead, let’s scrap Britain’s most damaging tax: Stamp Duty. Now the cat is out of the bag that the government is considering it, they either have to cut it immediately or rule it out forever. The latter is a a brake on the number of property transactions that is four times more harmful to economic efficiency than income tax, and eight times more harmful than VAT. The former is an immediate hit to the Treasury coffers — but it’s not like much is coming in anyway.
And if the Chancellor is going to rule it out but then renege, there will be some that don’t transact because they don’t trust you, and there will be some that do transact because they do trust you. Those people will be betrayed if you end up cutting Stamp Duty in the budget.
The furlough scheme kept people at home who would have been out of work as the pandemic hit, but a lot of firms have found out they don’t need the number of staff they have, and a number of companies have already started to fold. Unemployment is about to spike. People need to change jobs, start new jobs, and companies need that process to be as easy as possible. We must not punish firms that have kept workers on the books by giving others bonuses for taking on new staff. A much better approach is to give every company a tax cut for people on the payroll.
So the Chancellor should cut the cost of employing people across the board. As it stands, employers pay 13.8% on every pound the employee earns over £7,488 with no cap. If the Government wants to encourage firms to hire they should immediately fast-track raising the bottom threshold for employer’s National Insurance to £12,500.
Finally, ‘levelling up’ Britain might appeal to those who like grand plans, but it’s not big government that best delivers outcomes to match such ideals. Roosevelt was wrong, his interventions sustained the depression in the USA and Attlee’s command-and-control economy helped turned Britain into the sick man of Europe. Instead, Rishi should look to West Germany’s Ludwig Erhard. After the Second World War, and In the teeth of concerted opposition, he removed rations and controls, cut taxes and barriers to investment, with huge flourishing as a result.
Our government starts from a far better place than Erhard did, but there’s a lesson there. Cutting investment taxes pays dividends. That means lowering the cost of businesses investing in their own machinery and their own buildings: to do that, it’s time to abolish the Factory Tax.
Unlike expenditure on running costs (e.g. salaries, stationary), expenditure on fixed investment can only be written off over time, which fails to account for inflation and a real return on capital. Our current corporate settlement favours low-capital intensive knowledge economy businesses in the South East and London over high-capital intensive businesses in the Midlands and North. We’ve estimated it could boost investment by 8.1% and labour productivity by 3.54%. The right investments for people’s own businesses by their own free choice, in the right places, at the right time.
If there’s a leitmotif for the Chancellor it should be this: do less and let others do more. Bold and gutsy plays that set the economy back to growth would mean that mononym is a blessing and not a curse in the years to come. You can do it, Rishi!
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