It’s enough to make any good free marketeer despair. Britain has the highest tax burden since the Attlee era, a health service that would make Solzhenitsyn weep and a central bank which fuelled inflation with prolonged quantitative easing (QE). It’s a Bermuda triangle of economic pressures that make growth disappear without trace.
These, and a litany of other economic challenges were covered in a Centre for Policy Studies panel discussion on Britain’s fiscal outlook. Alongside the CPS’ own Robert Colvile (chair) and Tom Clougherty were The Telegraph’s Szu Ping Chan, Chair of the Office for Budget Responsibility (OBR) Richard Hughes and economist Gerard Lyons.
The event was centred (see what I did there) around the OBR’s July ‘Fiscal risks and sustainability’ report, a 50-year projection for the UK’s public finances. Needless to say, things aren’t looking great – and without a concerted pro-growth agenda, the situation looks unlikely to improve.
Let’s start with our extremely high debt-GDP ratio of 100%, which leaves us in a debt trap. Now, while the economic historians among you might highlight that we had a similar ratio in the 1960s, the nature of our debt and economic circumstances has changed. A quarter of our debt is now held in foreign hands, the second highest in the G7, leaving us vulnerable to myriad global insecurities. Further, our debt is increasingly short-term, with an effective maturity of two years, meaning that the impact of the Bank of England’s recent interest rate rises is felt particularly acutely.
There are a number of ways we could haul our way out of this hole. As Gerard Lyons pointed out, traditionally, monetary policy has been used to absorb the impact of soaring debt, but due to monetary mismanagement on the part of the central bank, that’s no longer an option. Since the 2008 financial crash, the Bank of England has taken its eye off the supply of broad money in the economy and, until recently, engaged in long term QE, pumping £450bn into a comatose economy during the pandemic. You don’t have to be an economist to recognise that printing money drives inflation. As a result the Bank of England has been forced to dramatically raise interest rates, constraining its ability to borrow.
With the central bank failing in its mandate, we have to turn to fiscal policy for macroeconomic stability. Some politicians may be tempted to try to tax our way out of oblivion, and allow the government to fund itself back to utopian levels of economic activity. But like all utopias, this would be utterly implausible and would, as Tom Clougherty said, result in a ‘collapse’ in living standards.
However, the spending pressures we now face with an ageing population are vast and will need funding. Spending on the over-65s is projected to increase by 11% of GDP by the 2070s, amounting to over £250bn per year. Besides encouraging healthier lifestyles or, alternatively, dying younger, what we need is systemic reform of our bloated welfare state.
Welfare reform must be coupled with tax simplification to stimulate investment. Take corporation tax, for example, which currently stands at 25%. It should have been slashed long ago to make Britain a more attractive place to do business. Our Irish neighbours took the initiative and reduced their headline rate to 12.5%, ushering in a wave of investment from overseas. Taking fiscal policy off of autopilot and making bold changes such as this will be fundamental to our economic growth.
But that’s easier said than done.
The scale of the problem at hand requires long-term economic thinking, which is made more difficult by our short-termist political system. Focussing policy on promoting economic growth is likely to annoy a number of people whose most productive years are behind them, and have interests in maintaining high taxation to fund gold-plated pensions and our current healthcare model. But annoying we will have to be.
It is vital that those who recognise the centrality of growth to our economic outlook continue to make the case for free markets and low taxes and challenge recalcitrant policymakers and an anti-growth status quo. The alternative is oblivion.
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