18 December 2019

Five ways Boris Johnson can reboot and rebalance the economy


A political leader who has just secured a large majority has rarely regretted doing too much, too quickly. Boris Johnson’s extraordinary opportunity for radical reform of the structures of government and economy must not be wasted. The challenge of delivering a successful economy for everyone is immense.

So here are five ideas for the new government to reboot Britain’s economy.

1. Abolish the Factory Tax to fix our productivity emergency

Britain is facing a productivity emergency. Over the last decade the annual rate of productivity growth has been just 0.4%. This economic stagnation means lower wages, less of a return for savers and pensioners, and less money for public services. It contributes to fewer winners. To change direction we need substantial investment in research and development, machinery and factories to increase the value of people’s labour per hour worked.

One way to encourage investment is to abolish the Factory Tax – the discouragement of investment built into the corporate tax system. It is possible for businesses to deduct ongoing expenses like pens and paper and salaries from their corporation tax bills. But they must write-off longer-term expenses, such as new buildings and machines, over a number of years. This means businesses actually don’t get back the full cost of their investment, because of inflation and other things they could have done with that money.

If we abolished the Factory Tax by allowing full expensing right away it would mean corporation tax no longer discouraged investment in tangible capital. One study found that this simple tweak to the tax system increases investment by 17.5% and wages by 2.5%. It was a key part of Trump’s tax reforms last year. In the short run, the Government could make the Annual Investment Allowance unlimited, that is, full expensing for machinery investment. This would particularly help to boost sluggish manufacturing in the Midlands and North.

2. Unleash Britain’s potential with a post-Brexit red tape cutting bonanza 

If Boris is to show that Brexit has a purpose, to truly unleash Britain’s potential, it is necessary to cut the unnecessary red tape that holds back the economy.

We know that red tape is advantageous to bigger business, who can employ armies of pencil-pushers to fill out documents. However it hurts small businesses and entrepreneurs across the country by creating barriers to entry. In effect this means red tape helps the likes of London conglomerates and chains over small local businesses in the North and Midlands.

There are many procedural methods to deliver on the Brexit-vote when it comes to the EU regulatory state. To begin with, EU directives should have an automatic 5 year sunset clause. This would force half a century of built up impediments to be justified as relevant to the UK today. Additionally, each department should have a ‘regulatory budget,’ requiring an annual reduction in restrictive clauses across legislation and regulatory instruments by at least 5%. This could be achieved through 1-in-2-out rules and 10 year sunset clauses for all new regulations. The Government could also create a universal sandbox regulator. This could be similar to the successful Financial Conduct Authority’s regulatory sandbox that has enabled challenger banks and new financial tools

3. Start fixing the housing crisis by abolishing stamp duty

The cost of housing puts extraordinary burdens on people throughout the country. It is an issue that must be addressed for the future viability of the Conservative Party. If only young people, aged between 18 and 24, voted last Thursday then the Tories would hold zero seats. While much of this reflects cultural divides, it is necessary for the Conservatives to address generational inequalities to have any chance in the future. The Conservatives must not just become the party of a declining number of older property owners, but rather, in the spirit of Thatcher, spread access to home ownership across the generations.

A good, popular and effective way to start down this track would be to abolish stamp duty. It is the most self-destructive tax. For every £1 raised for the Treasury, the tax destroys a further 80p of economic activity. It penalises older people who want to downsize after their children leave home. This means fewer places for young families to live. It means people have to live further from work where they could be most productive, contributing to lower incomes and higher carbon emissions. Removing Stamp Duty won’t solve our housing crisis alone, but it will boost housing and labour mobility, as well as economic growth and productivity.

4. Give people local control by devolving power back to them

The decision to vote to Leave the European Union was a rejection of governance by distance, by those who do not understand local challenges and solutions. The United Kingdom’s unitary state provides for some of the most centralised governance in the world. Leaving the European Union to get away from Eurocrats in Brussels only to grant more power to Whitehall bureaucrats would be self-defeating. We must harness local decision making to improve communities, and understand that the solutions to problems do not always come from within SW1.

The UK should look to moving to a serious federal model. In practise, there must be direct accountability between revenue raising and service delivery. For too long devolved administrations have been able to blame Westminster for funding woes. For decentralisation to work we need to establish a line of responsibility from revenue to spending.

This could start with decentralised business rates, meaning businesses in struggling parts of the economy pay less tax. This should come along with not taxing improvements to properties, therefore encouraging investment in buildings. We can also devolve rail, bus and road project spending to local authorities and city regions. Money could be freed up by scrapping the huge white elephant that is HS2. We can also devolve planning law on greenbelt designations and permitted development rights to city regions, allowing for the protection of more green space while freeing up brownfield for development.

5. Connect the countryside and towns to their regional economic hubs with faster, better transport 

Modern knowledge economies succeed off the back of ‘agglomeration effects,’ the benefits of people living closer to each other. In bigger places people interact, share ideas and become more efficient. Theoretical physicist Geoffrey West has argued that every time a city doubles it requires 15% less infrastructure (such as electricity lines and petrol stations) while incomes increase by 15%. West may have overstated this, with the OECD putting the numbers closer to 2 to 5%, but the point broadly stands.

More government spending alone will not make towns and countrysides prosper. It cannot replace agglomeration effects or create private sector entrepreneurs. The challenge, therefore, is to connect people. In this respect the UK has a big advantage: it is small. It is no coincidence that cities which sit within the commuter belt of London, such as Bracknell, Wokingham, and Milton Keynes are disproportionately productive. They can benefit from agglomeration effects.

The challenge is to create similar opportunities for people who live around the likes of Birmingham, Manchester and Leeds so they too can benefit from larger city economies. This means providing high quality commuter rail and connecting the Northern Powerhouse with fast rail between Leeds and Manchester. Better links can also be provided with high frequency buses along dedicated lanes that are fast are reliable. This would give people access to better jobs while keeping their housing costs low and providing higher incomes that can be spent back on their local high streets.

There is no single panacea, but a broad go-for-growth agenda is needed to remake Britain and secure the Conservatives for decades into the future.

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Matthew Lesh is the Head of Research at the Adam Smith Institute