“When you need someone to be thrifty with the nation’s cash, who better to call on than an adopted Yorkshireman?”
What a difference a year makes. Twelve months ago, then Chief Secretary to the Treasury Rishi Sunak was able to offer a little quip about his Richmond constituency. Fast-forward to today and humour will be thin on the ground as he takes to the virtual conference stage – the national debt now exceeds our entire national income, and this year’s deficit will be the largest in British history by a factor of three or four.
As well as the highly stressed public finances, Sunak and his Treasury colleagues are faced with other deep-rooted problems: sluggish labour productivity, stagnant real wages and living standards that have barely shifted for many people since the financial crisis.
So, it’s unlikely Sunak’s speech today will contain many of the gags or visionary pronouncements we’d normally expect at conference speeches. We may not be at war but we are on a war footing, doing our best fight on, with little time for grandiose visions of the future.
But when we do look to chart a long-term course out of this crisis, instead of dwelling on ‘isms’ or theories of radical reform, we would do far better to simply look at what has worked well in the past.
That’s the idea behind a new briefing paper, authored by Institute of Economic Affairs Chairman Neil Record, which examines the UK’s historical data and identifies the best-performing periods in the past 40 years under two criteria: rising real government revenue and rising labour productivity. It seeks to identify those policies that could maximise government revenue growth as we emerge from the Coronavirus crisis.
The period from 1993-2003 was one of high productivity growth, national income growth and growth in government revenues, especially when compared with recent times. As such, the paper makes the case for an economic policy framework more aligned with the one seen during that period.
In an open letter accompanying the briefing paper’s release, signatories call on the Chancellor to take note of those policies that were followed during much of this period and during the years immediately before.
So what are the 1993-2003 policies we should be looking to emulate?
Back then the UK had a simple tax system with relatively low top marginal rates of income tax (40% throughout that period compared with a top marginal rate today of 62%). We had, as a result of the spending restraint of the mid-1990s and in the first two years of Gordon Brown’s Chancellorship, a tight rein on government spending.
Corporation tax was as high as 33%, but fell throughout the period to 19%. Stamp Duty was no higher than 4%. VAT was 17.5% rather than 20%. The Capital Gains Tax rate was at the same as the income tax rate, but Taper Relief (from 1998-99) reduced the rate on shares by up to 75% (i.e. giving a top rate of 10%). To put that into its wider context: the tax take today is at its highest level for over half a century.
In addition, regulation was lighter and simpler across all sectors, but most notably in the financial sector, energy and the labour market. The enthusiasm for regulation that we see today, which was sparked by the credit crunch, has found its way into every corner of business. The number of occupations for which you need an official licence to operate has doubled in the past 15 years and now covers a fifth of the workforce.
The Winter Economy Plan reads like something from a different universe. Today’s speech could amount to little more than putting meat on the bones of the new JETS scheme (though appointing 13,000 work coaches seems ill-advised when many of those who have lost jobs are young and bright. Is this really £238m well spent?).
Now may not be the right time for an Autumn Budget, but at some point the Chancellor will need to look beyond tomorrow. While much of the short-term Covid-19-related government spending will fall away in the medium term, unless the Treasury manages to encourage strong growth in the underlying economy, the weight of the public debt burden and spending commitments could blight the prospects of this generation of young people.
As we seek to claw our way out of the Covid-induced economic black hole, a little nostalgia could go a long way. As our signatories – among them MPs, former Ministers and economists – point out, governments have choices. This government may not choose to adopt some or any of these successful policies. At the very least, this evidence should weigh heavily on any decision-making.
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