11 July 2022

The next Prime Minister should follow Shinzo Abe’s example


The assassination of Shinzo Abe last week was as shocking as it was evil. Abe will rightly go down in history as Japan’s most significant politician since the end of the Second World War. What is more, his economic reforms have much to teach the UK’s next government.

When Shinzo Abe took office for the second time in 2012 Japan’s economy was in a mess. A long period of low productivity meant that economic growth was stagnant, having a devastating impact on the people of Japan. Abe tasked himself and his government with turning things around by introducing a number of policies which he called his ‘three arrows’.

Abe’s first arrow was monetary policy. He instructed Japan’s central bank to follow a policy of monetary easing. Given that the UK is currently experiencing record high inflation, loose monetary policy would be the wrong approach to take. 

However, it does highlight the importance of monetary policy and central banks. The Bank of England has been blamed by some commentators for contributing to the high inflation in the UK, and Conservative leadership hopeful Kemi Badenoch has promised to keep a close eye on its activities if she were to become Prime Minister. The Bank almost certainly did make some mistakes, but this simply shows how difficult a job central banks have. Central bank independence is preferable to one in which monetary policy is controlled by meddling politicians, but the task they are given is sometimes almost impossible. The next government should seriously consider reforming monetary policy, perhaps by replacing inflation targeting with one which focuses on nominal GDP. Such a change would hopefully make life easier for the Bank of England, thereby helping to contribute stable economic growth for the UK.

Abe’s second arrow was fiscal policy. The Japanese government launched a stimulus package while implementing tax reform. With the exception of Rishi Sunak, every contender in the leadership election has promised some form of tax cut with a reversal of the increase in national insurance contributions, a slash to corporation tax, a reduction of VAT on fuel, and the scrapping of business rates all being suggested. 

In many ways such promises are understandable, and in some cases welcome. The candidates are vying to lead the Conservative Party which prides itself on being the party of low taxes (despite there being scant evidence of this in recent years). Taxes can hamper investment and increase the cost of living for working people. As such, tax reform should be on the agenda of the next government.

However, taxes help to fund essential public services and not all taxes are created equal, with some being far more damaging than others. Therefore, any discussion about tax reform should be serious and realistic. For example, promises to cut VAT on products such as fuel may be popular but it would be poorly targeted and risk leaving a black hole in the public finances. It would also be a mistake to lower or scrap business rates. Again, it would be popular but would lead to higher rents meaning that businesses would be no better off

Rather than tinkering with individual taxes, the next government should launch a reform of the entire tax system. Any tax which reduces the incentive to invest should be scrapped. What is more, the tax system should be simplified with flat rates and fewer exemptions. For example, a flat rate of VAT should be levied on all goods.

In addition to tax reform, the next government should prioritise spending which will bring about economic growth. For example, it should focus on the country’s strengths in technology, pharmaceuticals, and research and development (especially in our world leading universities). There should also be more investment in transport infrastructure in order to improve productivity.

Abe’s third arrow was a focus on structural reform. He helped transform Japan from a mercantilist country into a more open economy with a commitment to free trade. He took Japan into the Trans-Pacific Partnership and was instrumental in keeping the trade bloc going after Donald Trump took the US out of it. His government liberalised entire sectors of the economy such as agriculture and electricity. He increased immigration and encouraged more women into the workforce by extending free childcare.

The next UK government can learn much from Abe’s structural reforms. Take trade, for example. It’s encouraging that the UK is currently negotiating to join the revamped Trans-Pacific Partnership while also hoping to strike trade deals with other major economies. This should continue, but the next prime minister needs to take a more mature approach to our closest trading partner – the EU. This will no doubt be politically unpopular but a sensible and grown up relationship with Europe will bring significant economic benefits. The next government should be committed to free trade with the world, and that includes our neighbours.

We also need to look at energy. It is one of the biggest drivers of the cost of living crisis in the UK and things are set to get far worse this winter. The next government needs to focus on increasing supply while maintaining a commitment to Net Zero. As such, not only should the government invest in renewable sources of energy it should also allow far more nuclear plants to be built.

Immigration is another issue which is politically sensitive but needs to be tackled. There are skills gaps in the UK and we should be encouraging people from all around the world to move here to work and to study.

Abe’s reforms to get more women into work were hugely successful. In the UK the high cost of childcare is not only causing financial difficulties for families, it is also depriving the economy of talented and hard working women on whom the responsibility of childcare disproportionately falls. The next government should increase spending on childcare while also liberalising the system to increase the supply of providers.

Not every reform of Shinzo Abe was successful and some would not be appropriate for the UK context. In fact, arguably the biggest issue facing the UK economy has not yet been mentioned: housing. Our restrictive planning system has meant that supply has failed to keep up with demand. Not only is this exacerbating the cost of living crisis and causing misery for young people, it is also seriously hampering productivity and economic growth. Whoever the next Prime Minister is must be prepared to take on rent-seeking NIMBYs and allow millions of new homes to be built.

However, we can learn much from his vision. As much as we may not like to admit it, the country is in decline. We have already experienced a lost decade of wage growth and this looks set to continue with low productivity leading to a stagnant economy. 

The people of the UK deserve far better than this. The status quo and some tinkering here and there is not good enough. The next Prime Minister should follow Abe’s example of bold economic reforms and a relentless commitment to economic growth.

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Ben Ramanauskas is a research economist at Oxford University and a former adviser to a government minister.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.