21 March 2023

There’s nothing ‘pragmatic’ about perpetuating Britain’s decline


The Prime Minister has promised caution and pragmatism, and last week’s ‘steady as she goes’ Budget was no exception. But there’s nothing sensible about perpetuating the status quo. Britain is in decline, and we will not escape it by reflexively turning to higher taxes and increasingly elaborate spending plans.

We had known for some time that the Chancellor was planning to hike corporation taxes to 25% – an increase of over 30%. But that doesn’t change the fact that the policy will have profoundly damaging effects. The Government has defended the hike by pointing out that the UK will still have the lowest corporation tax in the G7. But besides the United States and, to a lesser extent, Germany, G7 countries are stagnating or declining. These countries are no longer benchmarks against which the UK should compare itself.

Britain’s increasing hostility towards investment has already driven organisations like AstraZeneca to invest in Ireland, where the headline corporation tax rate will now be half that of the UK’s. Ireland also has access to the European Single Market, a free trade area containing almost 450m consumers which Britain has lost access to thanks to Brexit. Poland and Czechia, also members of the single market, have signalled no intention of increasing their 19% rates. Michael P. Devereux of the Oxford University Centre for Business and Taxation finds that for each one percentage point rise in corporation tax lowers foreign direct investment by up to 2.5%, which is likely to be exacerbated by the litany of more attractive investment opportunities in the UK’s neighbouring countries.

The Government has also defended the increase on the grounds of fiscal responsibility. They are right to highlight the importance of balancing the books, but by using the argument only to make the case for tax increases, they have confirmed that the Government has no intention of cutting spending.

The point at which government spending stops positively correlating with GDP growth is highly contested and varies across different economies. The ‘optimal’ proportion of government spending is up for debate, but research suggests it is in the range of 17 to 30% of GDP, while very few advocate going above 40% if the state is very good at performing its core functions. Here in the UK, however, the OBR forecasts that government spending will settle at around 43.4% of GDP.

By arguing that damaging tax increases are necessary to balance the books, the Government has essentially admitted that growth is being sacrificed on the altar of fiscal ‘prudence’. To some extent, this is understandable given the lack of public appetite for austerity. But austerity is not the only way to reduce the size of government, nor necessarily the best way.

The spending cuts that defined the post-2008 era were a crude type of book balancing, which sought to reduce the size of government without really reducing its scope. For example, the Coalition government cut investment in affordable housing by 60% and capped the amount of money local authorities could borrow to finance social housing investment. What it didn’t do was enact the kind of radical planning reform that could have got more private sector housing built, lowering prices across the board (or at the very least containing the explosion in prices we’ve seen in recent years).

More important still are the areas in which the Coalition did not even attempt to rein in spending: healthcare and pensions. These represent the biggest chunk of both day-to-day and long-term spending, but were not on the table for cuts. While spending on both has consistently risen, successive governments have failed to implement reforms which would allow the private sector to maintain sustainable funding in the long-term.

So free marketers, fiscal conservatives, and leftwingers alike can all legitimately claim that they have been let down. The Budget is not balanced, tax and spending are at an all time high, and yet, public services are stretched beyond capacity and in some cases seem unviable in the long term.

This raises the question: is the UK destined for a doom-loop of higher taxes, lower growth, and crisis-prone public services? If we want the answer to be no, the Government must admit that it is unsustainable for the state to do as much as it currently does.

Taking spending cuts seriously means putting less government money towards healthcare, but that absolutely doesn’t mean a shortage of medical coverage. If the Government limited its responsibilities to offering catastrophic health insurance and transferring cash to low-income individuals to pay for healthcare, then it would encourage private sector healthcare investment to crowd in, while possibly reducing state health spending.

If the Government was willing to overhaul Britain’s burdensome planning restrictions, the UK could see a housebuilding revolution without the state needing to increase spending.

Likewise, the Government could limit its involvement in pensions to mandating a certain percentage of contributions to private plans per year and providing welfare transfers to the poorest pensioners, it could reduce the £115bn the state spent on pensions in 2021/22, while ensuring that mass pensioner poverty remains a thing of the past.

We have been locked in a zero-sum game between ideologues on the Left who favour turning Britain into a country subsumed by health spending and those on the right who would decimate state support for sectors like health, pensions, housing, and childcare without giving the market an opportunity to provide more competitive and sustainable funding solutions.

The solution to British decline will not be found in finding a middle ground between that false dichotomy, but in challenging its premise. Overhauling the high-tax, high-spend, low-growth economic consensus might be thought of as radical, but without doing so Britain will continue to decline. There is nothing pragmatic about allowing that to happen.

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Harrison Griffiths is Communications Officer at the Institute for Economic Affairs.

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