The UK economy is at best flatlining, with output growing at roughly the same pace as the population.
By the beginning of this century, following the bedding in during the 1990s of the Thatcherite reforms of the 1980s, the UK economy had nearly caught up with the United States as measured by GDP per capita, averaging only 11.6% behind.
But years of mistaken policies have taken their toll, and this year the UK’s GDP per capita has fallen back to just 67% of the US level, according to IMF figures.
Any government preparing its Autumn Budget ought to be focusing on how to narrow this gap – especially since the Prime Minister himself declared just a few weeks ago that growth was ‘the number one priority’ of his Government.
But instead – if the rumours are true of rising capital, pension and inheritance taxes, more aggressive Net Zero policies and increased trade union rights – the new Government’s plans are likely to make the gap even wider.
The Growth Commission has costed the impact on GDP of the policies currently being trailed in the media ahead of Rachel Reeves’ Budget next week and we estimate that they would lead the UK’s GDP per capita to fall to well below half the equivalent figure for the US.
The models which we use for this have been rigorously tested and – most importantly – they explain past history.
But there is another way, as is set out in the Growth Commission’s ‘Autumn 2024 Growth Budget’, published today.
The biggest problem for the UK economy at the moment is the failing productivity of the public sector, which evidently needs more and more people to produce services of an increasingly inferior quality.
Public sector productivity on ONS measures is 6.8% lower now than it was before the Covid pandemic. This not only reduces the overall productivity of the country, but it is also driving a rising tax burden which in turn damages the rest of the economy.
The Growth Commission proposes tough measures to bring the public sector under control, setting targets and ensuring that pay rises and new investment are only made available on the basis of clear evidence of productivity improvements.
Longer term, it will be necessary to ensure that promotions in the public sector are strictly on the basis of ability rather than on satisfying arbitrary diversity criteria, while the role of public sector unions in blocking change will also need to be examined.
On top of that, increasing (and rarely cost-justified) regulatory burdens are kicking the enterprise sector of the economy in the face. Building regulations are particularly stringent, while new planning permissions need to be certified as ‘increasing biodiversity’.
We wish the Labour Government every luck in its desire to reform the planning system, and indeed in our assessment of their policies, we have credited them with hoped-for success.
But without hacking away at those regulations that are not cost-justified as if they were a hedge that had been allowed to run wild, good intentions will not help them much.
With the public sector more productive, there will be funds to deal with the worst tax anomalies. We wish that it were possible to reduce the mainstream burden of tax, but the money simply isn’t there and is unlikely to be there for some time.
Former Labour Chancellor Denis Healey’s first law of politics was: ‘When you are in a hole, at least stop digging’. So we propose a return to indexation of tax allowances, ideally for next year, at least to stop taxes going up.
We also propose the smoothing out of the high effective marginal tax rates of over 60% when benefit withdrawal combines with the tax system or for those earning over £100,000 whose tax allowances are withdrawn.
The withdrawal of tax allowances probably does more to promote the playing of golf than any initiative by any golf club.
We propose the eventual abolition of inheritance tax (as is the trend around the world), bringing corporate taxes back down to their level of five years ago and introducing faster depreciation for buildings to offset the deadweight of the planning system.
We also propose an Australian system for labour markets and a minimum wage of 60% of the median wage.
Perhaps most importantly, we propose Smart Net Zero – where regulations to impose Net Zero are subject to a standard cost-benefit analysis test.
Many of the current Net Zero regulations not only harm growth but almost certainly hurt the environment too by leading to resource-intensive solutions that meet the law in letter but not in spirit.
This is why the Government’s own figures show that while the UK’s territorial carbon emissions have fallen since 1990 by 53%, our actual carbon footprint has only fallen by 22% because so much of our production has been transferred abroad to countries where production is less clean. And the government’s proposed Carbon Border Adjustment Taxes are a remarkably inefficient way of achieving Smart Net Zero.
So far, the economy has survived deindustrialisation because of our booming service sector and ‘flat white’ economy. But as services get dominated by data centres and AI, the sector’s energy usage will be transformed and failure to build the nuclear power stations that we need will do real damage.
Finally we have proposals relating to migration.
Most countries benefit from skilled migration and the UK is no different. But unskilled migration normally ends up placing more burdens on a hard-stretched infrastructure and housing supply than would be covered by the extra production it produces. We therefore propose bringing down net migration to 150,000 a year.
Whereas the measures we fear from the Budget if the rumours are true are likely to reduce GDP per capita by over 12% by 2045, we estimate that the Growth Commission’s 14-point plan would raise it by 27%.
The gap by 2045 between doing what we propose and what we warn against is worth over £21,000 per person in GDP per capita in today’s prices. That’s a staggering 67% of today’s GDP per capita.
Surely our suite of pro-growth policies makes sense?
You can read the Growth Commission’s ‘Autumn 2024 Growth Budget’ in full here.
Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.
