22 April 2020

To get us out of this mess, the Government must go for growth

By

We’re going to walk from a public health crisis into an economic one. Stock markets are crashing, oil prices plummeting and big high street names running out of cash and falling into administration.

You can put an economy in effective stasis for a short while – we basically do so every Christmas and various bits of Southern Europe do it for nearly the whole of August, but the longer it goes on the more firms lose the capacity to operate at the level they were operating before. That only gets worse the longer the restrictions endure.

The lack of certainty about when the lockdown will end also creates a host of problems. As a business owner you could justify borrowing for a little longer to bridge the gap between lockdown now and reopening later if you think you’ll make back the costs of doing so. As a bank you can lend if you think a deadweight loss will be greater from a firm’s collapse than the non-performing loan you don’t make.  And as a taxpayer you can stomach corporate welfare if you think you’re avoiding huge institutional loss with zero creative destruction gain. 

You can’t do any of those things if there’s no prospect of avoiding, mitigating or overcoming the costs. Nor would we want to live in a world where you could — directors of companies have a duty to tell those they’re working with and those who have invested in them if they are a going concern. If they’re not they close. It means resources get allocated in an efficient way and that lies at the heart of a functioning market economy.

This country walked into a pandemic with our eyes closed, so it’s important we don’t walk into this economic one in a similar state of unpreparedness. We’ve also seen what happens in health, procurement, testing, and so on when you rely fully on the state. That must not happen in the economy. It will not be big state solutions or vague witterings about “community” that will get businesses back up and running at the end of lockdown.

The public understand this too. At the end of last week the Adam Smith Institute commissioned Survation to ask 1,001 British adults whether they were worried about the economy, whether the lockdown was currently impacting them, whether a plan would be welcomed, if the Government was doing enough to develop a plan, and whether they supported tax cuts to boost growth and jobs at the end of lockdown. 

Two in five respondents (41%) said the lockdown was having a negative personal impact, compared to just over half (52%) who stated that it is having no negative impact. Over time more and more people are reporting to pollsters that they are in trouble. It was just 11% when Opinium asked the same question between March 20-24, when BMG asked between April 7-9, a third of the public said they were taking a financial hit. 

Younger people are taking the weight of the lockdown so far. Half (49%) of those under the age of 54 are experiencing a negative financial impact of the lockdown. The worst impacted age demographic are those aged 35-44, with well over half (57%) experiencing a negative financial impact. Older people have certainly been hit hardest by the virus itself, but their incomes are holding up — seven in ten of over-65s said the lockdown had not negatively affected their finances. 

The private sector is bearing the heaviest load, with revenues for many firms at nil. Retail and hospitality – both sectors where young people make up a big chunk of the workforce – are almost completely frozen.

Ultimately there are only a few ways you can get out of a mess like the one we’re about to walk into. The first is what some people call ‘austerity’ — including tax rises. But if government keeps its liabilities up and raises taxes to meet its obligations then it just passes the buck to families and businesses. These are the people currently paying the price for the lockdown in vanished revenue.

The second is inflation. We have tried that before and It ended with our country taking the begging bowl to the IMF. Just ask Zimbabwe, Venezuela and Argentina what happens if it goes really wrong.

The third and by far the most palatable is sustained economic growth. As Jethro Elsden wrote on this site recently, growth is “as close as humanity has to a universal panacea”. Achieving it means every company that has its revenue hit now needs to be freed up to perform more strongly when we return to economic normality.

I think that people understand this too. In fact 72% of the British public are supportive of tax cuts to boost economic growth and jobs. It’s an area that’s ripe for action too. The TaxPayers’ Alliance last year showed that the tax burden was at its highest in fifty years, with taxes now taking up 34.6% of value of UK GDP. Let’s not forget either that the impact of taxes is uneven. The lowest income households are hit the hardest, with the bottom 10% of households losing almost half (48%) of their gross income to taxes. Those people that have kept the country going during this time, stacking shelves and moving things about the country? It’s time for Britain’s private sector heroes to get a reward. 

In a rare bit of good news, the group that’s most in favour of tax cuts is the young. Of those aged 18-34, two-in-five (44%) strongly support lower taxes after the lockdown, compared to one-third (33%) of those over the age of 65.

There is also slightly stronger support for lower taxes among those with the lowest income. Of those who earn less than £20,000 per annum, two-in-five (42%) strongly support lower taxes after the lockdown; compared to 37% of those who earn over £40,000 per annum. 

But oh no, I hear the patricians and wets cry. We can’t be cutting tax now, it’s far too expensive, we have so many projects planned that need the cash, the state needs to spend to keep the economy afloat. No. No. No. 

Every penny the Government spends and borrows is ultimately paid for by taxpayers and our public services only exist thanks to a vibrant free market economy. The Prime Minister has said as much himself.

And let’s not forget, if tax cuts aren’t planned and if regulation isn’t being suspended or removed, then the Government’s choices dry up anyway. There won’t be any ‘revenue lost to tax cuts’ because there won’t be any revenue at all! A 35% drop in GDP and job losses in the millions will mean no money for white elephant projects for years to come.

So it’s time for the Tories to get their priorities straight. Are you on the side of businesses and entrepreneurs struggling to make ends meet and facing financial oblivion — or pandering to patronage, public sector unions, and PR campaigns?

Time too to drop the aversion to ambition. Young people know that these formative years are when they get to strike out and make it, and they are acutely aware of the time they are losing sitting at home during this crisis. Above all, they need to know their efforts are worth it and that government is on their side. 

At the Adam Smith Institute we’re trying to do our bit too. With the help of our global network, we are calling out to as many people as possible to send us their ideas. No matter how big or small, whether you own a small firm or are employed in the largest conglomerate. Your ideas matter and they’ll hopefully turn the tide on the economic waves that have begun to hit. This is our community: global, connected in ways no one could plan or conjure, and ready to help. Will you answer our call

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Matt Kilcoyne is Deputy Director of the Adam Smith Institute.