18 May 2015

What George Osborne should do next


“These are fantastically good figures”, the official concluded. “The state of the economy is much better than predicted.” Eyes swivelled to Gordon Brown. “What am I supposed to do with this?”, he snarled. “Write them a f***ing thank you letter?”

Tom Bower, Gordon Brown, HarperCollins, 2004

This was the first, but not the last, tantrum thrown by Gordon Brown in HM Treasury. Talking to his officials shortly after having been appointed as the UK’s chancellor of the exchequer in 1997, he was unable to credit the previous Conservative administration for what was a golden economic legacy. (Thirteen years later, another senior Labour figure did of course write a rather different letter (“I’m afraid there is no money), thereby lending weight to Margaret Thatcher’s dictum that “the problem with socialism is that eventually you run out of other people’s money”.)

In 2015, despite much that has improved over the last five years, George Osborne still faces a far more fragile economy than that inherited by Gordon Brown. The deficit is still over £90 billion. The current account deficit at over 5% of GDP is severe. And productivity growth – the best guarantor of long-term prosperity – remains stagnant.

But, politically, George Osborne does find himself in an extraordinarily strong position. Just like Brown in 1997, he can do pretty much what he likes: he doesn’t have to worry about either the Labour Party or the Lib Dems, both of whom were crushed in the General Election, and both of whom are now squabbling and facing divisive leadership elections. He doesn’t even have to worry for the moment about Tory backbenchers who are so delighted by the unexpected Conservative victory that their loyalty can be assumed for the immediate future. And while he would be well advised to remember P G Wodehouse’s quip that “it is not difficult to distinguish between a Scotsman with a grievance and a ray of sunshine“, numerically the SNP can do little in Parliament to disrupt his economic agenda.

So what should that agenda be? Here again he has a strong hand to play, for two reasons: first, largely unseen, an extraordinarily powerful entrepreneurial culture is bubbling up in Britain. Small companies are leading the way. And 90% of all UK companies are indeed small. They account for half of all private sector investment; and of those people without jobs in 2010 who have since found private sector jobs, 73% have done so in start-ups or small businesses. And it has been reported that young Britons (in the 18 to 29 year old age bracket) are now twice as likely to have taken steps to set up their own business as a decade ago.

Second, there are plenty of brilliant policy proposals around which can be taken off the shelf and implemented quickly, while the opposition parties are so weak. Take the Beecroft report on reducing employment regulation which was stopped by Vince Cable. Or the proposals put forward by Maurice Saatchi for the Centre for Policy Studies in The Road From Serfdom whereby corporation tax would be abolished for small companies, as would capital gains tax for investors in those companies. The result? More tax revenue for the Treasury within four years, more investment in the growing small business sector, less small business reliance on bank lending and many more jobs.

Or the sharing economy. While the Coalition had a fantastic record here – backing it where national and local administrations around the world are hampering start-ups with burdensome regulation – there is much more that can be done. Equally, the Chancellor’s plans for ‘sharing cities’ are a great first step, but the government should also release public owned land, reduce tax complexity, and increase patchy internet access. Osborne could also enact supply-side reforms to the patent process to further reduce the barriers to innovation. And that is before considering the possibilities for privatisation, rapid airport expansion in the South East, privately funded infrastructure such as new Garden Cities and cutting tax rates where the net fiscal effect (judged on a dynamic basis) is neutral or better. There is no shortage of ideas.

But there could be a shortage of time. Osborne’s current political advantages could fade almost as quickly as they appeared in the first place: the backbenchers could get restless. The Labour Party might just pull itself together, as it did after its last catastrophic defeat. Constitutional problems – the EU, Scotland, the House of Lords, constituency reform – will soon start to intrude. And perhaps even more importantly, the growing possibility of a global meltdown – of which more another time – means that Osborne could be guilty of “failing to mend the roof while the sun was shining”, the accusation he pointed again and again at the Labour Party during the last recession.

So the imminent Queen’s Speech is a brilliant opportunity for the Chancellor to start a bold and ambitious programme of economic reform, a programme which could build on the powerful, if latent, forces in the UK in favour of popular capitalism. And which would ensure that the next Government would indeed owe him a thank you letter

Will he take that opportunity?

Tim Knox is the Director of the Centre for Policy Studies.