In my last blog post from the early days of the leadership contest I stressed the need for the next prime minster to care about economic growth. We now do, but will this be sufficient?
The Importance of Growth
The growth rate of the UK after the financial crisis has hurt families and the public coffers relative to an alternative where the growth rate was higher. If the economy had kept growing at the level before the crisis, the average household would make thousands of pounds more per year and be more able to weather crises. The UK would be wealthier and more capable of borrowing and servicing debt.
The Reforms and the Fiscal Situation
The government is changing many policies including some which economists across the political spectrum have argued for. For instance, stamp duty and corporate taxes raise revenue in ways that reduce the performance of the economy. The first being a transaction tax that prevents the efficient allocation of housing, and the latter discourages investment especially without the introduction of full capital expensing. The critiques of these were well outlined by Tom Clougherty of the Centre for Policy Studies ahead of the announcement. The best bullish supply-sider reaction to the policies came from Ryan Bourne.
These reforms are growth-enhancing but are taking place at a time where the fiscal demands of the UK are rising primarily due to a) unfunded increases in spending from policies passed by the government in response to the energy crisis b) the rise in increase rates and c) reduced direct revenue from taxes. At least some of the reductions in revenue will be made up in the future by taxes from the resultant economic growth, but as many have argued, this course of action is a gamble. The widespread depiction of the language suggests that the fiscal gamble is the result of the more controversial policies (bankers’ bonuses, additional rate, etc) while much of the gamble is the result of pre-existing policies.
The biggest fiscal impacts (see Table 4.2) of the new government have been the widely supported residential and commercial energy policies and the reversal of new tax increases (raising the corporate tax rate to 25% while phasing out capital expensing brought in by Chancellor Sunak and introducing a National Insurance levy). The National Insurance hike similarly been criticised by many for raising taxes on all workers (both directly and through their employers) during the cost-of-living crisis.
Insofar as these policies are representative of the direction of travel in Westminster, onlookers should be less frightened this week than they were before the announcements. There is scope for growth-enhancing reforms with little direct fiscal cost (something I will discuss in a follow up blog post). The fact that the chancellor and prime minister put forward these policies is a sign that unlike their predecessors they are both primarily interested in economic growth and willing to use political capital to pursue it. The growth plan issued by the Chancellor to detail the changes adopts a 2.5% growth target and claims that “economic growth is the government’s central mission.”
The other reforms on issues like onshore wind and investment zones that are receiving far less attention from commentators than they should further this point.
No matter the outcome of the reforms, this government will not always be in power. The tendency of the Labour alternatives to adopt growth as their goal has also only been strengthened in the weeks since my last blog post which highlighted comments from the Labour leader. While the pressures facing the UK are growing more acute, the intellectual direction of travel is toward caring about growth. The terms of the political debate have shifted in a positive direction. Economic growth is a moral issue which affects us all.
Ultimately the success or failure of the actions on Friday will be determined by the other reforms that this government is able to accomplish. The market reactions will likely make this more difficult. We should all hope that they succeed.
John Kroencke is a Senior Research Fellow at the Centre for Enterprise, Markets and Ethics. For more information about John please click here.