Boris Johnson agrees, lacklustre growth figures mean we need targeted tax cuts now

July 28, 2011 2:34 PM

Figures released on Tuesday show the economy grew by just 0.2 per cent in the first quarter of this financial year. Initial estimates are usually revised up, subsequently. In addition, the Japanese tsunami and earthquake, the Royal Wedding, unseasonal heat and the delay in counting Olympic ticket sales have all been used by the ONS to save ministerial blushes for the disappointing figures. Is there really much of a macroeconomic impact from warm weather, for example? Wouldn’t spending simply be switched from heating and sweaters to ice-creams and shorts? But even ignoring all that the number is a serious disappointment, if not an unexpected one. Growth should be a lot higher and the Government’s continued high spending and failure to get to grips with supply side reforms is getting in the way. Ed Balls, the Shadow Chancellor of the Exchequer, voiced concern about the low figure:

"The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down"


At the same stage following the 1990-91 recession the economy was growing 5 times as fast as it is now. Fast growth following a recession should be expected, as depressed asset prices and wage levels tempt firms to make use of the capacity freed up during the contraction. Despite the rhetoric surrounding supposed cuts, the Government has continued to increase spending which has meant it is still employing staff, occupying offices and purchasing the supplies that would normally now be in the process of being reallocated into more productive and efficient use by price signals and market forces. With the Government still spending over half of the economy’s output, the room for the private sector to generate economic growth is much smaller than back in the early 1990s when the Government’s share was closer to 40 per cent.

[caption id="attachment_39423" align="alignright" width="466" caption="Quarterly economic growth, 2007-11 and 1990-94"][/caption]

Research has shown that an economy with a 10 per cent higher share of GDP being consumed by government will suffer from growth rate approximately 1 per cent lower than otherwise. But it’s not just aggregate spending figures which have conspired to fetter the nation’s economic prospects. The cumulative effect of two decades of gold-plated regulations from Whitehall and Brussels and tougher planning restrictions have also served to restrict the economy’s ability to adapt to changing conditions and preferences in society. Cities of London and Westminster MP, Mark Field, has highlighted the need for loosening the restrictions in the economy:

"As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size enterprises (SMEs). We have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs"


Fortunately, what needs to be done is not terribly unthinkable. On the regulatory front, hack back the thicket of over-zealous box-ticking regulations in town planning, health and safety and labour markets. Unwinding those regulations back to a sensible framework is no mean task but it is certainly not unthinkable. Similarly daunting is the task of overhauling Britain’s enormously over-complicated tax code. The 2020 Tax Commission , a major joint project with the Institute of Directors, is taking on this task and will produce a root-and-branch overhaul of the system in early 2012. But there are things that can and should be done right now, too.

Contributing to the ConservativeHome Growth Manifesto from London think tanks, Matt Sinclair, Director of the TaxPayers’ Alliance, said we should cut National Insurance, cut Corporation Tax faster and axe the 50p income tax band. Twelve other organisations contributed further pro-growth reforms that should give the Government plenty to be getting on with. Some, such as the European Trade Union Institute’s Duncan Weldon, at a BBC Radio 4 debate, have criticised the manifesto for not being a response to slow growth because we always propose such policies. The reason for this is simple. Supply side reforms always boost growth and we are always in favour of growth and prosperity, not just when the economy has been particularly wrecked by profligate spending, burdensome taxes and a mountain of debt.

Fortunately, the political momentum for tax cuts is growing and Mayor of London Boris Johnson called on the Government to scrap the 50p rate and cut National Insurance in yesterday’s Daily Telegraph:

"You’ve got to look at ways of stimulating growth now, and certainly I think you should look at National Insurance, you should look at ways of stimulating consumption confidence in the market"


Politicians from across the political spectrum who recognise the need for economic growth should join the Mayor of London in backing our proposed tax cuts.Figures released on Tuesday show the economy grew by just 0.2 per cent in the first quarter of this financial year. Initial estimates are usually revised up, subsequently. In addition, the Japanese tsunami and earthquake, the Royal Wedding, unseasonal heat and the delay in counting Olympic ticket sales have all been used by the ONS to save ministerial blushes for the disappointing figures. Is there really much of a macroeconomic impact from warm weather, for example? Wouldn’t spending simply be switched from heating and sweaters to ice-creams and shorts? But even ignoring all that the number is a serious disappointment, if not an unexpected one. Growth should be a lot higher and the Government’s continued high spending and failure to get to grips with supply side reforms is getting in the way. Ed Balls, the Shadow Chancellor of the Exchequer, voiced concern about the low figure:

"The economy has effectively flatlined for nine months and this is very bad news for jobs, living standards, business investment and for getting the deficit down"


At the same stage following the 1990-91 recession the economy was growing 5 times as fast as it is now. Fast growth following a recession should be expected, as depressed asset prices and wage levels tempt firms to make use of the capacity freed up during the contraction. Despite the rhetoric surrounding supposed cuts, the Government has continued to increase spending which has meant it is still employing staff, occupying offices and purchasing the supplies that would normally now be in the process of being reallocated into more productive and efficient use by price signals and market forces. With the Government still spending over half of the economy’s output, the room for the private sector to generate economic growth is much smaller than back in the early 1990s when the Government’s share was closer to 40 per cent.

[caption id="attachment_39423" align="alignright" width="466" caption="Quarterly economic growth, 2007-11 and 1990-94"][/caption]

Research has shown that an economy with a 10 per cent higher share of GDP being consumed by government will suffer from growth rate approximately 1 per cent lower than otherwise. But it’s not just aggregate spending figures which have conspired to fetter the nation’s economic prospects. The cumulative effect of two decades of gold-plated regulations from Whitehall and Brussels and tougher planning restrictions have also served to restrict the economy’s ability to adapt to changing conditions and preferences in society. Cities of London and Westminster MP, Mark Field, has highlighted the need for loosening the restrictions in the economy:

"As a matter of urgency we need to start implementing micro or supply side initiatives designed to free up small and medium size enterprises (SMEs). We have to ‘think the unthinkable’ and cut the regulatory and taxation framework which hinders many SMEs"


Fortunately, what needs to be done is not terribly unthinkable. On the regulatory front, hack back the thicket of over-zealous box-ticking regulations in town planning, health and safety and labour markets. Unwinding those regulations back to a sensible framework is no mean task but it is certainly not unthinkable. Similarly daunting is the task of overhauling Britain’s enormously over-complicated tax code. The 2020 Tax Commission , a major joint project with the Institute of Directors, is taking on this task and will produce a root-and-branch overhaul of the system in early 2012. But there are things that can and should be done right now, too.

Contributing to the ConservativeHome Growth Manifesto from London think tanks, Matt Sinclair, Director of the TaxPayers’ Alliance, said we should cut National Insurance, cut Corporation Tax faster and axe the 50p income tax band. Twelve other organisations contributed further pro-growth reforms that should give the Government plenty to be getting on with. Some, such as the European Trade Union Institute’s Duncan Weldon, at a BBC Radio 4 debate, have criticised the manifesto for not being a response to slow growth because we always propose such policies. The reason for this is simple. Supply side reforms always boost growth and we are always in favour of growth and prosperity, not just when the economy has been particularly wrecked by profligate spending, burdensome taxes and a mountain of debt.

Fortunately, the political momentum for tax cuts is growing and Mayor of London Boris Johnson called on the Government to scrap the 50p rate and cut National Insurance in yesterday’s Daily Telegraph:

"You’ve got to look at ways of stimulating growth now, and certainly I think you should look at National Insurance, you should look at ways of stimulating consumption confidence in the market"


Politicians from across the political spectrum who recognise the need for economic growth should join the Mayor of London in backing our proposed tax cuts.

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