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by Ben Ramanauskas, Policy Analyst
Today marks the 70th anniversary of the modern Commonwealth. To mark this auspicious occasion, let’s take a look at some of the economic policies of our friends around the world to see what they can teach us. Given that the Commonwealth is made up of 53 countries of various sizes and GDP, we will obviously not look at all of them. Instead we'll focus on just three.
Let’s start with Canada. While the rest of the world was rocked by the global financial crisis, and the majority of advanced economies took a hit during the Great Recession, Canada came out of it pretty much unscathed and continues to be one of the most prosperous nations in the world. However, things were not always so rosy for the Canadians. Back in 1995, the Wall Street Journal dubbed Canada “an honorary member of the Third World” and called the Canadian Dollar the “northern peso”. The country had experienced decades of increases in government spending, nationalisations, high taxes, barriers to international investment, and high levels of public debt. As a result, economic growth was sluggish and inflation was also very high.
So, how did they manage to turn things around? First, they followed the example of Margaret Thatcher and embarked on a programme of privatisation. This privatisation drive reduced government debt and helped to boost economic growth, just as it did in the UK.
They also got public spending and borrowing under control. High levels of government spending and borrowing are bad news for economies. For example, research conducted by Fournier and Johansson reveals that high public spending is associated with low economic growth. This is supported by other economists such as Slemrod and Myles. Getting spending and debt to more sustainable levels gave a strong boost to the Canadian economy.
Thanks in large part to the hard work of the Canadian Taxpayers Federation, successive Canadian governments, unlike many other governments around the world, resisted the temptation to return to high levels of spending and borrowing during the first decade of the twenty-first century. They also reformed the tax system. It lowered the top capital gains tax rate, scrapped a plethora of its special capital taxes, reduced income tax rates, and slashed corporation tax. These tax cuts encouraged investment which led to increased productivity and economic growth.
All of these reforms meant that once the crisis hit, the economy was in a strong enough position to withstand the shock. The UK should pay attention. Although steps have been taken to cut borrowing, the national debt and government spending are still far too high, with the government squandering billions of pounds on schemes such as HS2. What is more, the tax burden is currently at a 49-year high. As such, the UK economy is not in a strong position to deal with any future shocks.
Looking to Asia, what can we learn from Singapore? In 1965, the newly independent country was poor and had no natural resources. However, the economy was transformed, taking the country from poverty to prosperity. How did this happen? The government pursued a policy of low taxes and light regulation. As already discussed in the case of Canada, low levels of taxation and light regulation encouraged businesses and individuals to invest in the country. This led to increases in productivity, boosted economic growth, and improved living standards.
The UK should take heed. The British Government has a tendency to want to introduce more and more regulations on businesses. A study from KPMG found that regulations imposed on businesses have a detrimental impact on growth and also damage their profit margins. These costs are passed on to employees in the form of lower wages and to shoppers in the form of higher prices. What is more, there is a great deal of evidence showing that light regulation is an important factor in decisions about investing in countries. Given how reliant the UK is on foreign investment, the government should follow the example of Singapore and take a much more sensible approach to regulation.
Finally, let’s head to the Caribbean. Belize has incredibly low taxes on income, property, investments, and corporations. It also has a smaller and far less complicated tax code than in the UK.
Given that countries such as Belize are often characterised ‘tax havens’, this might seem like a controversial choice to include in this list. However, the UK, with its incredibly long and complex tax system, could follow Belize’s example in respect of simplification. As the OECD explains, a complicated tax system can lead to lower levels of investment. What is more, countries such as Belize play an incredibly important role in the global economy. They do this through stimulating foreign direct investment in high-tax countries, disciplining financial markets, encouraging good governance, promoting tax competition between different jurisdictions, and fostering economic growth.
So, let’s take this important anniversary to learn from other Commonwealth countries. The UK should lower and simplify taxes, reduce public spending, and slash red tape.