UK must become more competitive

June 07, 2012 5:12 PM

The phrase “in Europe, but not of it” originates with Winston Churchill who was expressing his cynicism about British integration into a “United States of Europe”, but it now seems relevant in economic affairs as well. For a long time Britain was one of the most competitive European economies, but high taxes and high spending may now have removed that advantage.

Research over the last five years by the International Institute for Management Development (IMD) has sadly shown that the UK is less competitive than many of our European counterparts. Above-target inflation, surging unemployment and fiscal and regulatory policy that continues to get in the way of the British entrepreneurial spirit are among the number of reasons mentioned that has stopped us from clinching the number one spot. But our jump to the eighteenth place from the twentieth placedue to reductions in corporation tax and moves to deal with the deficit show that there is hope for UK plc.

In their most recent report, the IMD concluded that Hong Kong is the world’s most competitive country. The small city-state was praised for its financial prudence and low unemployment. This is the second time that Hong Kong has clinched the title, having previously won in 2011. Runner-up was the United States, whose economic influence was regarded as unparalleled by the IMD.

Closer to home, the most competitive European countries were Switzerland, which came behind the US to be in third place, followed by Sweden – which has been cutting spending and some taxes sharply – in fifth place, Norway in eighth place and Germany – which took action to cut non-wage labour costs – in ninth place. The UK came eighteenth in the context of the global economy, and ninth in terms of Europe.

It is interesting to note that the high-flyers of the European continent were all lauded for their ability to balance their budget and show restraint when it comes to government spending. As the IMD notes itself, Switzerland, Norway and Germany have “export-orientated manufacturing and fiscal discipline”. Central government debt as a percentage of GDP is lower than here.

Our geographical peers have managed to improve their competitiveness whilst we are in an apparent economic inertia. The graph below shows the UK's ranking against other European countries.



Source: IMD World Competitiveness Rankings

As shown above, there has been little variation in competitiveness over the course of the last 5 years. Switzerland has tended to outperform other European countries whilst the UK unfortunately lags behind – and by quite a large margin. Despite this, however, the UK came ninth after coming tenth and eleventh for three consecutive years. The recent jump in rankings has been attributed to greater fiscal discipline and reducing the rate of corporation tax.

That is why it is of utmost importance that policies are implemented to ensure businesses are allowed to thrive and flourish. Contrary to popular opinion, the economy is not a zero-sum game where one person’s gain is another person’s loss. “A rising tide that lifts all boats” is a much more apt analogy.

We still have a long way to go before reaching the number one position in Europe when it comes to competitiveness. Although we have recently risen in the ranks, that is no excuse to remain complacent. Our long term prosperity depends on matching the best in Europe but also looking beyond at the more competitive economies in the rest of the world that are generating more jobs and higher wages for people there.

The only way to remain ahead in a competition is at least starting to make Britain more competitive. We need to reform Britain’s dysfunctional tax system to seriously improve on our current poor position. The final report of the 2020 Tax Commission is the perfect place to start.The phrase “in Europe, but not of it” originates with Winston Churchill who was expressing his cynicism about British integration into a “United States of Europe”, but it now seems relevant in economic affairs as well. For a long time Britain was one of the most competitive European economies, but high taxes and high spending may now have removed that advantage.

Research over the last five years by the International Institute for Management Development (IMD) has sadly shown that the UK is less competitive than many of our European counterparts. Above-target inflation, surging unemployment and fiscal and regulatory policy that continues to get in the way of the British entrepreneurial spirit are among the number of reasons mentioned that has stopped us from clinching the number one spot. But our jump to the eighteenth place from the twentieth placedue to reductions in corporation tax and moves to deal with the deficit show that there is hope for UK plc.

In their most recent report, the IMD concluded that Hong Kong is the world’s most competitive country. The small city-state was praised for its financial prudence and low unemployment. This is the second time that Hong Kong has clinched the title, having previously won in 2011. Runner-up was the United States, whose economic influence was regarded as unparalleled by the IMD.

Closer to home, the most competitive European countries were Switzerland, which came behind the US to be in third place, followed by Sweden – which has been cutting spending and some taxes sharply – in fifth place, Norway in eighth place and Germany – which took action to cut non-wage labour costs – in ninth place. The UK came eighteenth in the context of the global economy, and ninth in terms of Europe.

It is interesting to note that the high-flyers of the European continent were all lauded for their ability to balance their budget and show restraint when it comes to government spending. As the IMD notes itself, Switzerland, Norway and Germany have “export-orientated manufacturing and fiscal discipline”. Central government debt as a percentage of GDP is lower than here.

Our geographical peers have managed to improve their competitiveness whilst we are in an apparent economic inertia. The graph below shows the UK's ranking against other European countries.



Source: IMD World Competitiveness Rankings

As shown above, there has been little variation in competitiveness over the course of the last 5 years. Switzerland has tended to outperform other European countries whilst the UK unfortunately lags behind – and by quite a large margin. Despite this, however, the UK came ninth after coming tenth and eleventh for three consecutive years. The recent jump in rankings has been attributed to greater fiscal discipline and reducing the rate of corporation tax.

That is why it is of utmost importance that policies are implemented to ensure businesses are allowed to thrive and flourish. Contrary to popular opinion, the economy is not a zero-sum game where one person’s gain is another person’s loss. “A rising tide that lifts all boats” is a much more apt analogy.

We still have a long way to go before reaching the number one position in Europe when it comes to competitiveness. Although we have recently risen in the ranks, that is no excuse to remain complacent. Our long term prosperity depends on matching the best in Europe but also looking beyond at the more competitive economies in the rest of the world that are generating more jobs and higher wages for people there.

The only way to remain ahead in a competition is at least starting to make Britain more competitive. We need to reform Britain’s dysfunctional tax system to seriously improve on our current poor position. The final report of the 2020 Tax Commission is the perfect place to start.

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