What options are there for policy action? Here are my top 10, from the straightforward to downright radical
Two weeks ago, I argued in this column that it was not naive nor daft for the Government to be aiming to increase UK productivity. After all, there is scope for us to catch up with other developed countries. But at the same time, this is far from easy.
Governments have been trying to do this since heaven knows when. What options are there for policy action? Everyone will have their favourite cocktail of measures. I outline below my ten favourites, which range from the straightforward and relatively easy to implement, to the radical and politically difficult.
1. Public Investment
Increasing the appallingly low rate of investment is essential, including investment by the public sector. But just spending public money on any old project won’t wash. There is a long history of wasteful investment projects, many associated with transport. Concorde springs to mind. It looks as though HS2 may soon be added to that list.
By contrast, there could be serious returns to be had from increasing investment in many smaller projects to improve the road system. And government can justifiably spend more on encouraging R&D and facilitating the development of the digital and artificial intelligence industries.
2. Corporation Tax
Increased public investment will not be enough, however. Private investment also needs to be much higher. Perhaps it will spontaneously pick up decisively in response to the opportunities presented by Brexit, the revival of confidence after the Conservative election victory, and a more restrictive and better targeted immigration system.
But lower rates of corporation tax – which the government has put on hold – could make a difference, both by leaving businesses with more free cash for investment and by making investment in this country more attractive compared to investment abroad for both British and foreign companies.
3. Corporate governance
But on their own, cuts in corporation tax will not be transformatory. There is a good deal of evidence that the system of remuneration for senior corporate executives encourages them to focus on the short-term performance of the share price and to discourage real investment, especially for the longer term. The Government needs to look into this issue with urgency, but the response needs to be careful and considered.
4. Personal taxation
Including national insurance contributions, personal tax rates are too high pretty much throughout the income range. There are also some ridiculous quirks in the system where marginal tax rates jump. This discourages effort and distorts economic activity. The tax system is also ludicrously complex. This wastes the time of both company employees and private individuals, and results in the unproductive employment of countless civil servants.
5. Regulation
One of the main reasons why the EU’s economy has not done very well is its regulatory regime. There is now ample scope to reshape our system of regulation and to move it away from the safety-first bureaucratic approach of the European Union. If this is done properly, it will not only help to increase productivity directly but will also boost corporate investment.
6. Trade policy
The more open our economy is to international competition, the stronger will be the pressures to increase productivity. Greater openness can be achieved through concluding free trade deals with other countries and/or by unilaterally reducing our tariffs.
7. Education
In many ways, the Blair Government’s emphasis on education was correct; it just went about things the wrong way. You do not improve productivity performance just by force-feeding more young people into the university machine.
If anything, the economy needs fewer youngsters going to university and more going into apprenticeships and schemes for work-based learning. Meanwhile, this country has long suffered from low levels of basic attainment by school leavers in the essential skills of reading, writing and simple mathematics. Recent school reforms introduced by Michel Gove have started to make a real difference. This improvement needs to be built upon.
8. Law and order
Crime is not only a social evil, but also carries an economic cost, including huge amounts of money spent on prevention, security and insurance, not to mention the blighting of crime-ridden areas and the deterrence of investment and entrepreneurship by small businesses. A more effective police force and legal system that punishes crime severely and thereby deters criminals would, amongst other things, bring economic benefits.
9. The NHS
I have to mention this, although I don’t hold out much hope for radical measures. Of course, the most important thing about the NHS is that it should deliver good health outcomes for our citizens. But there is also an economic aspect to all this. After all, the NHS takes up about 15pc of government spending and employs about 4pc of the national workforce. Getting the NHS to function properly would do wonders, not just for our health, but also productivity. Merely splurging money on it will not do the trick.
10. Road pricing
Here is a really radical proposal with a potentially huge payoff. The idea is to charge motorists a fee per mile of road usage, with the charges varying both by area, type of user, type of road and time of day. The annual fixed charge on motorists, which used to be called the Road Fund Licence, would be cut or abolished. The effect would be to reduce road usage at the margin, incentivise the use of shared vehicles and public transport, and to make more efficient use of our road network. The reduction in the time spent in traffic jams would both increase productivity and improve human wellbeing.
Road pricing could be for Boris Johnson what privatisation was for Margaret Thatcher. Of course, it would initially be very unpopular – until people saw the benefits. This is why governments have shied away from it in the past.
Mind you, what are large parliamentary majorities for if not to push through radical policies that promote the national interest in the teeth of initial popular resistance?
Roger Bootle is chairman of Capital Economics.
roger.bootle@capitaleconomics.com
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