10 Tips for increasing productivity

Roger Bootle in The Telegraph - ideas, no analysis:

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

Higher taxes as appetite for austerity wanes?

Critical reading for the exam. This is current context writ large - remember the key details and use them in a fiscal policy/public spending/public services essay:

Britain’s long-standing opposition to tax-rises is slowly softening

Politicians on right as well as left are beginning to confront the need to raise more money

 Print edition | Britain

Jan 25th 2018

DENIS HEALEY had a bittersweet message when he took to the stage at Labour’s annual conference in 1973 with a pledge to increase taxes. There would be “howls of anguish” from the rich, the then shadow chancellor promised delegates in Blackpool. But he added: “Before you cheer too loudly, let me warn you that a lot of you will pay extra taxes, too.” Pay they did. Two years later, Healey raised duties on alcohol and tobacco and increased the basic rate of income tax from 33% to 35%. It was the last time a British chancellor moved the basic rate upwards.

Today such rhetoric—and such a policy—is alien. The tax burden as a share of GDP has dropped some three points below where it stood in Healey’s day. Income-tax rates have fallen steadily, as tax-free allowances have risen (see chart). The bracing, revenue-raising budgets of the past have given way to ones that trumpet tax cuts and do their best to disguise measures that might bring in more money.

Yet the long-term tax-cutting trend may be over. If the quality of public services—in particular, the National Health Service—is to be maintained, Britain faces the grim prospect of across-the-board tax increases. Healey’s budget, one of the harshest in the post-war period, raised tax equivalent to 1% of GDP. According to official estimates, putting the country’s finances on an even keel requires permanent tax rises in the region of 2% of GDP each decade, for many decades to come. Political minds on the right and left are turning to the question of how to raise this kind of money.

Until recently, politicians could dodge tough decisions on tax. From the 1950s to the late 2000s, the economy in general and wages in particular grew much faster than they are growing today. That made it easier to collect extra revenues. In the decade to 2008, bankers’ juicy salaries and rising employment meant that income-tax receipts rose by 60% in real terms, despite a softening of the income-tax regime.

As a result, the public is unused to the idea of structurally higher taxes. A hysterical political culture and round-the-clock media coverage makes it hard for chancellors to take unpopular decisions, says Kenneth Clarke, who did the job in 1993-97. “A few years ago [an increase in taxes] would not have been regarded as sensational,” he says. “People knew perfectly well that sometimes taxes went up and down.” In 2002 Gordon Brown increased national-insurance contributions (NICs), promising the extra money for health care. But such boldness is rare. These days, governments prefer to raise money by stealth. In the Healey budget of 1975, there were eight big tax measures. In George Osborne’s budget in 2016 there were 86 crafty little ones, including higher taxes on landfills.
But the reality of Britain’s financial straits is forcing a rethink. The best estimates say that the NHS needs another £20bn ($28bn) per year by 2022, equivalent to 1% of GDP. Other departments are also squealing. This week the head of the army issued ominous warnings about the need for more cash. Voters will have to pay more or receive even less—and after eight years of cuts, they have no appetite for the latter.

The two main parties are responding, albeit cautiously. Labour talks boldly about raising revenues, including by reversing recent cuts to corporation tax. But even its avowedly socialist leaders blanch at increases to tax for anyone bar the rich. They have ruled out increases to the basic rate of income tax, VAT or NICs. Only those earning over £80,000 a year—about the top 4%—would face higher taxes (a policy which might not raise money at all, in part because high earners are adept at managing their finances). Recently a shadow minister raised the prospect of those in big houses paying more council tax. He was promptly forced to resign.

Among the Tories, there is a growing clamour for more spending, if not yet for higher taxes. This week Boris Johnson, the foreign secretary, took a break from his day job to demand that the NHS receive an extra £100m per week. When it came to the matter of how to pay for it, Mr Johnson fell back on the idea of a “Brexit dividend”, an optimistic notion given that Brexit is expected to cost the exchequer money.

But some in his party are thinking seriously about how more revenue could be squeezed out of voters. Last year the Tories’ election manifesto promised to make asset-rich pensioners pay more towards the cost of their care in later life, by including the value of their homes in assessments of their means. The policy’s poor design meant that it was rightly criticised as a “dementia tax” on those unlucky enough to run up large bills for social care; it was hastily dropped. Yet many Tories remain open to tapping the wealthy. “There is a critical mass that tax on wealth will have to happen at some point, as the system is unsustainable. It is something the prime minister is cautiously interested in,” says Chris Wilkins, who was head of strategy in Downing Street until last summer.
Others, such as Nicholas Boles, a former Tory minister, have suggested raising NICs, arguing that the idea might win public support if it were made clear that the revenue went to the NHS. Various technocrats, including Nick Macpherson, a former permanent secretary at the Treasury, have given cautious backing to something akin to a hypothecated tax for the NHS, an idea normally unpopular with economists.

Tax reform is unlikely during this parliament. The legislative calendar is crowded by Brexit and the government has only a slim majority. Slowly, however, political tectonic plates are moving. The prime minister is under increasing attack for her timidity. Polls show that half of voters think taxes should rise, the highest proportion since 2004. If the public want to maintain current levels of public services, they must pay. Eventually the government, and the opposition, will have to take their lead from Healey and admit it.

Y.

This article appeared in the Britain section of the print edition under the headline "Sacred cows no more"

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 Print edition | Britain

Jan 25th 2018

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