The UK’s exit from the EU and shift to new trading terms marks the biggest shake-up in its foreign, political and economic relations for half a century. It is a moment, too, for reflection on how the country can make the best of its new status and position itself wisely in many areas — its place in the world, its internal governance, its ambitions for trade and industries such as financial services.
It is in economic policy where the requirement for a post-Brexit strategy is most urgent. The trade and co-operation agreement with the EU brings certainty for business alongside a more distant relationship. Yet for all the slogans of the past five years, Boris Johnson’s government has never defined a coherent vision for what to do with the new freedoms Brexit offers. Moreover, the prime minister’s preferences often contradict. “Levelling up” the UK’s regions may not boost productivity growth. Sustainability in the public finances conflicts with the desire to end austerity and keep taxes low.
Putting in place a coherent new economic strategy is therefore as big a task as that faced by the Thatcher government in addressing postwar industrial strife at the start of the 1980s.
Although the economy is deep in recession, the UK’s economic problems are largely structural, not cyclical. The macroeconomic framework, targeting low and stable unemployment and inflation, is broadly satisfactory so long as the Bank of England and the Treasury do not prematurely tighten policy.
In addressing the structural challenges, politicians should first recognise that the UK population’s desires for both low US-style taxes and European-style public services will require a continued mid-Atlantic model for the UK economy. The latest British Social Attitudes survey shows that, if forced to choose, a majority would prefer higher taxes over lower public spending but Britain does not want significant changes in this area. There is hardly any appetite for a low-tax, low-regulation society, inaccurately dubbed Singapore-on-Thames.
A new economic strategy also needs to accept trade-offs. Decarbonisation can slow growth; increased longevity will require later retirement; running the economy at maximum efficiency will not provide all the protection or insurance for people that society demands. Brexit itself will add to the economic challenges.
Yet Britain must not fall into despair. The UK is a dynamic, advanced economy and there is scope for reforms that boost productivity growth without undesirable distributional or social consequences. In short, the UK needs to make it easier to prosper in weaker parts of the country, while easing the cost of living in more prosperous parts. This requires bold reform in competition, planning, education and taxes.
With signs that competitive forces are weakening, the UK needs a stronger independent competition authority. It must be willing to play a central role in boosting genuine competition while seeking to eliminate business advantages gained by exploiting corporate or employment structures, tax loopholes or consumer inertia. That way, real entrepreneurship is rewarded.
A more dynamic business sector needs to operate in an environment where there is a presumption in favour of development, especially for housing, except in the most environmentally sensitive areas. Taxpayers, not landowners, should expect to receive the bulk of any uplift in land values generated by planning liberalisation.
With greater efficiency should come a better trained workforce with opportunities for life-long learning. The UK’s biggest weakness in this area is among the half of the population without university education, who are least mobile and need help to acquire the skills necessary to thrive in the digital era.
More vibrant companies and a better trained workforce should interact with a simpler and less distortionary tax system, able to collect more revenues to pay for the public services required by an ageing population. The tax system currently distorts in favour of debt finance over equity, provides incentives for tax-driven incorporation and taking income as capital gains. The mission of the government should be to eliminate such unnecessary barriers to efficiency and fairness.
There are no quick fixes to the problems of modern advanced economies. But to prosper outside the EU, the UK needs a bold long-term programme of reforms.
— to www.ft.com
