David Cowan 7.45am
On Tuesday the ONS revealed that growth for the last quarter was only 0.5 per cent. Many were expecting the figure to be lower, especially after only 0.1 per cent growth in Q2, but this meagre performance is still a serious cause for worry.
This may be unsurprising given the current global financial storm, the latest Eurozone bailout package being at threat by a Greek referendum and the lack of a credible plan from President Obama and Republican presidential candidates. However, this does not mean that the UK is powerless to boost growth. In fact, the Government is pursuing policies that are harming growth.
The most irresponsible is the Bank of England’s second round of quantitative easing (QE2). The de facto printing of money to the tune of £75 billion will not boost growth, but only exacerbate the already dangerously high level of inflation at 5.2 per cent. There is nothing progressive or compassionate about allowing the ‘inflation tax’ to put further pressure on the poorest people in the country at a time when real wages are not increasing. We cannot inflate our way out of our problems. The Government must realise that we need capital accumulation based on real savings for investment into British businesses instead of cheap credit at the heavy cost of rising inflation.
The Government’s growth strategy also seems to be too heavily weighted towards investment programmes. While it is certainly desirable that the Government should invest in more science R&D, education, apprenticeships and expanding the broadband network, there are some potential ‘white elephant’ projects that should not be pursued.
The biggest one is High Speed Rail 2 (HS2) which is based on Labour’s original badly planned route, has £28 billion worth of hidden costs and leaves our current infrastructure in its present decrepit state. The £1 billion Regional Growth Fund is also another futile attempt to get growth going and will actually destroy jobs.
Businesses are still having to pay higher taxes, which the state then inefficiently redistributes to areas which are already heavily dependent on hand-outs. Growth will not come from a Keynesian style ‘multiplier effect’. The focus should be on tackling the true restraint on growth: high taxation.
The 50p tax rate remains, despite it losing £4.5 billion and driving businesses away. National Insurance Contributions (NICs) are penalising job creation and have caused perverse income tax rates. The 10 points increase in Capital Gains Tax (CGT) will only prevent the capital accumulation we so desperately need for real investment in the private sector. Green taxes are already making up 20 per cent of every household’s energy bill.
On top of this, new taxes have been arbitrarily levied on banks and energy companies with little or no warning thus causing uncertainty. It is time for real action on reducing and simplifying our unnecessarily long tax code which is punishing enterprise and the poor.
Tax cuts can largely pay for themselves, as optimal levels are reached and increasing growth will boost revenues. However, there will need to be some spending cuts to soften any loss of revenue which may occur. I would suggest scrapping HS2, which will save £30 billion, dismantling the Green Investment Bank and Regional Growth Fund, which will save a further £4 billion, and abolishing the Department for Education (as I have previously suggested here).
The Government is contending with a turbulent economic climate and the legacy of Gordon Brown, which has left the UK heavily indebted and uncompetitive. There have been bold moves to tackle this, such as the deficit reduction plan, liberalising employment law and planning regulations, and education and welfare reform. However, there has been no attempt to deal with the key threats to economic prosperity for all, especially the poorest: rising inflation and high taxation.
It is essential that George Osborne tackles these twin dangers if he wants to regain the Conservative party’s reputation for economic competence and social compassion.
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