Keep Britain competitive

By Michael Howard

Economic prospects are uncertain. The best insurance policy is a business-friendly environment.

We cannot yet quantify the cost to our economy of the events of September 11. But while they have added a new dimension to the uncertainty about prospects for the UK economy, those prospects were far from clear on September 10. Headline economic indicators may have painted a rosy picture but beneath the surface there were causes for concern.

Thousands of jobs had been lost in manufacturing. Savings were running at half their rate in 1997 and there was a large trade deficit. Government spending had begun to increase more quickly than the Treasury thinks the economy itself can grow. As the Institute for Fiscal Studies has made clear, Gordon Brown cannot continue with spending increases on this scale beyond the next couple of years without resorting to higher taxes.

Perhaps most worrying of all, Britain’s competitiveness has been eroded. In four years, the UK has slipped from 9th to 19th in the International Institute for Management Development’s world competitiveness scoreboard. Two-thirds of the tax advantage the UK used to enjoy against continental Europe has been lost.

When the headlines make happy reading and the small print excites concern, uncertainty is the inevitable result. There are as many different views about the medium-term prospects for the economy as there are economists to express them. Broadly, however, there are three strands of opinion: that a significant slowdown is imminent as consumer confidence tumbles; that any imminent slowdown will be a mere pause and the real problem lies with inflationary pressures that will inevitably lead sooner or later to recession; and that technological progress and institutional reform mean we need not worry too much about such pressures, as our ability to supply goods and services can catch up with consumption.

Attention has recently focused on the first scenario. It is said that many sectors are already struggling and that it is only consumer spending that has kept the economy ticking over. Consumer confidence was falling before September 11 and has dropped still lower since.

Other economists are more worried that consumer demand has been unsustainably strong in relation to output. Over the past five years, domestic demand has grown by 20 per cent and output by 15 per cent, with the trade deficit taking the strain. Household debt and mortgage lending reached record levels this year and average earnings have been rising by 4.5 per cent. These economists conclude that there are considerable inflationary pressures in the system, which are being held back by the strength of sterling. As it cannot be assumed that the pound will remain at its present level indefinitely, they think we should worry about the chain of events following a fall in its value. As the risk of inflation increased, so the argument goes, the Bank of England would raise interest rates. If asset prices fell as a result, so would household wealth and household spending. In short, the situation would be qualitatively similar to the recession of the early 1990s, though less severe.

Still others are less gloomy. They acknowledge that supply has not kept pace with demand but say there are a variety of ways in which the two can be brought back into line. It is claimed that balance of payments deficits can be financed for some time because the structural reforms of the 1980s and early 1990s have made the UK an attractive location for investors. In addition, it is thought that technological improvements mean output can now rise more quickly than it used to. The bubble is not about to burst because it has never been a bubble.

I do not profess to know precisely what is going to happen to the British economy and nor should Gordon Brown. One of the lessons of September 11 should be humility. Being prudent is about preparing for the worst-case scenarios while working to achieve the best.

If the good times do come to an end, we shall need a business-friendly environment based on light regulation and a competitive tax system for the economy to bounce back quickly. If they do not, and if our national output must rise to meet demand, our needs are the same.

Frustration among the business community over precisely these issues is beginning to boil over. Ever greater amounts of red tape and taxation are restricting the ability of businesses to respond flexibly to changing economic circumstances. It is time to allow companies to get on with the task of winning orders and creating jobs. Instead, there is talk of further tax rises, either in next year’s Budget or in Budgets after that, to finance the long-term upward trend in public spending.

Far from raising the spectre of yet more burdens on business, ministers should be looking to ease the burdens already in place. Whichever view one takes of current economic conditions, it is clear that competitiveness is the key to our future prospects.

The writer is shadow chancellor of the exchequer

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