While the British economy appears to have outperformed many of its European counterparts in terms of its recovery from the COVID-19 pandemic, there are still huge problems in a whole range of areas. The United Kingdom suffers from chronic underinvestment and low productivity and as a result we have stagnant growth. The British economy is also suffering from the highest levels of taxation since World War 2 and inflation remains stubbornly high. All these combined challenges mean that the government needs to adopt a radical programme for growth, which means going against the Treasury and establishment economic orthodoxy.
The primary reason that the British economy is now performing as well as it could is due to underinvestment. For decades, investment that has come into the country has been driven into property, assets, and the city. While these areas are important areas of the economy, they do not deliver the returns we need to maintain and improve our standard of living and deliver growth. The government needs to adopt an Industrial Strategy to give clarity and direction to investors that we need investment in power, mechanisation, and technology. The current government abandoned the UK's Industrial Strategy some years ago and as a result there is a real strategic void. These are the sorts of investment that deliver real increases in productivity and as a result higher growth. This is not just in the types of Industry the government wants to encourage but also in tax policy.
When one considers that not so long ago British industrial output was the largest in the world, it is a great shame to see how far we have fallen. But if the United Kingdom is to stand on its own two feet and pay for the investment in our public services that we so desperately need then we need a real plan for growth. That plan must focus on driving investment into the productive parts of the economy, especially in British manufacturing. Before this can be achieved, the government and indeed the Labour Party need to demonstrate that stability is the order of the day. The past four years have not been the most stable period in British politics and our economy has suffered as a result. Investors will not choose a country that isn’t stable and well run. As we approach a general election, both main parties need to reassure investors that if they decide to invest in Britain their decision is a safe one.
A major contributing factor to Britain’s low growth is our high levels of taxation. All the main party leaders agree that a high tax economy is a low growth economy. While all politicians would like to cut taxes, and businesses and consumers would prefer lower taxes, there remains a real debate as to how feasible that is now. Both parties are committed to major spending on issues such as climate change, the NHS, social care, and a range of infrastructure measures, but there are no real indicators that the economy will grow any faster than it is at present. Growth comes from increases in productivity and therefore both parties need to ensure tax policy incentivises investment in areas of the economy that drive productivity. A good example of this was the government's super deduction allowance. Measures such as this need to be expanded and a range of other deductions made available for numbers of manufacturing staff, new plants and factories, equipment, and even extra deductions for investment in areas that are left behind. Government needs to show investors that Britain is the place to invest, and no stone should be left unturned in order to attract the investment we need.
One of the major barriers to investment is the hauntingly high rates of Corporation Tax that businesses must pay in the UK. The current rate of Corporation Tax in the UK is 25%. As a result of this tax hike the UK has lost out to European competitors. AstraZeneca chose to locate a new £320million factory in the Republic of Ireland as opposed to the UK because of the ‘discouraging’ rate of UK corporate taxes. Both main parties need to consider whether these higher rates of Corporate Taxes are worth it. While revenues may increase from existing companies, the high rates serve as a direct deterrent for new investors and a loss in future potential revenues and job creation. To drive growth, which both main parties state as their priority, consideration ought to be given to introducing a new manufacturers corporate tax rate, which is lower than the standard rate, to encourage new manufacturing businesses to set up and to attract investment. Such a policy could be well received by both parties. For the Conservatives it achieves the objective of reducing taxation and for Labour it demonstrates that a Labour government will focus on delivering the growth we need.
This article has focussed on tax and driving productivity. There are of course a multitude of other policy areas that require attention such as education and skills, planning reform, infrastructure, and importantly a competitive exchange rate policy. Productivity increases come from specific investments where higher productivity gains can be achieved, namely mechanisation, automation, and power. Britain’s strength and major advances came from our economic growth as a result of investment in manufacturing. If we are to remain a great power that can pay its way in the world, urgent action is required now to ensure we stay on top.