Bill Allen Esther Baroudy Richard Batley Bruno Paulson Peter Sinclair
Abstract
Despite its varying pattern of cyclical ups and downs, the British economy has, on average,grown at 2.5% per year for six decades, with minimal breaks in trend. So history warns us that government policies to change that trend may have little effect. There is a bit more movement in the trend growth of national income per head, which has been weakening worryingly in recent years. On unchanged policies, we think it likelier than not that aggregate national income will grow more slowly than in the past; and this is even likelier for national income per head. Silly policies to stimulate growth (such as boosting demand) have no long run benefit, only the costs of higher inflation and uncertainty. Sound, supply-based policies offer real promise – but they tend to work only slowly. One recent boost to overall growth (but not growth of GDP per head) comes from three sources on the labour side: increased immigration, the future course of which is uncertain; a second from welfare to work, where further continuing big gains are improbable; and rising labour force participation by the old, which will continue to be useful but modest. To keep raising the quality (or productivity) of labour, improving secondary education, mathematical skills and technical training are all important. So, too, are saving and investment. Raising the growth of Britain’s capital stock will be a slow process. It is cuts in Corporation Tax that offer the best prospects here: simply broadening the base could buy a big cut in the standard rate, to about 15%, with deeper cuts possible if accompanied by some tweaking of VAT and higher “green” taxes. The switch to higher saving and investment could then be reinforced by some reductions in inheritance tax, and some flattening in income tax rates. Further growthsupporting measures we consider include various ways of improving the supply of housing; steps to reduce banks’ lending rates to small and medium sized firms, which appear unjustifiably large; and a switch to congestion-sensitive road pricing – a clear case of “adopting market principles” to cure an artificial shortage – coupled with higher investment in infrastructure. We conclude by contrasting the economic growth records of Ireland and Scotland, among other regions or countries. Recent years have seen Ireland outperform Scotland by a large margin – and similar “peripheral” regions in France, Germany and Italy even more. One lesson this teaches is that much can be achieved, sooner or later, by taxing company profits more lightly. The ultimate beneficiaries of lower taxes on profits are consumers and workers. The key message is to think long term. Sustainable long term growth is a tripod. One leg calls for building up Britain’s physical capital; a second, deepening its human capital by enhancing numeracy and training; a third, defending its environmental capital. These are not alternatives. They are complementary imperatiClassification-JEL: 040
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Publisher Info
Paper provided by Department of Economics, University of Birmingham in its series Discussion Papers with number
07-11.