Boris Johnson and Jeremy Hunt plan to go on a spending spree – pouring public money into heavy tax cuts. Johnson has talked of raising the 40% tax threshold from £50,000 to £80,000 and reducing National Insurance contributions. Jeremy Hunt has suggested cutting corporation tax to 12.5%.
How much sense does this make? Not a lot, according to Philip Hammond, the Chancellor of the Exchequer, who is keen not to see the relative stability of the public finances undermined. But there is a much more fundamental case to be made against the sort of giveaway policies we are currently seeing promised.
The UK does not need more consumer spending. If we are going to achieve a reasonable rate of economic growth in future we need to rebalance our economy, and this does not mean more household spending. It means more exports and investment – and rebalancing our economy to achieve these goals.
The reason our economy grows so slowly is that we invest a smaller proportion of our GDP in the future than almost any other country in the world. More importantly yet, we invest almost nothing in the most productive forms of investment, such as mechanisation, technology and power, because these tend to be found mostly in light industry, which now barely exists in the UK.
As late as 1970, nearly a third of our GDP came from manufacturing. Now it is less than 10%. Deindustrialising like this has left us with huge regional imbalances, millions of people with much less productive or satisfying jobs than they had before, while depriving us of the productivity increases which are so much easier to achieve in manufacturing than they in services.
Deindustrialisation has also left us with insufficient products to sell abroad. The result is a huge balance of payments deficit every year, averaging around £100 billion. The reality is that we currently enjoy a standard of living about 5% higher than we are actually earning, which has to be paid for by selling assets and borrowing money every year. No wonder we have lost control to foreign interests of so much of our economy.
What we really need to do is to get investment up, especially of the most productive kinds, and to sell more abroad, so that we are living within our means instead of running up more debt. We could do this, post-Brexit, if we made sure that we made the UK more competitive for manufacturing. We could make our exchange rate more competitive to encourage people to swing resources into investment and exporting, but unfortunately this does not look likely to happen. This is evidently not where the focus of our contenders for the Tory leadership lies.
Instead, it looks as though we are going to get a big round of tax cuts which won’t last because none of our fundamental problems will be tackled. The reality is that the major imbalances in our economy all grew up during the period since we have been in the EU – and Brexit on its own is not going to solve them.
What Brexit might have done, however, is to provide an opportunity to reset our economy is a way which really would build for the future instead of simply staving off a temporary downturn which Brexit may cause.
If this does not happen, yet another chance to get our economy back on track will have been lost. Unfunded giveaways, which we can’t afford and which the country does not need, may buy support among Tory Party members but in the longer term the consequences will come home to roost in the form of stagnant wages and relative decline in relation to the rest of the world. What a way to run the country!
John Mills is an economist, entrepreneur and chairman of JML