We Need to Re-embrace the Free Market
Jul 18, 2023
Free markets are in a headlong retreat around the world. UK Prime Minister Rishi Sunak is trying to shore up free market ideals to solve Britain’s woes but he recently hit a wall when negotiations for a free trade agreement with Biden faded. Stubbornly high inflation and augmenting interest rates are looming on Britain, and Sunak is bound to back what the Bank of England decides.
Sunak’s ministerial appointment continues to cause discontent. Unlike his counterpart, Liz Truss, Prime Minister Sunak raised corporation tax from 19% to 25% from April 1st, 2023. He hiked up personal taxes by increasing Britain’s employees’ and employers’ social security taxes by 1.25% each—against a pledge not to—later ascertaining that he was a “low tax Conservative”, but that tax cuts would have to wait until the economy and public finances reached a stable state. “We’ve got to get inflation down first, get borrowing under control and then we’ve got the sound fundamentals to cut taxes,” he further added in an interview with the ConservativeHome website. However, high and complicated taxes, and low investment incentives, are the very impediments to Britain’s growth and flourishing free economy, concluded the Treasury Committee and The Economy 2030 Inquiry.
On 16 June 2023, the Treasury Committee called for accountability of government efforts to streamline the UK’s complex and burdensome tax system. In a new report, the cross-party Committee of MPs concluded that the UK’s “overcomplicated tax system is an impediment to economic dynamism, creating compliance burdens, confusion, and disincentives to work or grow a business.” The UK’s trade barrier index score is eight globally.
In 2021, the Resolution Foundation and the Centre for Economic Performance at the London School of Economics set up “The Economy 2030 Inquiry” that evaluates the potency and drawbacks of the UK economy and lays out an economic strategy for the 2020s encouraging growth. Its interim report, “Stagnation nation,” notes the UK’s poor investment track record in comparison to the economies of America, France, and Germany, which have greater productivity. The UK’s average productivity gap with France, Germany, and the U.S. nearly doubled, “to 16%, between 2008 and 2019.”
The data verifies that recessive growth is responsible for Britain’s flatlining wages—growth of wages fell to below zero in the 2010s. By 2018, typical household incomes were 16% lower in the UK than in Germany and 9% lower than in France. The data also points to a dramatic stagnation in the UK due to the coupling of low growth and salary inequalities, mostly felt by low-to-middle income Britons. Low-income households in the UK are 22% poorer than their counterparts in France.
What is the way forward?
The “Stagnation nation” report, despite the disheartening data, is the bearer of some good news. It encourages the government to focus on science and to build on the success of the UK’s existing services economy. The most apt manufacturing opportunities for the UK are in the chemicals and machinery sectors. It is essential to support future areas of strength that are aligned to existing capabilities, which also includes the production of equipment, clean technology, and energy.
Taxation matters, and investment calls for lower corporation and personal taxes. The Chancellor of the Exchequer, Jeremy Hunt, has already acknowledged the need for a strategic plan evaluating how the corporate tax system can encourage capital investment and R&D. In a letter addressed to the Treasury in March 2023, Mr. Hunt claims:
Tax simplification is a key objective for the tax system: the government wants the tax system to be simple, fair and to support growth. Simplifying the tax system reduces the time and money businesses and individuals spend on tax administration and boosts productivity. When making decisions, the government also has to consider other objectives for the tax system, which include raising revenue, incentivizing certain behaviors, or tackling avoidance and evasion. There sometimes are trade-offs between these objectives.
The chancellor and the prime minister are of the same mind—the first priority of the government is not cutting taxes, or its simplification, however the intention to do so has been communicated. Once taxation is sorted, greater investment incentives will hopefully take effect.
This article originally appeared in The European Conservative, see link:
https://europeanconservative.com/articles/commentary/conservatives-need-to-re-embrace-the-free-market/