Why the Tory right's "growth plans" won't work

Scrapping workers' rights and deregulating planning laws won't stimulate growth.

Labour may be most associated with calls for a "plan for growth" but recently they’ve been joined by another force: the Conservative right. Liam Fox was in the Times yesterday arguing for one, and the Free Enterprise Group group of backbenchers also have a book out entitled Britannia Unchained. Some of their ideas, however, might be not be helpful.

Cutting taxes for business

Cutting corporation tax has been proposed as a stimulus for business. There are two arguments behind this: firstly, a lower rate might attract foreign direct investment to the UK, and secondly, reducing the tax rate leaves overburdened businesses with more money, which could help them expand and create jobs.

Let’s first remember that any benefits from foreign corporations setting up shop in the UK would take years to filter through, and so not be suitable as a stimulus. In addition, it's not clear that cutting the rate further would attract much new business anyway. At 22%, the UK already has the fourth-lowest headline rate in the G20 after Saudi Arabia, Russia and Turkey. Comparable countries (Germany 31%, USA 41%, Japan 40%, France 35%), who all do far better in terms of domestic industry, all have higher rates. Any gains in competitiveness would be marginal at best.

As a boost to our existing businesses, a corporation tax cut is also largely pointless. This is because businesses have plenty of cash: UK firms are currently net savers and are sitting on a combined total of £754bn. This is not normal for a healthy market economy, where firms should be borrowing to invest. But there are no available investment opportunities, either because of a lack of demand or because of a more fundamental slowdown in the rate of innovation, and firms are just doing what is rational. Pumping them with more cash would be unlikely to have any effect. Since corporation tax is on a percentage of profits, there is also no reason why cutting it would make previously unprofitable investments viable. A cut in the rate would be unlikely to help.

Making it easier to fire people

The main recommendations to come out of the government’s Beecroft Report were ideas like no-fault dismissal and other restrictions on workers' rights. The stated justification is that firms are too scared to take on employees because it is difficult to get rid of them if they are underperforming.

One of the economic trends that ministers have sought to draw attention to is the contrast between growth and employment. Unemployment has been slowly but consistently falling, despite the economy shrinking. The most common explanation for this is because firms are hoarding labour, so they don’t have to reconstruct a skilled workgroup when demand returns in the future. The Bank of England looked at five indicators of labour hoarding and found that there was good evidence to suggest this is what was happening.

If this is the case, then firms are, in aggregate, feeling quite the opposite way that Beecroft suggests they are: hoarding labour beyond the point you need to is not really consistent with being terrified of taking on workers.

Conversely, if you’re suspicious of the Bank’s findings (and why not?) it could be possible that firms desperately want to get rid of these workers but can’t. This is unlikely because overall the UK labour market is pretty flexible (the third least regulated in the OECD according to the CIPD), but if this were true, then a lot of people would lose their jobs as newly liberated firms sacked with abandon. This would make the Beecroft proposals a recipe for unemployment.

Scrapping planning regulations

The Labour left has led calls for a housing stimulus, mainly composed of council housing. But an alternative take on this comes from Tory elements, within and without government. Get rid of planning laws, they say, and market-led housebuilding will commence.

The evidence suggests this policy has been plucked out of thin air. The Local Government Association reports that there are 400,000 homes with planning permission that haven’t been started by developers or have stalled their construction. Last year in London, where demand is highest, London Councils counted around 170,000 homes that had gained planning permission but were not been built.

This is not a picture of a planning bottleneck. It’s also why claimed successes of previous planning reforms that count permissions granted as delivery should be ignored, and why getting rid of more regulations will likely have higher costs than benefits.

Tory MP and former defence secretary Liam Fox is leading calls for deregulation. Photograph: Getty Images.

Jon Stone is a political journalist. He tweets as @joncstone.

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Lord Sainsbury pulls funding from Progress and other political causes

The longstanding Labour donor will no longer fund party political causes. 

Centrist Labour MPs face a funding gap for their ideas after the longstanding Labour donor Lord Sainsbury announced he will stop financing party political causes.

Sainsbury, who served as a New Labour minister and also donated to the Liberal Democrats, is instead concentrating on charitable causes. 

Lord Sainsbury funded the centrist organisation Progress, dubbed the “original Blairite pressure group”, which was founded in mid Nineties and provided the intellectual underpinnings of New Labour.

The former supermarket boss is understood to still fund Policy Network, an international thinktank headed by New Labour veteran Peter Mandelson.

He has also funded the Remain campaign group Britain Stronger in Europe. The latter reinvented itself as Open Britain after the Leave vote, and has campaigned for a softer Brexit. Its supporters include former Lib Dem leader Nick Clegg and Labour's Chuka Umunna, and it now relies on grassroots funding.

Sainsbury said he wished to “hand the baton on to a new generation of donors” who supported progressive politics. 

Progress director Richard Angell said: “Progress is extremely grateful to Lord Sainsbury for the funding he has provided for over two decades. We always knew it would not last forever.”

The organisation has raised a third of its funding target from other donors, but is now appealing for financial support from Labour supporters. Its aims include “stopping a hard-left take over” of the Labour party and “renewing the ideas of the centre-left”. 

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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