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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Why Angela Merkel's comments about the UK and US shouldn't be given too much weight

The Chancellor's comments are aimed at a domestic and European audience, and she won't be abandoning Anglo-German relationships just yet.

Angela Merkel’s latest remarks do not seem well-judged but should not be given undue significance. Speaking as part of a rally in Munich for her sister party, the CSU, the German Chancellor claimed “we Europeans must really take our own fate into our hands”.

The comments should be read in the context of September's German elections and Merkel’s determination to restrain the fortune of her main political rival, Martin Schulz – obviously a strong Europhile and a committed Trump critic. Sigmar Gabriel - previously seen as a candidate to lead the left-wing SPD - has for some time been pressing for Germany and Europe to have “enough self-confidence” to stand up to Trump. He called for a “self-confident position, not just on behalf of us Germans but all Europeans”. Merkel is in part responding to this pressure.

Her words were well received by her audience. The beer hall crowd erupted into sustained applause. But taking an implicit pop at Donald Trump is hardly likely to be a divisive tactic at such a gathering. Criticising the UK post-Brexit and the US under Trump is the sort of virtue signalling guaranteed to ensure a good clap.

It’s not clear that the comments represent that much of a new departure, as she herself has since claimed. She said something similar earlier this year. In January, after the publication of Donald Trump’s interview with The Times and Bild, she said that “we Europeans have our fate in our own hands”.

At one level what Merkel said is something of a truism: in two year’s time Britain will no longer be directly deciding the fate of the EU. In future no British Prime Minister will attend the European Council, and British MEPs will leave the Parliament at the next round of European elections in 2019. Yet Merkel’s words “we Europeans”, conflate Europe and the EU, something she has previously rejected. Back in July last year, at a joint press conference with Theresa May, she said: “the UK after all remains part of Europe, if not of the Union”.

At the same press conference, Merkel also confirmed that the EU and the UK would need to continue to work together. At that time she even used the first person plural to include Britain, saying “we have certain missions also to fulfil with the rest of the world” – there the ‘we’ meant Britain and the EU, now the 'we' excludes Britain.

Her comments surely also mark a frustration born of difficulties at the G7 summit over climate change, but Britain and Germany agreed at the meeting in Sicily on the Paris Accord. More broadly, the next few months will be crucial for determining the future relationship between Britain and the EU. There will be many difficult negotiations ahead.

Merkel is widely expected to remain the German Chancellor after this autumn’s election. As the single most powerful individual in the EU27, she is the most crucial person in determining future relations between the UK and the EU. Indeed, to some extent, it was her intransigence during Cameron’s ‘renegotiation’ which precipitated Brexit itself. She also needs to watch with care growing irritation across the EU at the (perceived) extent of German influence and control over the institutions and direction of the European project. Recent reports in the Frankfurter Allgemeine Zeitung which suggested a Merkel plan for Jens Weidmann of the Bundesbank to succeed Mario Draghi at the ECB have not gone down well across southern Europe. For those critics, the hands controlling the fate of Europe are Merkel’s.

Brexit remains a crucial challenge for the EU. How the issue is handled will shape the future of the Union. Many across Europe’s capitals are worried that Brussels risks driving Britain further away than Brexit will require; they are worried lest the Channel becomes metaphorically wider and Britain turns its back on the continent. On the UK side, Theresa May has accepted the EU, and particularly Merkel’s, insistence, that there can be no cherry picking, and therefore she has committed to leaving the single market as well as the EU. May has offered a “deep and special” partnership and a comprehensive free trading arrangement. Merkel should welcome Britain’s clarity. She must work with new French President Emmanuel Macron and others to lead the EU towards a new relationship with Britain – a close partnership which protects free trade, security and the other forms of cooperation which benefit all Europeans.

Henry Newman is the director of Open Europe. He tweets @henrynewman.

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