George Osborne must ignore the siren calls – and take steps to raise potential growth

The CPS' Ryan Bourne gives its hitlist for the 2013 budget.

Over the past few weeks, we’ve heard from advocates of more government spending to attempt to stimulate the economy, advocates of shock-and-awe tax cuts to stimulate the economy, people suggesting the Government needs more interventionist long-term planning for the economy, and calls from back-bench Conservative MPs that this should be a‘cost-of-living’ budget.

Following more than £500 billion of deficit spending, £375 billion of QE, interest rates at their lowest level in the history of the Bank of England, a sharp fall in sterling, and with inflation continuously above target, it is difficult not to agree with Sir Mervyn King that most of our economic problems are structural. Years of a stagnant economy despite extraordinary monetary and fiscal policies suggest that in the wake of the crisis we are now suffering from a sustained fall in potential growth on unchanged supply-side policies – which, even if you do believe that stimulus spending policies work, cannot be solved by more short-term borrowing or money printing. Those convinced the economy just needs a kick-start to push it into a new equilibrium of self-sustaining recovery should look at Japan’s recent economic history.

Nor would increasing the structural deficit by borrowing significantly more for tax cuts be sensible. With public sector net borrowing still over 8% of GDP and debts already above the level known to permanently retard growth for two decades, adding to the deficit significantly, two years before the uncertainty of another general election, poses significant risks in bond markets (and even if we print to hold yields down, merely transfers to a problem for sterling).

The Budget then needs to recognise that the UK has a medium-term growth problem. It should therefore contain policies to raise our medium-term growth rate. This is the main insight which drives the 20 recommendations which we set out in Take the Long View, ahead of next week’s Budget. We suggest a three-pronged approach addressing fiscal strategy, supply-side reform and a robust pro-competition agenda in certain oligopolistic industries.

Support is waning for the Government’s fiscal agenda, but in truth cuts to investment expenditure and tax hikes were front-loaded and cuts to current expenditure were back-loaded. For a developed country like the UK, evidence suggests that cutting the latter not only has a far smaller impact on short-term growth, but also enhances medium-term growth. Abandoning the overall plan now, just as it about to start cutting in the right areas, would be madness. In fact, if anything the level of current spending cuts are inadequate. Because of ring-fencing of several large items, current spending overall is actually forecast to increase in real-terms over the course of this Parliament by 0.7%. But this assumes growth will generate large increases in tax revenues to close the deficit. As we mentioned above, we do not believe this will happen on unchanged policies. So further cuts to current spending, in part used for enterprise inducing tax cuts, should be implemented to enhance the economy’s medium-term growth rate.

To decide where these cuts fall the next spending review should examine all spending without any ring-fencing, particularly focusing on areas which have the smallest effects on short-term growth, like pensioner benefits, retirement ages, and eligibility for a host of other transfers. A failure to re-open spending in this way risks some budgets being savaged to protect areas of which have seen significant largesse over the past decade.

On the tax side, the spending review should be supplemented by better resourcing of the Office for Tax Simplification and giving it a more strategic role over efforts to simplify and restore trust in our tax system. Substantial pro-growth tax reform, along the lines of broadening bases and lowering rates, is an area which the Coalition has so far done little.

On the supply-side, the key aim is to raise the productive potential of the economy. A Small Business Incentive Scheme, which includes significant exemptions from regulation for small businesses, should be introduced. Though less sexy, a framework for ‘sunset clauses’ for new regulations should be rolled out and Michael Fallon’s ambitions for deregulation utilised by widening the scope of the ‘One-in, Two-out’ framework further. And the Government should look again at the case for abolishing national pay bargaining, which could substantially enhance public sector efficiency and counter regional inequalities in the medium-term.

Finally, the only sustainable way to address rising living costs for the UK public requires an aggressive pro-market agenda in many oligopolistic industries to enhance innovation and productivity, and to lower costs. Banking, energy, water, rail and education are all necessity industries or state run services where there is scope for much more competition, and there would be much more beneficial long-term effects of removing barriers to entry for new providers, and providing a level playing field for existing market participants, in these than dealing with the symptoms of our current cost-of-living problems through fiddling with changes to certain taxes or subsidies.

20 recommendations for the budget

On fiscal strategy

  1. Announce the remit of the 2013/14 spending review. This should include:
    • plans to cut government current expenditure substantially over the next five years with no ring-fences;
    • a programme of reducing entitlement eligibility;
    • a plan to raise retirement ages more rapidly than currently planned.
  2. Widen the remit of the Office for Tax Simplification to establish tax reforms for the rest of this Parliament along the principles of base-broadening and lowering rates.
  3. Pledge no new taxes or further net tax rate rises for the 2013/14 spending review period.
  4. Set out a path to raise the threshold for the basic rate of Income Tax to the equivalent of the gross income of a full-time earner on the minimum wage.
  5. Cut Capital Gains Tax immediately, as it is above the revenue maximising rate.
  6. Commit to further reductions in Corporation Tax.
  7. Re-open negotiations on public sector pensions.
  8. Supply-side reform
    Announce a Small Business Incentive Scheme to include a package of exemptions from regulations for very small businesses. This should include exemptions from: minimum wage legislation for those under 21; requests for time off for training; and pension auto-enrolment.
  9. Adopt sunset clauses for all regulations with a post-implementation audit three years after enactment of each regulation; and bring more regulation into the scope of 'One-In Two-Out'.
  10. Adopt a Consolidated Planning Act and repeal all existing legislation with a single rationalised Act.
  11. Encourage neighbouring local councils to co-operate in identifying sites for new Garden Cities.
  12. Abolish national pay bargaining in the public sector.
  13. Ensure that the recommendations of the Davies Review of airport capacity can be implemented swiftly.
  14. An agenda for competition
    Adopt the "Fair Shares" scheme for the re-privatisation of Lloyds and RBS.
  15. Reduce the regulatory burden on new banks.
  16. Give the Financial Conduct Authority a competition mandate.
  17. Require the legal separation of retail and supply arms of water companies, paving the way for the extension of retail competition.
  18. Encourage far greater competition between operators on the rail network.
  19. Lift the bar on profit-making companies running academies and free schools.
  20. Abandon the planned unilateral carbon price floor and phase out subsidies for renewable energies.
Photograph: Getty Images

Ryan Bourne is the head of economic research at the Centre for Policy Studies.

Photo: Getty Images
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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.