How to mend a broken Britain

Neither of the major parties has a credible plan for limiting the damage caused by borrow-spend-and-

The question no longer is whether Britain is broke: it is. Or whether the financial plan laid out by the Chancellor is disastrous: it is. Or whether the spending binge on which the government is engaged is sustainable: it isn’t. Or whether either the profligate government or the pusillanimous opposition have a credible plan to minimise the damage caused by borrow-spend-and-tax economics: they don’t. So it is up to the rest of us to answer the question put by Lenin in a different context: “What is to be done?”

The urgency of the question is a result of the policies of both major parties. Labour, shorn of its “New” adjective — to the silent horror of Lord Mandelson and the audible relief of Gordon Brown and others more comfortable as “comrades” than as mere “citizens” – continues to spend money, borrow unprecedented amounts, expand the state, soak the rich, and hope that something will turn up. And that it won’t be a team from the IMF.

The Tory leader, David Cameron, calls for “an age of austerity” but cannot identify specific ­areas for pruning, and for such unexceptionable nostrums as “delivering more for less”, while his shadow chancellor refuses to promise to repeal Labour’s new 50 per cent tax on the marginal incomes of those it considers too rich, a tax that Cameron has called “a pathetic piece of class war”.

The first step on the path to a return to reason is to determine the long-term goal of economic and social policy. That clearly must be to put the economy on a growth path so that the un­employed who want to work can find work, the flow of funds into the Treasury increases without further boosts in the rate of tax, and without further pressure on a social fabric that is already rent.

Every study shows two things: a nation can improve its standard of living only by increasing the rate of productivity, and the productivity of the public sector is far lower than that of the ­private sector. Yet, the public sector is growing, while Britain’s private sector shrinks. Someone has to say “enough” to those public-sector employees who add little to the quality of service, and to the overblown rewards they receive for non-useful jobs. These are not evil people; they are only doing the jobs assigned to them. The fault lies not with them, but with the politicians who refuse to acknowledge that Britain will never dig its way out of its financial hole without tough decisions – not how to do more with less, but how to do less with less.

The next step is to encourage the small businesses that are the engines of economic growth. Soaking the rich is an attractive policy to the left, especially those whose constituents’ jobs come not from the private sector but directly or indirectly from big government. But raising taxes on the most mobile wealth-creators hardly seems the way to maximise growth. Yet Labour’s backbenchers say “good riddance and don’t come back” to departing millionaires, while the Tories’ young Etonians fear voter revulsion if they seem to be favouring the rich. So Cameron et al have fallen back on their old tactic of never missing an opportunity to miss an opportunity, with George Osborne not daring to oppose the new tax, even though he knows (as does the ­government) that the Treasury will never see much money from the new tax. Some high-earners will repair to the “tax havens” so feared by the Prime Minister, while others will deploy an army of accountants to avoid the tax, and all quite legally.

Voters now say they favour soaking the rich, but that is less important than this fact: Tony Blair succeeded three times in doing something Brown has never accomplished or even dared try – that is, leading his party to electoral victories. In ­order to accomplish that feat, Blair had to prevent his then-chancellor from violating a Labour manifesto pledge not to raise marginal tax rates, a pledge that has since been consigned to the scrapheap of history. Blair had no stomach for the unending battles that were Brown’s forte, but on one thing he stood firm. Britain is an aspirational country, one in which most people want to improve their material conditions, own a house, a nice car, earn enough money to educate their children, and perhaps indulge in a bit of conspicuous consumption of the sort that the then-chancellor could neither understand nor condone. So, Blair held fast – well, almost. He did allow Brown to impose a series of stealth taxes that violated the spirit but not the letter of New Labour’s manifesto promise.

But now we are back to “Labour is best when it is Labour”, to squeezing the lemon until the pips squeak. Or leave. Brown has always believed that the entire wealth of the nation belongs to the government that provided the education, healthcare and infrastructure that makes economic activity possible. With that as a starting point, it must seem to him the height of generosity to allow the public to keep half of what belongs to the government. Any fair person must admire his search for social justice – but quail at his inability to accept that the old-time religion just won’t get him there.

But with a recognition of the need not to drive away productive members of society must come a recognition that man does not live by efficiency alone. Which is why an equitable, fair tax and regulatory structure is an essential ingredient of a return to shared prosperity. It’s no good ladling out funds to institutions too big to fail, while families too small to be noticed bear the brunt of the downturn; or financing benefits for upper- and middle-income families while pensioners scrape by to meet basic living costs, as Cameron, to his credit, has pointed out. And it’s no good attempting to ameliorate the suffering of the ­unemployed and low earners with government programmes that have failed to get as many as five million people into the active workforce.

The answer for these people is jobs, real jobs generated by solid economic growth, and penalties for refusing to work, such as those proposed by James Purnell. And the answer to the need for equity is a regulatory system that does not reward bankers who failed to manage risk properly, who relied for their bonuses on short-term earnings. But don’t deploy an army of ­clipboard-wielding, risk-averse regulators. Instead, regulation that aligns private incentives with the public interest is required. Write a ­mortgage, but keep a portion of the risk of non-repayment; earn a bonus, but forfeit it if profits prove to be ephemeral. There’s more, but you get the idea: rules that make markets work better, and require only minimal on-going government intervention.

And by all means, go green. But not by picking winners. Instead, tax carbon emissions, and use the proceeds to reduce taxes on income and profits. Green entrepreneurs would then be competing with carbon emitters forced to pay for their pollution – and let the best technology win.

That’s a small part of what’s to be done. It is Britain’s misfortune, and a cause of pain to us Anglophiles, that no one is stepping up to propose just that to the electorate.

Irwin Stelzer is director of economic policy studies at the Hudson Institute and a columnist for the Sunday Times