The right response to an economic downturn


Let's start with the wrong response: raising taxes and borrowing in order to spend money on government projects. Even if you accept the Keynesian argument that the government should 'prime the pump' with increased spending during a economic downturn (and I don't), the whole idea is predicated on counter-cyclical economic management – saving during the good times (increased taxes were meant to reduce demand, keeping down inflation) so that you have money to spend when things tighten up. Quite clearly, that is not what the current government has done: they've borrowed and spent beyond their means all through the boom years, and now intend to load us up with even more debt. More debt means higher taxes in future, and more money taken out of the productive (i.e. private) sector of the economy, to be spent in the unproductive (i.e. public) one. And that's not going to do a struggling economy any good at all.

A much better recipe for recovery would be to strictly control government spending and drive out government waste – that's what recessions do in the real economy; the public sector shouldn't be any different – while easing the burdens on business, strengthening the incentives for wealth creation, and putting money back into people's pockets. Here are some ideas politicians should be considering:

  • Reduce the uniform business rate: For small businesses this can be a major problem since it is based on the rateable value of commercial premises, rather than ability to pay (i.e. profit).
  • Eliminate employers' national insurance contributions: These 'contributions' are essentially just a tax on jobs – with unemployment on the rise it really makes sense for them to go.
  • Stop the rise in the small business corporation tax rates: Following the last budget, the tax on small business profits has risen from 19 to 20%, and is set to rise another 2 points in 2009.
  • Scrap the climate change levy: It doesn't do anything to combat climate change and it poses a significant burden on businesses – especially energy-intensive manufacturing ones that use a lot of electricity.
  • Reduce the burden of business regulation: First, stop new burdens being introduced. Second, scale back existing burdens. Third, simplify administration to reduce costs.
  • Get rid of stamp duty: This tax on share and property transactions makes little sense at the best of times, and less still when those markets are in trouble.
  • Encourage private investment: Get rid of taxes on capital gains, dividends, inheritance and savings.
  • Simplify and reduce corporation tax: Get rid of all the exemptions and complications – just have a single low rate on operating profit.
  • Raise the personal allowance: Take low-earners out of the income tax net, and put more money in everyone's pocket.