Commentary: UK Needs Tax Cuts, Not Money Printing
So we've had the cuts, now it's time for the growth. That's the message at Monday's annual CBI conference - and it's the right one.
George Osborne may have hinted at some pact with the Bank of England whereby more quantitative easing offsets the government's austerity drive, but what we really need is a supply side transformation. Specifically, targeted tax policy that encourages business of all shapes and sizes to invest and individuals and funds to invest in business.
In a CBI survey of reasons for companies not to invest in the UK, tax comes pretty much at the top and this is despite the coalition government's pledge to reduce headline corporation tax. Other areas that need attention are capital allowances, intangibles like intellectual property, the treatment of R&D and especially the tax on profits of foreign holdings.
And although the CBI doesn't comment on personal tax policy, it's about as close as I've seen them come to criticising the 50 percent top rate of income tax. In the words of one survey respondent, "it's impossible to attract staff to the UK" and that's because of current personal tax rates on income, capital gains and changes in pension rules. And of course if you can't attract staff you're not going to invest here.
Not that I expect changes to personal tax, there's too much politics involved, but we do need to encourage business investment with targeted fiscal policy. Investment-led growth is the only way we're going to generate the higher tax receipts needed to pay down our debt, but I fear the government will hope for more expansionist monetary policy instead.
What Will Do the Trick?
As far as the effectiveness and need for more quantitative easing is concerned, I remain deeply unconvinced.
On Tuesday, the first estimate of gross domestic product for the third quarter should show a rate of growth of 0.4 percent from the second. That's hardly a number to cause panic, but plenty at the Bank of England believe things could look very different in two years time and that's a reason to act soon.
It's this two-year time frame that former Deputy Bank of England Governor Sir John Gieve tells me could be used to explain moving on more quantitative easing even if consumer price inflation is still in letter-writing territory at 3.1 percent.
Central to the view that inflation will eventually come down is the "output gap." But as both Sir John and another former MPC member Kate Barker say, measuring this with a degree of accuracy is very difficult. In fact it's so difficult, I believe it folly to focus too much on this while not giving enough attention to the impact of global inflation on British domestic prices.
On its own inflation mandate it's hard to see how the bank could justify more quantitative easing, let alone justify it as a tool to stimulate growth. I've yet to hear one convincing argument on why reflating assets through more QE leads directly to a CEO deciding to hire more people in this country.
On the other hand, some targeted tax policies, combined with liberalisation on things like regulation, might just do the trick.