- Cut corporate tax to 12.5%
- Slash income tax to 15% and 28%
- Fully transferable personal allowance
- £250bn investment over 10 years on infrastructure
- Bank of England should adopt NGDP targeting
The economy is in pretty good shape, ever since coming into office in 2010 the Tories have increased employment to record levels, reduced the deficit and managed to pull us from the great recession to steady growth rates of 2%. Pretty impressive right? As a Tory, I should be overwhelmingly happy at what the Conservatives have achieved right? Well, I am happy about what my party has achieved, however, I am disappointed at one thing. Steady growth. The economy, in my opinion, should be booming at 4% per annum, instead, we are growing at a sluggish 2%. To move the needle on growth I urge the government to cut taxes and invest in economic infrastructure to boost growth
If you want to boost short and long term economic growth, tax cuts and infrastructure spending is the way to go. Although capital spending is around £50bn, the government should take advantage of the ultra-low interest rates and borrow an extra £250bn over the next decade to invest in infrastructure. If I favour borrowing to invest in infrastructure then does that mean Jeremy Corbyn’s plan to borrow £500bn over a decade is a good idea? No! The problem with Corbyn’s plan is that it would send capital spending to around £100bn (around 5% of GDP). If labour wanted to bring debt down as a percentage of GDP, the economy would have to grow at over 5% per annum for 10 years. Moreover, labour would also have to run a balanced current account budget (which they won’t do). Also, the national investment bank Corbyn wants is pointless and inefficient, the problem I have with a national investment bank is that the money raised will not be spent on infrastructure, instead, the money will be blown on welfare programmes. Corbyn’s plan is totally unrealistic and would send the debt to GDP soaring above 100% (Greece territory). My plan of £250bn would send capital spending to around £75bn (around 3% of GDP) with a current account surplus. If we aim for 4% real GDP growth which is perfectly possible with pro-growth policies, then long term debt to GDP would shrink. Deficits are not a bad thing as long as debt to GDP remains at sustainable levels, most developed nations were built on governments running a deficit.
Instead of Jeremy Corbyn’s inefficient national investment bank, the government should invest in infrastructure through public/private partnerships. Paying private companies to build stuff instead of inefficient government agencies is common sense to me. The private sector is way more efficient, quicker and cheaper for the government to use instead of inefficient government agencies. So what should the government invest in? I think the UK would benefit greatly from a tram network, most European nations have tram networks and I think it’s time the UK has one as well. Trams are better than trains for short journeys across cities, more reliable than buses and would reduce congestion making the economy more efficient. As well as a tram network our railways are in dire need of an upgrade, I think the government should upgrade the current railway lines, reopen old railway lines and build HS3. I would postpone HS2 until costs are brought down significantly, I do not oppose the idea of HS2 I just think it costs far too much. Moreover, the UK should also upgrade our roads by filling in potholes and upgrading our bridges.
The government should also invest heavily in social housing and garden cities, the UK is in desperate need of housing, especially affordable housing. On the issue of social housing, I actually agree with the left when they say “we need more social housing”. The government should aim to build 100,000 new social homes a year, however, unlike the left, I do believe in homeownership, every single new social home should have a right to buy guarantee for its tenants. New social homes should be nice three bedroom family homes that people want to live in. I would recommend new social homes should be townhouses as they are generally cheaper, I would also abolish tower blocks and replace them with affordable ‘social apartments’ which would be affordable European-style flats in and around city centres. In addition, the government should also loosen planning restrictions and expand the help to buy scheme, to avoid bubbles I recommend the help to buy scheme adopts the shared ownership scheme only. Moreover, new social homes, social apartments and private estates should be built within garden cities. Social homes and private estates would surround the main city, the main city would have shops and European-style apartments, existing cities could also be made into garden cities.
Capital investment in science, technology and employment training is vital for the future growth of the economy. One of the main reasons Israel does so well is because it invests heavily in science and technology. The government should invest in research and development, superfast broadband available to every business, invest in renewable energy and nuclear power stations. Investing in energy is essential to long term economic growth, the government should invest into how to make renewable energy low-cost and export that technology around the world. In addition, nuclear energy is the safest form of energy, the government should phase out fossil fuels in favour of nuclear power. I also think we should move towards shale gas, commonly known as fracking with the correct regulations in place to make sure it is done safely.
As well as capital investment, the UK should push through a pro-growth tax cutting bill in the next budget to promote economic growth. The government should cut income tax from 20%, 40% and 45% to the Reagan rates of 15% & 28%, cut corporate tax to 12.5% to match Ireland, fully transferable tax-free allowance, index capital gains for inflation, full expensing of capital investment, £12,500 tax-free allowance, £50,000 higher rate threshold, freeze council tax, freeze business rates and abolish the bank levy/surcharge. Cutting income tax to 15% and 28% while increasing the tax-free allowance and higher rate threshold will put more money in peoples back pockets, workers will then spend that money boosting the high street economy. To give middle England the vital tax relief they need the 45% tax rate should be abolished, 40% higher rate should be cut to 28% and the higher threshold should be raised to £50,000. The married tax penalty should also be abolished by making the tax-free allowance fully transferable, marriage is an important social institution that is unfairly demonised in my opinion. Moreover, to boost investment the government should cut corporate tax to 12.5% and make it border adjustable. Border adjustment changes the formula from export and domestic to domestic and imports, it switched the tax base from a companies production to a companies consumption. This would significantly boost investment as the effective tax rate on production would be 0%, cutting the corporate tax to 12.5% would attract businesses into Britain, they’ll all create jobs and we’ll have the prosperity we really want.
How would we pay for tax cuts and capital investment? The first thing the government should do is separate current account spending and capital spending into public spending and capital investment. Borrowing to invest in infrastructure is perfectly fine as long as long term growth rates outgrow debt. Public spending, however, should be funded out of tax receipts, not borrowing. The tax cuts can be phased in over the parliament to avoid current account deficits, although, the income and corporate tax rate reductions should be done straight away. Cutting income tax to 15% and 28% would cost around £35bn and cutting corporate tax from 19% to 12.5% would cost around £15bn, totalling £50bn. However, if including Laffer curve effects the tax cuts could actually raise revenue, cutting the top rate of tax to 45% and corporate tax to 19% has actually increased revenues, but let’s assume we have no Laffer curve effects. To pay for these tax cuts, the government should limit child benefit, child tax credits and universal credit to two children, equalise public sector pay with private sector pay, means test winter fuel payments, means test all welfare benefits (including state pension), raise retirement age, abolish the triple lock, cut foreign aid to £4bn (boost peacekeeping missions instead), abolish Barnett formula to Scotland in exchange for devo max, 4 year ban on migrants claiming in work benefits and public services, abolish police and crime commissioners and abolish government pointless departments and quangos. On the tax side dividends and capital gains should be equalised with income tax. Spending reform and tax simplification should raise enough revenue to pay for the tax rate reductions on a static basis if we include Laffer curve effects then the government would be running a current account surplus.
The costless way government can increase the rate of growth is to change regulation and monetary policy. The Bank of England should stop targeting inflation, instead, the BoE should target NGDP (nominal GDP). Nominal GDP is real GDP plus inflation, NGDP targeting is very smart because if there is a recession due to a fall in aggregate demand, the central bank will ease credit to boost consumer spending again, but if real GDP growth is high the central bank will tighten monetary policy to avoid excessive credit bubbles. I would recommend the government set an NGDP target of 5% per annum. The BoE should use three measurements, GDP, PEC (personal consumption expenditures index) and money supply. CPI should be scrapped, in my view it far more accurate to measure inflation by the level of household consumption, instead of measuring real GDP plus inflation we now measure real GDP plus consumption. For example, if GDP growth is at 1% and PEC index is only at 1%, with an NGDP target of 5% the central bank should increase the money supply by 4% to boost consumer spending. Likewise, if GDP was 4% and the PEC index was 4%, the central bank should tighten the money supply bring PEC index down to around 1%. In my opinion, NGDP targeting provides a more stable economy than the current policy of inflation targeting. Another policy that won’t the cost the government anything and boost economic growth is to repeal and not replace every single EU regulation. According to Open Europe, EU regulations cost the economy over £33bn, just repealing those regulations would boost GDP by £33bn.
To conclude investing in infrastructure, cutting taxes, repealing EU regulations and the central bank making credit available to start up companies would increase the rate of growth from 2% to 4% on an annual basis. If businesses around the world see the UK has world class infrastructure, technology and low tax rates, investment will flood into the UK. If the government wants to move the needle of growth from 2% to 4% then they should implement something similar to what I have proposed in the next budget.
This post was originally published by the author on his personal blog: http://lukedanceblog.blogspot.co.uk/2017/07/luke-george-cut-taxes-and-increase.html