The economic mission for 2011 – growth
January 10, 2011
Forget national sovereignty or control orders, it is the thrust for economic growth that has pride of place in January’s grid for government action.
At its heart must be a restoration of the UK’s traditional reputation as an outward-looking trading nation and the liberation of our businesses from red tape. Somewhere in a globalised economy that is proudly ‘open for business’.
Most of the UK’s economic competitors are desperate to break into developing markets in China, India and south east Asia. Financial services and its vast array of associated professions has provided this country with an enormous competitive advantage in this regard, not least as the increased wealth and propensity to save from people in these new markets will ensure that this sector will continue to grow rapidly in the decades ahead. Whatever the distaste for bankers’ bonuses, it is firmly in the national interest that the City of London and the UK maintain its global pre-eminence in this highly mobile sector.
After some weeks of ‘banker-bashing’ and idle threats about draconian regulation from some quarters of the coalition, it was tremendous to hear David Cameron yesterday make a robust defence of the UK’s financial services strength. In the heat of a General Election it was forgivable not to hold back in joining the public criticism of the banking industry. Now, however, with over four years until the next General Election, the government is right to show leadership on the issue, even if the general public are still to be won round. David Cameron was also spot on in his balanced analysis (see my CH article of 4 December 2009) as to why these strictures should equally apply to Lloyds Banking Group and RBS, in which the taxpayer still holds sizeable stakes.
Looking ahead, what the financial services fraternity now need is greater certainty that we truly are moving beyond the ‘to bash or not to bash’ debate. The City broadly accepts that things cannot be the same as they were – indeed many bankers would point to the concrete changes that have been made to their organisations since the tumultuous events of 2008, particularly with regard to the levels of capital they hold. Unfortunately with the Banking Commission (whose work will include an examination of whether to break up our biggest banks) not due to report until September, and the debate still not settled over the 50% top rate of income tax, there is the perception that the banks are still fair game. Many financial businesses are now spending huge sums trying to second-guess what regulations might be coming over the horizon in this environment of damaging uncertainty. When such uncertainty encourages the holding rather than lending of capital, regulation becomes a problem not just for the banks but for the wider economy.
Naturally free trade is promoted best by a competitive, certain tax system. We have already done some good work on corporation tax (which will be reduced in each of the next four years) and entrepreneur’s relief, but the same must also apply to our income tax rates which are now amongst the highest in the developed world. It is encouraging to see that the case for economic efficiency and maximised tax-takes is being made strongly, even when most of us can appreciate the political difficulties in reducing higher-rate taxation levels at a general time of austerity and rising living costs.
Open trade applies to human capital too. I have written recently on ConHome about immigration. I understand why some of this is an unpalatable message for many Conservatives – and flies in the face of our (in my view unwise) manifesto commitments. However, sustained growth in this difficult era will only be promoted by private sector commerce and global businesses based here will want to recruit the most talented people. This should be encouraged, not restricted, if the UK is to be truly open for business.
The same applies to students who come to study here will return to India, China and elsewhere as lifelong ambassadors for this nation. Similarly if the UK is to be home to global leaders in all business sectors it needs to be open to the brightest and best talent internationally. The sad corollary is the threat of a brain drain. Indeed I take little pleasure in being proved right in something I said several times in parliament in 2004 and 2005 as Shadow Minister for London. I predicted then that the emergence of an access regulator interfering with university admissions would turn what had hitherto been a trickle into a flood of the UK’s most talented school leavers deciding to study for undergraduate degree overseas (predominantly in the US). This has now happened and it will be sobering to see how many (or few, perhaps) of these bright, ambitious Britons return to these shores…
Closer to home, it is worth mentioning some of the concerns from business people coming through in my constituency postbag. Alas, many lament that while the government talks mistily about support for SMEs and the expansion of Britain’s trading links, politicians have no real understanding of the risks and sacrifices taken by business people in trying to generate wealth.
Of imminent concern is the Bribery Act 2010 which is due to come into force in April. No one would dispute the importance of inculcating an ethical dimension to the conduct of British companies trading overseas. However, this little poison pill from the last government does rather more than penalise corruption – it reverses the burden of proof in any legal proceedings arising from international trade dispute. In essence the potentially draconian penalties that will surface when a business deal goes wrong are likely to dissuade many highly respected British businesses from trading abroad, particularly in the developing world.
One constituent, who works for a 300 year-old wine and spirits business, is keen to take advantage of the growing interest in the Far East for whisky but is fearful of the risk. As he advised me, ‘I have plans for Board approval to set up a joint venture in China. The non-executive directors are challenging me not on the business case or on the opportunity but on whether we should risk the venture because of inadvertently breaking the law under the UK Bribery Act. Despite Mr Cameron’s advice to expand into the new and growing markets of the East, I cannot recommend to the Board that we expand because we cannot prevent our partners doing business in the country in the ‘normal’ way’.
Similarly, a number of dentists have written to me in despair at another new 2011 regulation. On 1 January, a requirement for dentists to register with the Care Quality Commission (CQC) came into force. At a sweep, one constituent in the profession advises me that his small practice will now have to find £40 000 per annum to meet the costs of compliance – ‘including £26 000 to pay the salary of an extra member of staff employed solely to ensure our business is abiding by the new rules’. He suggests he will have to stop taking on NHS patients so that he can meet the huge bill through his more lucrative private practice.
Most businesses are not interested that the Bribery Act and the CQC regulations are Labour in origin. They will reserve their anger for the government that has brought them to bear.
We must be mindful too of the unintended consequences on small businesses when, in a bid to reduce the deficit, government contracts are cancelled. A constituent operating a small financial services business recently advised, ‘I have faced a ruthless, largely unintelligent and exceptionally unpleasant series of demands from the Inland Revenue for tax. This has drained my energy, wasted my time and severely hampered my ability to restore my business to profitability as well as exposing the Inland Revenue as incompetent. The underlying problem was this: the IR, part of the government, was demanding a large sum of money, which I could not pay, because another part of the government had reneged on one contract, cancelled another and delayed payment on a third’. He had been left fearing that the coalition’s pro-business promises might be hollow.
In short, our rhetoric on the liberation of businesses must be grounded in reality. They must not just be told we are on their side – they need to feel it with demonstrable action. In this regard the government’s review of the tribunal system, as well as the other progress I have mentioned, is a welcome start down this road. But we must relentlessly pursue our task of giving British businesses, large and small, all the tools they need to repair our confidence-battered economy. Politicians must never forget that it is only their energy, innovation, enterprise and freedom in the global market place that will provide the growth essential to recovery.