London and the UK need a Budget for GrowthMarch 21, 2011
Opinion piece by Baroness Jo Valentine, Chief Executive of London First, which appeared in the Evening Standard (21 March)
Where does internationally footloose business choose to invest and expand? London was always an obvious answer until the credit crisis, but now it’s not quite so clear. If London’s competitiveness remains in question, it could spell more trouble to the country’s economy.
The stalling of UK GDP growth in the last quarter and the reduced net contribution by London last year means that now, more than ever, Government needs to do more to encourage private sector growth. The time for vaguely supportive words has passed, business is looking for, and the economy needs, real action. The last Budget was all about deficit-reduction. This time the theme must be growth.
This will require political bottle. The Government has already demonstrated an admirable ability to foster political consensus (not universal but substantial) on the need for tough medicine to repair the economy. But crossing fingers and praying to a dozen gods for private growth will not replace lost public sector jobs. It is down to Government to create a conducive economic environment, including the right fiscal incentives for business to invest, to recruit and to flourish.
London should be at the centre of its focus. London’s workforce remains more productive than any other part of the country. For most of the last decade London’s net contribution could be relied upon to distract attention from the deficit in almost every other UK region – where, even in good years, tax revenue failed to cover Government expenditure. Without a flourishing London, there’s little hope of reducing the gaping budget deficit. But the elephant in the room remains London and the UK’s international competitiveness.
Airports in London and the South East are straining at the seams – international links are critical to business, but the Government’s aviation policy has ruled out any increase in capacity, before even starting its forthcoming review. Add to this the continued difficulties and perceived problems with the immigration cap and changes to the planning system which threaten to wrap proposed developments in extra layers of bureaucracy and uncertainty. It’s easy to see why London’s attractiveness is under threat.
UK tax policy isn’t the competitive asset it may once have been. Our highest rate of personal tax is out of line from our main competitors. Not good news in a city where a large proportion of businesses and their workforce are international and have experience of working across the world. Whilst no-one expects the 50% rate to be reduced in the Budget, a commitment to reducing it by the end of Parliament would send a clear signal and demonstrate that the UK is “open for business”.
Many have speculated about businesses leaving the UK, but the real issue is how all of these issues affect new investment decisions by international companies. Do they expand their London operation or that in New York; do they locate European teams here or elsewhere; do ambitious people think the costs of spending some years in London are still outweighed by the benefits? Deterring talented people from coming to London and making others consider leaving will hardly help the recovery.
The Government has acknowledged that the 50% rate may not raise any additional Exchequer revenue (as high earners move away or change behaviour to avoid it). Other commentators, like the Institute of Fiscal Studies and the Adam Smith Institute, suggest that it may actually reduce Exchequer receipts in the medium term.
Perhaps it should be no surprise that thus far Government has avoided making any commitment to reduce the highest rate of income tax. Many public servants are concerned for their job security and many small businesses are only beginning to experience economic recovery, so it probably hasn’t been at the top of Government’s political priorities. Given the current state of the economy it now should be climbing towards the top. After all, if this boil isn’t lanced now, eventually a shrinking economy will cost the Government politically as well as fiscally.
Private sector growth is essential. Government needs to be alive to the opportunities and the barriers to this growth. An uncompetitive personal tax regime is a handicap which a careful signal from the Chancellor can help to overcome. Politically, this may not be easy, but explaining a stagnant economy and high unemployment when the General Election comes around would be harder still.