Friday, October 22, 2010

UK austerity

While at least some on the political right celebrate the austerity measures being imposed by the UK government, I'm not sure it is time to uncork the champagne. Reductions in public spending, while laudable, need to be paired with structural reforms and liberalization measures to help dull the pain and provide the economy with new opportunities for growth. A spoonful of sugar to make the medicine go down if you will.

The Wall Street Journal seems to be of a similar mind based on this editorial:
If a government is going to move people from welfare to work, it's also going to have to offer a pro-growth agenda that permits businesses to create jobs. And here is where Mr. Cameron's austerity blueprint falls short. Mr. Osborne this week has promised that he would soon introduce the "maximum sustainable" tax on banks, calling into question the future attractiveness of London as a global financial capital. The government had already announced a 2.5-percentage-point rise in the VAT, to 20%, an increase in capital gains tax to 28% from 18%, and it has no plans to bring the top marginal income tax rate down from its current 50%.

Nor does it help for the government to continue to fund fashionable environmental boondoggles, such as £1 billion "commercial scale carbon capture and storage demonstration project," or the £200 million it means to spend for wind-power generation.

If Mr. Cameron's government wants economic growth, it will have to move in the opposite direction, especially on taxes; a diet of budget cuts alone won't do it. It will also leave his government politically vulnerable to the charge that mediocre economic results are the result of insufficient spending. The truth is that government can neither spend nor cut its way to national prosperity. Its role is to create the conditions in which businesses and entrepreneurs can do it themselves.
That last sentence is key. Business and commerce thrives when there are fewer obstacles to engaging in them. The more we can do to expand economic freedom, the more economic growth we will see. While I am not familiar enough with the UK to recommend measures for its government to undertake, in the US there is no shortage of measures which could improve the economy and increase our growth potential.

This would include revenue-neutral tax reform which eliminates deductions in exchange for lower rates, passage of free trade agreements, deregulation in the airline and sea transport industries, abolishing the minimum wage, increasing the number of H-1B visas for talented and entrepreneurial foreigners, ending the Cuba trade embargo, going through the Federal Register and subjecting regulations to cost-benefit analysis just to name a few.

At the end of the day the approach taken by government should roughly be, "What are the obstacles to doing business and do they make sense?" Suffice to say there are many that do not.

There is much that can be done, and it goes far beyond taxes.

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