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The UK needs a reform road map to avoid stagnation – The Irish Times

“The definition of insanity is doing the same thing over and over and expecting different results.” This remark is often attributed to Albert Einstein, apparently wrongly. The misattribution is a homage to his genius because the quote makes excellent sense: if outcomes are to change so must behaviour. This must also be true in policy.

As I wrote two weeks ago if economic growth had continued on its 1955-2008 trend GDP per head in the UK would now be 39 per cent higher than it is. As the Institute for Fiscal Studies notes in Constraints and Trade-offs for the next Government, taxes are “at record levels for the UK (though remain low-to-middling by European standards). Public services are showing visible signs of strain, and are in many cases performing less well than they were in 2010. Further tax rises and further cuts for most public services are built into current plans. But on official forecasts this is only just enough to stabilise government debt as a fraction of national income.” In all rather grim!

Unless one believes that any significant reforms would make things even worse, changes in institutions and policies have to be made. But here lies the irony of current politics. The Conservatives are exhausted and Labour timid. Change might be necessary, but nobody wants to talk about it, largely because significant reforms are likely to make things noticeably worse for significant groups in society.

This is the calculation behind the bland and cautious Mais Lecture of Rachel Reeves, the shadow chancellor of the exchequer. I do not know whether her political judgment is reasonable but suspect it would be wiser to seek a mandate for more radical change. But what does seem clear is that, whether before or after the election, the UK needs a new strategic framework and proposed steps towards better results.

So, here are four areas of reform.

First, the country needs a strategic vision. Muddling through is not enough. This means that the government should build a rolling five-to-ten-year vision of how the world and national economies might evolve, what skills might be needed, what investments must be made, how to encourage innovation and how to deal with the challenges of ageing, climate change and so forth.

It is only against such a vision that one can judge whether today’s activities make sense. It is also only in this context that one can have a sensible view of the priorities for immigration, education and so forth.

Second, there needs to be institutional reform. The two most important changes will need to be in the structure of central government and the regional division of powers.

The first will require a substantial shift of powers away from the Treasury. Part of this will involve the creation of a department tasked with developing the view outlined above and ensuring that the spending of departments fits within the agreed overall direction.

The second will demand a substantial review of the distribution of fiscal revenues and responsibility for spending between the centre and local governments. My view is that the framework for the latter should be the city-region, as the late Jane Jacobs argued.

Third, there seems to be no prospect for dealing with the gulf between available resources and the demands on government without higher taxes. This, in turn, will require substantial reform of today’s fiscal mess. In considering reform, a job on which the Treasury must focus, attention should go where higher taxes might lead to improved efficiency. Fuel duties should, for example, be replaced with a carbon tax, with the revenue used to compensate losers and finance the energy transition. Replacement of today’s property taxes with ones on land value, which could stimulate development, would also help achieve important objectives.

Finally, the government needs policies for saving, investment and borrowing. It must, for example, think about ways to raise private savings. An obvious one is to increase the minimum recommended rates of pension savings above the current level of 8 per cent of earnings. Again it needs to decide which public investments will be essential if it is to achieve its goals. But, as my colleague, John Burn-Murdoch, has noted, it costs vastly more to build just about any infrastructure in the UK than in peer countries. This has to change. That in turn will require big changes in planning procedures. In addition, it makes good sense to borrow to invest, particularly if the assets financed have clear market value. The government can, for example, borrow to invest in expanding the supply of housing.

The response to such ideas will be fear. This is understandable, yet mistaken: stagnation should frighten us far more. – Copyright The Financial Times Limited 2024

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