Is the IoD putting business before growth?

In the year and half since the coalition government came to power economic growth has been lacklustre at best. In the second quarter of this year the Bank of England and the Office of National Statistics put the UK economic growth figure at 0.2%. If the economy does not improve the government will face dire political consequences at the next election. In addition they risk not meeting their budget deficit targets due to the lack of growth in tax revenue associated with periods of economic stagnation.

The Institute of Directors (IoD), a professional members body made up of the directors many private businesses, has suggested several reforms to government policy that they believe will boost growth. I believe that economic progress is not at the heart of these proposals but making conditions easier is for private business is. These changes are steeped in the ideology that if markets are deregulated and taxes reduced then businesses will flourish and the economy will grow.

I could write an article on the motivation and the advantages or disadvantages of each of their proposals, but instead I will summaries and quickly evaluate each below.

Cutting corporation tax to 15% by 2020

This assumes private business is being suffocated under oppressively high corporate tax rates which it clear it is not. It also ignores the issue of where in their tight budget the government would find the money for such a give-away.

Improve labour market flexibility

This basically breaks down into making it easier for firms to hire employees (reduction in security checks and equal opportunities quotas) and to fire employees. In times of high unemployment labour markets become more flexible as jobs become scarcer. There is a limit to how flexible labour can be as there are ultimate restrictions of people’s job search such as being tied to a geographical area by having a family.

Ring-fence transport, energy and IT and telecoms spending

This does make sense, cutting government spending is having a negative effect on growth, especially during a time when business are being cautious and not investing. I have said before that infrastructure investment will suffer due to the short-termism of the government’s market reforms.

Ensuring that energy policy "does not sacrifice UK competitiveness for green credentials

The government commitment to investment in Green energy is one of their better ideas. It creates job and develops the infrastructure of the country. It could potentially lead to a whole new industry which we will be an international leader in. Also having “green credentials” attracts much needed foreign investment to the UK.

Expand free school provision with profit incentives

The profit incentive will not make our public services more efficient. See my previous article on this topic here.

End the £100,000 personal allowance taxation "anomaly"

This is the idea that those earning £100,000 a year are paying more tax then those earning £150,000. This is cover for cutting taxes on the wealth which is deeply unfair during a time where government cuts are hitting the poor.

Intensify competition policy, both domestically and within the European Union

Intensifying competition is synonym for privatisation. As I said have before, it is the belief that the profit maximising incentive can be used to harness the power of human selfishness to deliver efficacy gains which can create new inefficiencies through perverse incentives. Also some of the IoD’s members represent monopoly or oligopoly industries and if they want to increase competition in the economy they should consider breaking up the strangle hold large companies have on certain industries.

Carry out radical civil service reforms to promote deregulation

This is based on the myth that there are unrealised business opportunities that are blocked by cumbersome legislation. A lot restrictions placed on business can be for good reason, such as to protect public safety or prevent a single firm from becoming disproportionately powerful. Deregulation will only encourage firms that cut corners and will spur a ‘race to the bottom’. There can be net benefits for the economy by working within the existing legislative framework.

Reduce political influence over infrastructure planning

More deregulation. More privatisation. One would think that there had never been an economic boom in the past as private business is clearly wilting under oppressive government over-regulation.

Reduce public spending to 35% of GDP by 2020

This also means create business opportunities by cutting government services. If public spending falls then that means that some services will have to move to the private sector. Creating opportunities for businesses to deliver service is only one of the many roles of government. More important roles are providing essential services to the public and ensuring there is an eco-system that encourages economic growth. Cutting spending on the economy and raising unemployment does not create confidence in private business and can lead to a stifling of investment.

Repatriate key employer power rules from the EU

This is another by word for making labour markets more flexible which is also known as making jobs less secure and repealing employment rights.

It will come as no surprise that the IoD has also called for the scrapping the top 50% tax rate on income. This is itself a further example of the neo-liberal political agenda being pursued by the IoD above the needs of the economy. It is also worthy of note that a reduction in taxation will cause the budget deficit to rise.

Privatisation may seem like a good way to boost the economy in short term but in the long term it can lead to gaps in services which used to be filled by the government but are now empty as no firm can make a profit in these areas or delivering these services.

Degradation can be dangerous in certain industries where government oversight is seen as in the public interest. For example, in planning where rushing the approval of new construction projects can lead to unsafe buildings or projects being placed in the wrong location.

These changes are ideologically and not economically driven. They have the interests of the IoD’s members at their heart, i.e. directors of (mostly larger) private businesses, and not the health of the economy overall. The government would do well to avoid pandering to invested interests when economic stability is at stake.