From the November 4, 2009 Daily Telegraph
November 4, 2009
by Irwin Stelzer
When the shadow chancellor laid out at his party conference his plan to restore sanity to the nation's finances, I distressed him by dubbing the talk appropriate for a bookkeeper, but not for a man who aspired to manage the British economy. I was right about the speech, but wrong about the man. For one thing, his boss had assigned him the task of warning voters that austerity is to be their lot during the first Tory parliament. None of the view from the mountaintop of a land of milk and honey, reached after a hard climb. That pleasurable prospect David Cameron reserved for his own speech.
For another, George Osborne has more-than-properly-timed Tory cuts in mind to reverse Britain's decline. Good thing, since last week brought two bits of unnerving news. First, the announcement that the American economy grew in the third quarter, and that its recession might just about have run its course, left the UK the only major nation in which green shoots have not broken through the stony ground of unavailable credit, a threatened currency, and an International Monetary Fund poised for a visit should the rating agencies decide that enough is enough, and downgrade the country's credit rating.
Then came the report by Bloomberg that its poll of investors, traders and analysts on six continents showed that London has dropped to third, behind New York and Singapore, as "investors' preferred place of doing business". To add to the gloom, the consultants Kinetic Partners LLP reported that they have helped 23 hedge funds move to Switzerland from London in the past 18 months, with more packing their bags.
Labour can rightly claim that the Opposition must share the blame for the threat to London's central role in international financial markets. After all, it was Osborne who proposed to roll up the welcome mat by taxing foreigners doing business here, a suggestion eagerly adopted by Gordon Brown and Alistair Darling. And it is Osborne's team who tell me they want to reduce the relative importance of financial services to the British economy – presumably to divert resources to the production of widgets and other stuff that China's $1-per-day labourers turn out in the millions. A new sort of industrial policy: instead of picking winners, pick losers, and ignore the financial sector, in which Britain has a huge competitive advantage conferred by the English language, a time zone that makes it easy to do business around the world, and an intellectual infrastructure of traders, bankers and advisers.
But now Osborne seems to have got the message: cost cuts and tax increases cannot significantly reduce Britain's budget deficit. Only economic growth can do that. The shadow chancellor has given me permission to reveal the contents of a private communication that, in my view, demonstrates that there is more to his talents then bookkeeping – and his skills as political hitman for the Tory party, a role assigned to him by David Cameron, and one that makes it difficult for City observers to judge Osborne's proposals on their economic merits, rather than as mere political ploys.
Osborne agrees with Cameron that it would be impolitic for a party led by rich Etonians to repeal Brown's new 50 per cent tax. But he will promise to abolish it once the deficit has been brought under control and the freeze on public-sector wages lifted. It is impossible to predict whether high earners will believe him, or continue packing. He also plans to "reduce corporate tax significantly", perhaps in steps, until it is no longer at levels that encourage businesses to explore the possibility of moving headquarters and other operations to jurisdictions with lower taxes and – this is important – less intrusive tax collectors who do not assume that every businessman is a crook.
Osborne also plans to induce reinsurers to abandon sunny, regulation-light Bermuda for less sunny London; locate a Treasury minister in Brussels as part of a programme to represent Britain more vigorously when eurocrats turn their attention to financial regulation; and rejig regulatory responsibilities to prevent some of the abuses that have come to light in recent years.
So far, so good. But he will have to do a lot more if the shrinkage of the economy is to be converted to growth at more than an anaemic level. Anyone who has started a business knows what a nightmare it is – a mountain of paperwork, Treasury officials determined to have several pounds of flesh, ludicrous health and safety regulations, workplace rules that make it difficult to operate efficiently, banks that see new businesses as credit risks rather than as potential clients, taxes that penalise success.
I once asked Ed Balls to put on a disguise and open a small business here, and then repeat the process in the US. He declined. Osborne might consider doing just that. And then add deregulation, tax cuts, and common sense to his admirable but only half-formed programme to make Britain so business-friendly that economic growth produces the tax revenues he will need to make a dent in the deficits he will inherit, and to make good on his boss's spending promises.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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