Boris’s statist policies will hurt the economy

Ben Ramanauskas

December 13, 2019

During his election campaign, Boris Johnson announced a raft of policies which he hopes to implement by January 2021. Among these are new state aid rules to allow the government to intervene to support failing industries, a commitment to scrap the “tampon tax”, and requirements for public bodies to “buy British” and support local areas.

These are all dreadful ideas.

Let’s start with the state aid rules. It’s obviously sad when a business or an entire industry goes bust. People lose their livelihoods and often entire towns and cities are left devastated. However, bailing out businesses and industries by either giving them money or imposing tariffs on imports is not the right thing to do.

It is not a sustainable solution to give huge amounts of money to unprofitable firms. It might keep the wolf from the door for a little while, but one month, six months or a year down the line, they will need bailing out again.

It’s also deeply wrong to place the burden on members of the public by using their taxes to save a struggling industry or to increase the cost of living by imposing tariffs. Such a move might help a handful of people, but it hurts far more.

The capital tied up in these struggling firms and industries would be much more efficiently used in other companies and industries. This would boost productivity in those areas, creating jobs and boosting the economy in the process.

State aid would also hamper the UK’s ability to strike new free trade deals. One of the main benefits of Brexit is that the UK can embrace free trade, not just with the EU but also the rest of the world. Free trade agreements generally contain provisions that governments won’t offer their own industries special treatment in the form of bailouts and tariffs.

If the Conservatives are serious about helping struggling businesses and industries then they should focus on cutting damaging taxes which discourage investment and keep productivity low, such as corporation tax. They should also use the opportunity of leaving the EU to review the country’s regulatory framework and cut the red tape that holds businesses back.

People losing their jobs is a tragedy, especially if they live in an area where there are not many jobs or if they do not have the skills or qualifications they need to find new work. But instead of protecting the past at the expense of the future by bailing out failing industries, the government should scrap universal credit and replace it with a universal basic income which would provide a true safety net. It should also commit to providing funding for people to be able to retrain to acquire new skills.

As for scrapping the “tampon tax”, this will no doubt be popular, but it would be a mistake. This is because it would add yet more complexity to our already ridiculously long and complex tax system.

There are too many goods and services in the UK which are either exempt from VAT or are on a lower rate. This creates economic distortions and is also a burden on businesses who have to comply with it.

Rather than tinkering with the VAT system by making yet more products exempt, the next government should take the opportunity provided by Brexit to reform VAT. It should scrap all exemptions and levy a single rate on all goods and services.

Such a move would allow a much lower rate to be levied and would bring in a large amount of money for the Treasury. This would give the government room to cut some more of the most economically damaging taxes, as well as introduce more targeted help for the poorest people in the country.

Of course, period poverty is a real problem, but abolishing the tampon tax is not the solution. It would be much more effective for the government to use the extra revenue from a broader VAT base to provide free sanitary towels to those in need.

Finally, the “buy British” and “buy local” rules for public bodies are misguided for numerous reasons.

If, for example, there are two companies, one British and the other French, which create the same product to the same standards, but the British one happens to be more expensive, why should public bodies be forced to buy the more expensive one?

Politicians must remember that public bodies receive their funding from taxpayers and it’s vital that they spend this money wisely rather than squander taxpayers’ hard-earned money in this way.

This is not just a hypothetical scenario. For example, such rules in the US increased government expenditure by $5.7bn. What’s more, a similar system in Canada increased utility prices by $500 million.

If we want a competitive economy that values innovation, creates new jobs, increases productivity and sees Britain reaching out to the rest of the world, then this proposed list of statist policies should be scrapped.


Written by Ben Ramanauskas

Ben Ramanauskas is a research economist at Oxford University and a former adviser to the International Trade Secretary.


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