On 13 February 2020, Rishi Sunak replaced Sajid Javid as chancellor of the exchequer, making Javid the only chancellor to never deliver a budget. While we’ll never know what was going to be included in a Javid budget, recent reports suggest the highlights would have been substantial tax cuts, as well as increased funding for infrastructure, healthcare and policing. Indeed, during his short tenure as chancellor, Javid always seemed to act as a force against irresponsible debt-financed spending rather than a facilitator of Boris Johnson’s economic state expansionism.
Sunak, on the other hand, seems to have been appointed as someone more willing to work with the Johnson-Cummings establishment. Although he’s likely to preside over some expansions in the size of the state, from his professional and political experience it’s easy to conclude that he’s no statist by nature. So, if he’s reading this, here are three crucial long-term issues affecting the UK and how to solve them.
First, a huge problem for Britain as a whole is industrial decline. Sadly, it seems to have been accepted that a natural byproduct of development is deindustrialisation, and the approach of all governments from 1979 onwards seems to have accepted this. Why else would the annual rate of output per house have grown just 0.3 per cent since the global financial crisis? A huge reason for this is the design of our tax system, specifically in not allowing for almost any cost recovery of corporation tax. This is why the Tax Foundation ranks us second to last worldwide in this regard.
In simple terms, this means that companies will not be able to deduct the tax obligation of long-term investments like machinery and premises. This makes it much more difficult for firms to invest and create technical economies of scale, therefore preventing large jumps in efficiency.
Currently, Estonia is the best example of a country doing this. This is how they’ve managed to create the most competitive corporation tax regime in the world, even though they have similar rates to the UK (which sits in 16th place). By transforming the way we allow companies to invest without having to pay the additional burden of taxes, efficiency will follow. This creates a much greater opportunity for the old industrial hubs to begin to resurface and take advantage of the potential that this country holds.
The next problem is climate change. Although successive governments have taken some great steps in addressing the issue – evidenced by the 25 per cent fall in emissions since 2010 and the fact that we’re at our lowest rate of emissions since 1890 – this does not mean that there’s not more to do.
One way that seems to be universally popular is the adoption of a carbon tax. This would be a gradually rising tax on carbon emissions which would not stop rising until net zero has been reached. It’s simple economics that where there is a negative externality, a way to fix it is to tax it. This increase its price and forces producers to switch to less carbonising methods of production.
This is not just a theoretical belief backed by economists across the political compass, but a sensible evidence-based approach. Australia is the clearest example of this. In 2011, carbon pricing was introduced as part of the Green Energy Act, which was repealed just three years later by Tony Abbott’s government.
Within six months of its introduction, there was a nine per cent decrease in emissions from electricity generators. However, upon Abbott repealing it, greenhouse gas emissions have grown by 1.3 per cent per year. Carbon taxing works and if we’re to take the steps necessary to lead the world in providing a good example of how to decarbonise they’re a great way to do it.
Finally, the biggest woe of them all is housing, and this is a problem in Britain as much as it is anywhere else. Indeed, in England, the average house price rose by 1.7 per cent in 2019. And while a lot of housing powers are devolved to local government and other ministries, the upcoming budget could make a big difference.
Liberalising our scandalously outdated planning laws would be a start, along with introducing a land value tax as an alternative to business rates. Stamp duty, too, is an incredibly damaging tax that needs to be abolished. It currently raises £13.2bn while business rates raise £29.3bn, so we would, of course, have to find a way to make this money up.
A land value tax would do that while at the same time incentivising home selling. This works because even unused land is taxed, so it incentivises the efficient and productive use of land. These would be quite radical overhauls of the system, but if implemented they would have a hugely positive impact across the UK
All of these ideas aren’t just debt-financed promises, but they are evidence-based, fiscally responsible measures to improve people’s lives without damaging future generations. By implementing these reforms, Rishi Sunak could usher in a new age of prosperity just as the UK seeks to make the most out of these next few crucial years.