The government has realised belatedly that it wants to pursue an agenda for ' growth '. The problem with this sort of language is that it encourages government departments to take interventionist measures that they believe promote growth and improvements in productivity. These measures nearly always backfire.
The rhetoric is important because government ministers and civil servants need no excuse to intervene in the economy and, if government strategists do not promote the right message, intervene they will.
What we really need is an agenda for ' supply-side liberalisation ' or, more simply, ' economic liberalisation ' . We need to set people free so that individuals are not constrained from creating wealth and growing their businesses. Employment and economic activity should not be unduly constrained either explicitly by regulation or implicitly through the operation of the benefits system. Economic growth and employment growth happens when people are economically free – governments do not have to actively promote it.
For these reasons the IEA has been asking experts to examine supply -side liberalisation. They have come to a number of conclusions:
- The planning system should be liberalised. Currently planning restrictions raise business costs and prevent the expansion of the retail industry as well as preventing people from having the living space to which they legitimately aspire. This would not lead to the country being concreted over: currently retail space occupies an area no bigger than half the Isle of Wight.
- Regulatory restrictions on employment contracts are a big and growing burden. This government has also increased those burdens enormously, bringing in new ' rights ' for employees, raising the minimum wage and reducing the age at which a minimum wage has to be paid. Indeed, the government has further plans to impose burdens on employers. The evidence shows that such an approach locks the most vulnerable people out of the labour market.
- We have a benefits system which, despite reform, makes it very difficult for people to enter full-time work without losing huge amounts in benefits and taxes. Furthermore, housing benefit gives rights to people to live in particular local areas whereas those in work may have long commutes because of the difficulty of affording housing.
- The tax system is very complex and taxes have increased dramatically in recent years. The recent increase in VAT, for example, reduces real take-home pay for those in work whereas those on benefits will be compensated by the indexation of benefits. The complexity of the tax system bears especially heavily on small firms who have a tax-administration cost burden 16 times that of the largest firms as a proportion of turnover.
- The government’s energy policy is imposing greater energy costs on businesses and households alike.
- Increased financial regulation, the regulation of hedge funds and bank capital requirements – none of which resolve the problems that caused the financial crash – are in danger of stifling the supply of new capital to businesses.
Unfortunately, these burdens on 'producers' are not decreasing – they have increased over the life of the coalition government. Some of the measures have been inherited from the last government, some of them are imposed by the European Union, but many are home grown. The British Chambers of Commerce estimate that the cost to employers of forthcoming changes to employment regulation will be £23bn in the remaining life of the coalition. This relates to only one aspect of the supply side problems discussed above. As David Cameron surveys the dole queues (with alarming figures for long-term and youth unemployment being announced yesterday) , this should weigh very heavily on his conscience.