How can Britain Prosper in a Global Economy? or Britain, Europe and the Global Economy

- Wednesday, 6th January 1999

 

We live in a global economy.

As a result the power of national governments to control and direct their economies is limited.

The most fundamental challenge facing our country is how best Britain can prosper in this new environment.

It underlies the debates about economic policy, our relations with Europe, the issue of the Euro, and ultimately our future as a nation.

There are two sharply differing views of the strategy to adopt.

Left of centre view

The predominant view among those on the left of centre is that the reduction in the power of the state to manipulate the economy is a regrettable loss.

So they want to find a way of restoring it.

That means creating a unit of government large enough to stand up to global pressures and manipulate its own economy.

They see the EU as that essential unit.

Indeed, in the minds of many of its advocates, that is what the EU is for.

That is its principal attraction for those on the left.

They envisage an EU that is essentially protectionist ? able to resist external global pressures - and dirigiste ? able to influence the domestic flow of capital, trade and investment.

They no longer use the term Fortress Europe but that is essentially what they intend.

This shows in their talk of ?standing up against unfair competition?, ?resisting social dumping?, ?preventing harmful tax competition? and the like.

They see international commerce in military rather than economic terms.

For them it is about winning and losing - not about mutually beneficial exchange.

It is about trading blocs confronting each other - not about seeking the widest possible access to customers and suppliers.

They see globalisation as a threat rather than an opportunity, still less as a benefit.



The dangers of the left?s approach



Mistaken objective However, the whole approach to globalisation based on the supposed need to restore the state?s power to control the economy is profoundly mistaken.

It is true that government intervention in the economy was more prevalent when national economies were less integrated into the world economy.

Governments then had more leeway to direct their domestic economies through taxation, regulation, intervention and Keynesian stimulation.

And they were all too willing to use those powers.

But such intervention was rarely beneficial even in the short term and was invariably harmful in the longer term.

So it is a totally mistaken objective to try to regain such powers.

[Think of analogy for pursuing a power which does no good.]

We in the UK learnt that lesson the hard way.

For decades we assumed that the answer to any economic problem was for the state to intervene by taxing, spending, controlling and protecting.

This process culminated in the 1970s when the economy nearly collapsed under the weight of crippling tax rates reaching 98%, the dead hand of nationalisation over large swathes of the economy, and controls over prices, wages, dividends, and foreign exchange.

It was only when we set the economy free and opened it up to the world that we transformed our economic fortunes.

Since then experience worldwide has confirmed that the states which prosper most are generally those countries - big or small ? which do not tax, regulate or intervene too much.

So it would be perverse in the extreme if we of all people were to base our whole economic and political strategy on an attempt to regain the very powers which, when we did have them, nearly ruined us!



Danger of protectionism Not only is the objective of creating units of government large enough to regain power to control their economies mistaken, it would also be profoundly damaging to world prosperity.

It would be damaging because it is essentially protectionist and often based on xenophobia.

I remember the lurid, and to me somewhat shocking, posters across France during the last Euro elections.

They showed an attractive European figure being crushed between two racial stereotypes ? a grotesquely fat cigar-smoking Uncle Sam and an evil looking Japanese businessman.

The posters called on us to ?build Europe to survive? this appalling threat.

Protection and xenophobia have always had their appeal.

In deflationary times, and we may be entering a more deflationary period, their appeal is particularly potent as we learned during the nineteen thirties.

But it is precisely in such times that such policies can be most dangerous.

It was protection that turned the recession into a prolonged slump.

Of course not all those who argue for building up the EU to resist global forces do so on the basis of crude xenophobia.

Professor Giddens, Tony Blair?s guru of the Third Way reaches the same conclusion in more genteel language in his Reith lecture.

He simply asserts the need to regain control over the forces of the global economy because ?fluctuations in the global economy or global technological change do not respect the borders of nations they escape democratic process?.





How globalisation limits state?s power It is far from certain that nation states ever had control over fluctuations in the global economy still less over technological change.

But they do now have less power to control their economies

And the reason for that is that as travel and communication become faster and cheaper and wealth creation is increasingly based on knowledge and information, economic activity is becoming more mobile.

People have more opportunity to move themselves, their businesses, their savings, their knowledge to another country, either physically or electronically, if their own government taxes, regulates or intervenes too much or in an unacceptable way.

By definition governments can only regain power over their citizens by restricting their options to move ? for example by creating a single jurisdiction over the whole continent.

And the only reason for doing so would be to tax, regulate and intervene more than people would other wise tolerate.

Those are certainly not Conservative objectives.

And they are almost the reverse of what is required to make Britain prosperous.



The Conservative vision



Whereas those on the left see globalisation as a threat, we Conservatives see it as an exciting opportunity.



An opportunity for greater trade and investment.



An opportunity for greater prosperity and freedom.



An opportunity for which Britain is uniquely qualified.



Our aim should be to exploit the opportunities of globalisation to the hilt.

Far from trying to stop our businesses from moving away we should be trying to make Britain an attractive place for them and others to invest and prosper.

Our vision is simple, clear and realistic.

It is to make Britain

the lowest taxed, lightest regulated, best educated

country in the developed world.





A feasible objective

We have already proven that it is possible to move in that direction.

Over the last two decades we have moved from being one of the more highly taxed countries to being the lowest taxed major country in Europe.

And by quite a sizable margin.

The OECD forecasts that this year government spending will absorb 38.9% of national income in the UK whereas for the EU as a whole it will be as high as 47%

Lower taxes mean lower costs ? making our industry more competitive.

They mean sharper incentives ? making our economy more dynamic.

And they mean greater freedom for people to spend, give, save, and invest as they choose - making Britain a more attractive place to live.



It is harder to quantify the relative burden of regulation.

But Britain has deliberately pursued a more deregulatory policy than the rest of Europe across large areas of activity.

Indeed the combined effect of regulatory and tax policies increase the cost of employing people by 41% in France, 31% in Germany but only 15% in the UK. [check figs]



There is a less rosy tale to tell about education.

British education has had inherent weaknesses for over a century, which will take decades to set right.

In particular our schools have been least successful in developing the full potential of the less academically oriented two thirds of pupils who do not go on to do A-levels.

Nonetheless, there have been some unrecognised achievements especially in equipping the new generation for the information age.

In particular we have done more than most other countries to equip the rising generation to succeed in a world dominated by information technology.

Our schools have far more computers than most other countries and pupils emerge from school familiar with their use.

As a nation we have achieved one of the highest levels of computer literacy in the world.

Partly for that reason Britain has developed more advanced IT and software industries than most of our competitors.



The progress we have already made towards making Britain lower taxed, more lightly regulated and better educated is already producing tangible benefits for our economy.

Overall Britain has succeeded in attracting the lion?s share of inward investment coming into Europe.

We have created more additional jobs in recent years than most of our partners put together.

And our industry is now far more knowledge, skill and technology intensive than we could have dreamt of two decades ago.

[Figures for share of exports which are high tech v rest of Europe ? see Eurofacts]

We opened up the gap between our tax burden and that of our partners not by absolute cuts but by bearing down on spending while other countries let it grow faster than GDP.



In a growing economy it is possible for a tax ratio to fall while public expenditure rises if it grows no faster than national income.



Spending on Some services, like health, tend to outstrip national income. It is therefore crucial that others decline ? the key to this is social security ? by far the biggest spending department in government.



Spending on social security has grown twice as fast as GDP for 50 years taking an ever rising share of net income.



It has been the main engine of rising taxes.



It has been the main engine of rising taxes.



My reforms reversed that trend. As a result , social security spending took a declining share of national income and actually fell after my five year programme took effect.



We will need to resume the process of reform because the Labour government has actually started boosting welfare spending. Although it says a lot about welfare reform, this government characteristically talks tough and acts soft.



Most of its major measures, not least its welfare to work programme, actually increase spending.

[The only cut has been in benefits to the genuinely disabled]



There is no magic solution.



It requires focussing benefits, conditionality and encouragement for self-provision.



But success in welfare reform is a huge prize in opening up the prospect of a lower tax burden.



UK uniquely well placed to exploit globalisation

Britain is uniquely well placed to pursue a strategy of exploiting globalisation rather than seeking refuge in a protectionist bloc.

We have a number of advantages that enable us to exploit both the mobility of business and the communications revolution.

Language, location and liberalisation combine to make us the natural communications centre of our hemisphere.

Our language, English, is the international language for trade, finance, travel and communications.

In the past ports and harbours determined the location of industry and commerce.

Now airports are the magnets of growth.

Heathrow is the natural gateway to Europe, its position reinforced by the privatisation of airports and the deregulation of airlines.

As a result it already handles more international flights than any other airport in the world.

Likewise our pioneering deregulation of telecommunications has helped make Britain the communications hub of this hemisphere with major corporations moving their headquarters here for that reason.

Our time zone, midway between America and Asia, has reinforced Britain?s position as one of the three great financial centres in the world.

Our universities are regarded as world-leaders in their fields and are attracting substantial inward investment, much of which comes from outside the EU.



Incompatibility with the Euro

The objective of making Britain the lowest taxed, most lightly regulated, best-educated country in the developed world is perfectly feasible.

We have already made considerable progress towards it.

But we have to recognise that there is a very real risk that it would be incompatible with membership of the Euro.

That is because the Euro could, as many of its advocates hope it will, lead to the creation of a single government equipped with powers to tax, spend, borrow and regulate.

And it is all too likely that it will lead in that direction ? single currency, single government, single state.

After all there never yet has been a currency without a government to run it and a state to back it.

This is one more reason for keeping the pound: to see the political consequences of the Euro as well as how it works in good times and bad.

Already the Euroland countries are anxious to move in that direction with a programme of tax harmonisation.



If we were to cede powers over our economy to Euroland then, by definition, we would not be able to pursue a strategy of making ourselves more attractive to business than they wish to be.

Could tax competition go too far?



Some people assert that it is an illusion to imagine that any country can pursue its own distinctive economic strategy.

Global economic forces are now so powerful, they say, that all countries will be compelled to follow much the same policies.

This is a gross exaggeration.

The same arguments were put when we were in the ERM.

It was claimed that no individual country like Britain could set its own interest rates.

Yet once we were freed from the shackles of that monetary system, Britain discovered that it was able to reduce its interest rate and achieve both growth and low inflation.



Economic policy has always been about trade-offs.

Global mobility alters the terms of trade a country faces when exercising any instrument of policy but trade-offs still exist.

For example, there has always been a price to pay in terms of reduced competitiveness and incentives, for levying taxes.

It is up to each country to decide what price it is prepared to pay for the luxury of taxing its citizens heavily!

Clearly different countries have different preferences since the proportion of income levied in taxes varies quite widely.



But if tax harmonization were to follow our entry into the Single Currency, as many say it must, then taxes in the UK would have to rise by about a sixth to reach the current levels on the continent.

And in the longer term, things might become even worse.

The trend in Europe is for public expenditure to grow faster than incomes.

And greater public expenditure means higher taxes.



To justify tax harmonisation it is sometimes asserted that tax competition will drive down the levels of tax which countries can successfully levy below that necessary to fund the normal functions of the state.

There is no sign of this in reality.

Of course, states which did not provide basic services would not be attractive to wealth creators.

But we are nowhere near that problem.

Despite globalisation the level of tax has been rising over the last decade in many if not most countries.

The truth is that there are powerful forces in all democracies ? particularly those without the strong liberal tradition of the Anglo-Saxon countries -constantly pushing up public spending and therefore taxation.

Tax competition is simply a valuable countervailing force helping to keep taxes within bounds.



In addition to tax competition between states there will be a growing problem of levying taxes on transactions carried out on the internet.

Countries large and small will find a portion of their taxable capacity disappearing into cyberspace.

That merely reinforces the case for pursuing a strategy of making Britain a low taxed country.



Dangers of reversing existing gains

There is, however, a distinct danger that many of the steps we have taken in the direction of making Britain the lowest taxed, lightest regulated, best educated country in the developed world may be reversed by this Labour government.

The burden of tax is set to rise as a result of the government?s stealth taxes.

On its own projections, the average person will have to pay an extra weeks pay in taxes each year by the end of this parliament. [Check]

Because we signed the Social Chapter we are open to more and more regulation from the EU.

When Britain opted out of the European Social Chapter it was said by none other than Jacques Delores that this made Britain a ?paradise for investment?.

And yet this government has accelerated the pace of domestic regulation on top of that with an additional 2,600 regulations since the election.



Conclusion



Globalisation is a fact of life.



It has arisen from the twin forces of technological advance and economic freedom.

Better technology has given us greater freedom.

Greater freedom to travel.

Greater freedom to trade.

And greater freedom to question, inquire and understand the world around us.

Such global technology has already broken down trade barriers and helped to destroy tyrannies.

Globalisation even helped undermine the most encompassing and repressive state of all time, the USSR

We Conservatives welcome globalisation and relish its opportunities.

We believe that a strategy based on trying to restore state powers is doomed to failure.

By contrast we want a low tax, lightly regulated and well educated country to exploit the opportunities of globalisation.

At every stage of our history, Britain has met the changes in the structure of world trade with enthusiasm, courage and confidence.

Britain is a global nation. She, more than any other country, has the resources, people and political legacy to meet the challenge.

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