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Unpalatable choices

29 September 2014 By Hugo Dixon

The UK faces an unpalatable choice in next May’s general election. The Labour opposition, which is currently ahead in the polls, has a somewhat anti-business agenda. Meanwhile, the Conservatives want to hold a referendum on Britain’s EU membership. If the people vote to quit the EU, industry will lose full access to its biggest external market.

To many in business, the choice seems like one between the devil and the deep blue sea. It’s not quite that bad. But Britain risks being stuck with a government that damages its economy.

Look first at Labour, whose annual conference was held last week. Ed Miliband, its leader and quite possibly Britain’s next prime minister, isn’t quite an old-style socialist. But he doesn’t understand enterprise, business or markets in the way that Tony Blair, the former Labour leader, did.

Miliband’s economic policies are mostly about interfering with the market: an increase in the minimum wage; raising the top rate of income tax back to 50 percent; a new tax on “mansions”; a freeze on electricity prices; special taxes on hedge funds and tobacco companies; further taxes on bankers’ bonuses; and yet another hike in the levy banks pay according to the size of their balance sheets.

None of these measures is disastrous. Take, for example, the planned increase in the minimum wage from 6.50 pounds per hour today to 8 pounds per hour in 2020. Although that’s a 23 percent increase, the annual rise amounts to only 3.5 percent, not much above inflation. So the plan probably won’t price many people out of the jobs market.

Or look at the mansion tax. Housing is currently under-taxed in the UK; and the richest people pay far too little. So there’s rough justice in Labour’s plan to tax homes worth more than 2 million pounds. But there are better ways of reforming the system – for example, by making Council Tax, the local property tax, proportionate to the value of the houses in which they live.

To be fair, Labour has come up with some measures that could be good for the economy. Given youth unemployment of nearly 20 percent, it is rightly emphasising the importance of training young people and getting them into jobs. It will require companies that have public contracts or hire workers from outside the EU to set up apprenticeships. It will also guarantee young people a job and remove unemployment benefit if they don’t take it.

The party, meanwhile, is promising a sharp increase in house-building. The lack of supply has pushed up prices which, in turn, undermines competitiveness and makes housing unaffordable for many young people. Labour’s main plan to combat this is to make public-sector house building a priority, (the Conservatives want to boost apprenticeships and house-building too).

Miliband also wants to increase infrastructure investment, which has been sorely neglected in recent years. He will, for example, green-light new airport capacity for London. This is vital as Heathrow is congested.

Finally, Labour’s capacity to create mischief with the public finances is limited by its promise to deliver a budget surplus before investment spending and put national debt on a downward path as soon as possible in the next parliament.

Miliband didn’t mention this key pledge in his conference speech, saying he forgot it since he was speaking without an autocue. Critics may see this as a Freudian slip. But at least Ed Balls, the Labour finance spokesperson, reiterated it when he spoke.

So a Labour government, while unappetising, wouldn’t be the devil incarnate.

Now look at the Conservatives, which are holding their annual conference this week. Their coalition with the Liberal Democrats made the right call on the budget deficit. The cuts have been sufficient to maintain the UK’s credibility with financial markets, but not so severe as to clobber the economy. The International Monetary Fund expects the UK to grow 3.2 percent this year, faster than any other advanced country.

It is this track record which provides David Cameron with the strongest case for his re-election as prime minister. Were it not for his EU policy, there would be little argument that such an outcome would be best for the economy.

The snag is that the pledge to hold a referendum on Britain’s EU membership creates a huge risk. At the moment, it looks like the people will vote to stay in the EU even if there is such a vote. That’s largely because Cameron himself will probably campaign to stay in. By the putative referendum date of 2017, he should also be able to point to some concrete ways in which the EU is making itself more competitive.

Brussels is, for example, working on plans to complete the single market in services and the internet, cut a free trade deal with America, reduce red tape and create a “capital markets union” which would boost the region’s capital markets. All these initiatives would be good for Britain.

That said, Cameron is leader of a largely eurosceptic party – and he doesn’t have a firm grip on it. The party is in danger of panicking after a second member of parliament quit at the weekend to join the UK Independence Party, which wants to pull Britain out of the EU. There is a risk that Cameron’s backbenchers will push him into making extreme demands of his EU partners, which they will be unable or unwilling to deliver. At that point, he would find it harder to argue that he had successfully renegotiated Britain’s relationship with Europe and he might even campaign to pull out of the EU in his planned referendum vote. The UK then really would be stuck in the deep blue sea.


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