The Heritage Foundation have published the 2014 Index of Economic Freedom which calculated the economic freedom of all countries around the world. The UK came 14th, the United States came 12th. The top 34 are shown below.
14th place may seem like quite a good place to be until you follow what has happened over time. The report for the UK says the following things:
- Over the 20-year history of the Index, the U.K.’s economic freedom has declined by 3 points, the second worst performance among advanced economies. Despite notable improvements in trade freedom and investment freedom, the overall gain has been offset by combined declines in the management of public finance and regulatory efficiency.
- Britain’s economy has been consistently rated one of the world’s 20 freest. However, since 2006, when it reached its highest economic freedom score ever, the U.K. has been largely on a path of declining economic freedom. Expansionary public spending has generated significant budgetary pressure. With government debt over 90 percent of the size of the economy, underlying economic fundamentals generally remain weak.
- Following the market reforms instituted by Prime Minister Margaret Thatcher in the 1980s, Britain experienced steady economic growth throughout the 1990s, but the government’s size and spending grew significantly under successive Labour governments.
- Public debt continues to rise, surpassing 90 percent of gross domestic output.
The second worst performer out of the advanced economies proves that the UK government has become too big and bloated. Not only that, but it has terrible control over its spending. The stats for the UK are shown below.
It is clear that spending controls, such as those used by the Swiss who have been able to reduce government spending from 34%GDP to 20%GDP (2003-2012), are needed in the UK. Switzerland is the 4th freest economy in the world. Over the same period, most countries increased government spending.
Another interesting point is how consistently well, Hong Kong and Singapore have performed. Throughout the 20-year history of the Index Hong Kong has been rated the worlds freest economy every single year. Why is this the case?
- Hong Kong has one of the world’s most prosperous economies, thanks to a commitment to small government, low taxes, and light regulation.
- The standard individual income tax rate is 15 percent, and the top corporate tax rate is 16.5 percent. The tax system is simple and efficient, and the overall tax burden is around 14 percent of GDP. Government spending remains equivalent to slightly under one-fifth of the domestic economy. Public debt is virtually nonexistent, and a budget surplus has been maintained even in light of increased government spending and tax rebates.
- Hong Kong is very open to international commerce, with a 0 percent average tariff rate and few barriers to foreign investment. A robust and transparent investment framework, in place for many years, continues to attract foreign investment. The financial sector remains highly competitive and well capitalized, serving as a leading global hub. There are no restrictions on foreign banks, which are treated the same as domestic banks.
But what does being more economically free actually translate to? How does it benefit the people? Here’s how:
Hong Kong GDP (PPP) = $51,494 per capita
United Kingdom GDP (PPP) = $36,941 per capita
Unemployment: HK = 3.3%, UK = 8.0%
Growth: HK = 1.4%, UK = 0.2%
Foreign Direct Investment inflow: HK = $74.6b, UK = $62.4b
Public debt: HK = <0.5% of GDP, UK = 90.3% of GDP