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How free is the United Kingdom?

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.

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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.

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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

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What happens when you have a big government and high taxes? Just ask France!

What happens when you have a big government and high taxes? Just ask France!

The Telegraph today:

Today it was revealed that French borrowing costs have continued to rise as latest figures revealed the manufacturing sector underperformed even Greece. The ten-year bond yield climbed as much as 4.5 basis points on Wednesday as a gauge of activity in its manufacturing sector slipped to a seven month low, to the lowest of the eurozone’s major economies.

This is a worryingly large increase in cost.

France’s manufacturing PMI slipped to 47, lower than the flash estimate of 47.1, and below the 50 mark which separates expansion from contraction. That marks the 22nd consecutive month of contraction for factory activity in the eurozone’s second largest economy.

 

“This suggests that competitiveness is a key issue which the French manufacturing sector needs to address to catch up with its peers.”

How do you solve an inefficient, uncompetitive nation? You lower all taxes and decrease the size of government. It really is that simple. Make a competitive environment, and jobs will be created.

Yet France pushes on with its hate tax of 75% for top earners, leading to a mass exodus of wealthy business people and entrepreneurs from the country, who incidentally are the people who create the jobs. 

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Falling out of the global race

I have been reading updates of David Cameron’s visit to China over the past few days and I can’t help thinking that the whole trip should never have happened in the first place.

Firstly, what is the point in the prime minister visiting a country that we can’t sign a free trade deal with (Our ties to the EU mean we are no longer able to control critical and important things such as this). Instead he has to ask them to hurry up their planned free trade deal with the EU instead which has caused unrest among EU officials here and here.

Secondly, on his trip he wanted to prove that the UK is still part of the global race. To take part in the global race you have to structure your economy to ensure that it doesn’t have a trade deficit, and that it is competitive on tax rates to attract people and businesses over to the UK. Yet he is another prime minister on a long list of backbone-less politicians. This is what the telegraph had to say about the current government:

If anyone is to make the case for difficult supply side reform, it ought to be Mr Cameron, with responsibility delegated to individual departments, rather than dictated by the Treasury as part of some Soviet-style five-year plan. In any case, beyond lip service, we’ve so far seen precious little of it. The Coalition has dabbled in education, planning, welfare and tax reform, but none of it has been transformational, while on energy policy, the Government seems to have steamed off in the other direction entirely.

What about red tape?

Any exploration of supply-side reform starts with the well-tested notion that the best thing government can do for business and the economy is simply to stay out of the way. Michael Fallon, minister for business and enterprise, has been heroically leading the unglamorous charge against red tape, but new obligations keep mounting, most recently with the start of pension auto enrolment, adding a further 3pc to labour costs.

Public spending?

Sure enough, public spending is slowly – very slowly – being brought back into line with revenues, but too much of the burden of this adjustment has been put on to rising taxes and not enough on a smaller state. Forging ahead with HS2 in the belief this will expand the economy’s potential flies in the face of the basic principle, backed by much economic research, that money ploughed back into the economy through tax cuts is likely to be far more helpful to growth than tax-funded government investment. Examples of public policy that promote self-reliance, as opposed to further discouraging it, remain all too thin on the ground.

The UK’s attitude for growth after world war two was “export or die” and “We must sell the things we like to buy the things we need”. Now it is “cut little bits here and there until growth resumes, then spend more”.

Nothing is solved by government spending, full stop.

Reaganomics vs obamanomics

Again, another great article from Dan Mitchell (CATO):

Both President Reagan and President Obama had to deal with serious economic dislocation upon taking office.

But they used radically different approaches to deal with the problems they inherited. Reagan sought to reduce the burden of government, whereas Obama viewed government as an engine of growth.

And here is the proof:

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