Eight reforms to position Britain for the coming Asian consumer revolution

We live in a truly exciting age. In the first half of the twenty-first century, the world economy could triple in size. By 2050, two-thirds of the top 30 economies are likely to be those classified as emerging today. And by 2050 the seismic shift will have only just begun. The potential sevenfold increase in per capita income in China will still leave incomes at a third of those in the US. The implications are mind-boggling, with an explosion in incomes in the Asian economies and dramatic falls in their stratospheric savings rates as well. Higher incomes and more of that income spent on consumption – it’s a dazzling prospect.

 

So how does the UK position itself to reap the dividend from this transformation in global prosperity? What do we need to do to maximise the UK’s future competitiveness? Here are eight suggested reforms.

 

Number one, we need to continue to shrink the size of the state. On current plans, the state shrinks to around 36 per cent of GDP by 2020. This would be a great achievement, but in the twenty-first century the most competitive economies will need an even smaller state. A realistic target is a reduction to 33 per cent of GDP by 2025. Ideally one would wish to push further and faster, with a reduction to 30 per cent of GDP. But a combination of the need for higher defence spending and the burden of an ageing population will be pushing public expenditure up as well.

 

I estimate that a reduction in the ratio to 33 per cent could raise the underlying growth rate of the UK economy from 2.3 per cent to 3 per cent in the long term, as resources are transferred into the more productive private sector. Lower spending would also permit a reduction in the tax burden. As the growth rate accelerates over time, the larger cake would permit further reductions in the ratio of tax and spend to GDP: 30 per cent by 2030 would be doable. Remember that an economy growing by 2 per cent per annum doubles in size every 36 years, but at 3 per cent it takes just 24 years and at 4 per cent a mere 18.

 

Number two, we need to sharply raise the share of infrastructure spending in overall public spending. A doubling in infrastructure spending to around 3 per cent of GDP is required. Combining this with a decision on airport expansion would send a strong positive signal to inward investors.

 

Number three, the UK economy requires a revolution in the tax system, with a much simpler and flatter structure, to transform the incentives to work, save and invest.

 

Number four, we need a seismic shift in the burden of red tape and employment law. One rule of thumb is that a 10 per cent reduction in red tape could create an extra 250,000 jobs.

 

Number five addresses the planning system. It is ridiculous that, on a small island, 90 per cent of the population lives on just 9 per cent of the land.

 

Number six requires more private sector product market competition in the interests of consumers – hyper-competitive markets.

 

Number 7 foresees far more competition within the public sector. A good place to start would be a decentralisation in pay bargaining to the local level (e.g. to hospitals), and a dramatic expansion in free schools. 

 

Finally, number 8 is a common sense competitive energy policy, in place of the current uncompetitive nonsense. We need more shale, and less of the damaging government policies which raise the cost of electricity.