Tackling economic growth

According to the pundits, there are a number of issues that the new government will have to tackle if it wants to increase government revenues by achieving higher economic growth.

They include:

• Encouraging investment
• Reduce unemployment, and
• Improve productivity

Encouraging investment

There are already generous tax reliefs that allow businesses to write off the full cost of productive assets to reduce tax charges. Any upward movement in present allowances would reduce tax revenues and compound the current government funding crisis. It’s an unlikely component of the first Labour budget.

Reduce unemployment

In a recent press release, Liz Kendall announced that the Department for Work and Pensions will be setting out changes to employment support in a focussed attempt to improve employment opportunities for the unemployed and those unable to work because of ill health or long-term disability. According to the press release:

• Britain remains the only country in the G7 whose employment rate has still not returned to pre-pandemic levels.
• 2.8 million people out of work due to ill health or disability.
• 1 in 8 young people not in education, employment or work.
• Spending on sickness and disability benefits is set to increase by £30bn over the next five years according to the OBR.
• Too many people trapped in low paid, poor quality work, with little prospect of improving their lot in life. Of those in low pay in 2006, only one-in-six escaped it a decade later.

Liz Kendall argued:

“The fundamental problem we face is that the current system of employment support is designed to address the problems of yesterday – not today, tomorrow and beyond.

She said over the last 14 years the DWP has focused almost entirely on the benefits system, and specifically on implementing Universal Credit, and that “nowhere near enough attention has been paid to the wider issues – like health, skills, childcare and transport – that determine whether people get work, stay in work and get on in work.”

Improve productivity

Improvements in productivity would mean that output would rise without an immediate increase in the direct labour costs associated with its production. In turn, this would improve profitability and create the means for future increases in earnings.

According to government sources, the UK came fourth highest out of the G7 countries, with the US and Germany highest and Japan lowest. UK productivity was about 16% below the US and Germany.

Outlook

Much will depend on the government’s ability to enthuse the business community with ideas to kick-start economic activity. But if they continue to hold down taxation and reduce government borrowing, the only source of funding they will have to finance expansion will be economic growth. In some respects, this does present government with a classic – which comes first, chicken or the egg conundrum.