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Manchester’s Mixed Messages: The High Tax Threat to High Productivity

 

The Prime Minister set out his stall for a high skill, high productivity labour market in Manchester this week.  But for Britain’s businesses to boom, a low tax economy is also needed. 

Many Conservatives this week left Manchester puzzled. Boris Johnson was upbeat. His first address to the conference as Prime Minister was winning in its charm and reassuring in its reach. But it was worrying in its substance. He, and the conference as a whole, left the audience with two, conflicting messages. The country must become a high skill economy. But it must also pay higher taxes to cover higher public spending.

On the one hand, Johnson had already announced that the solution to HGV driver shortages, empty petrol pumps and supermarket shelves, was not to pull ‘the lever of immigration’ to import cheap labour, but to improve training and pay more. On the other hand, he now told delegates that to avoid more public debt post-Covid, tackle dire fiscal balance sheets, ‘fix’ NHS waiting lists and social care, tax rises were on the way.

Although the delegates applauded, the speech did not add up. In the country no less than the hall, the two messages seemed incompatible.

The problem is not that the UK has no high productivity, high value, high skill industries, but these are in short supply in the once prosperous heartlands of the industrial revolution. Indeed, where the UK excels, Britannia rules the waves, salaries often pushed up by imported labour!

Financial services and its array of activities, from banking to insurance benefit from a highly educated and trained workforce, including lawyers, actuaries and accountants. They helped to put the City of London in the lead globally, overtaking Amsterdam in the 17th century and Paris by the end of the 18th, rivalled today only by New York. Another sector, Britain’s universities, also leads globally – one fifth (18 percent) of those studying in British universities do so overseas, with one pre-pandemic tally indicating the UK was second only to the US with its campuses in countries from Brazil to Ghana, Qatar to China, South Korea to Malaysia and Singapore.

These historic regions and their towns were failed by government as industries closed their doors throughout the 20th century. That was not simply because government didn’t ‘level up’. Rather it deliberately ‘levelled down’. Grammar schools were forced to go comprehensive, the curriculum dumbed down and the exam system followed suit. Vocational schools and work-based training, suffered collateral damage. Though some grammar schools survived and skilled workers found jobs with foreign companies establishing local plants, the overall picture was bleak. Children in regions blighted by the closure of local industries were condemned by an education system, the standards of which lagged lamentably behind high performing schools in the EU and Asia. Escape routes came piecemeal – Thatcher’s grant-maintained schools in the 1980s, Blair’s academies in the 2000s, Gove’s free schools after 2010 along with his academically aspirational curriculum and exams. But generations were lost to the vandals who destroyed the opportunities provided by good schooling.

Boris need only look across the channel to see why the Germans and have higher productivity whereas the UK, which led the industrial revolution, has less. Their knowledge-based economy results in high productivity, with higher earnings per hour, whereas ours lags behind that of France and Germany. Unlike Britain, these two G7 countries have no shame in nurturing the brightest and ablest through selective education systems, Germany from 12, France from 16. Each also has ambitious professional and vocational training schools, Germany more so than France. Pupils on the vocational and professional route continue maths, language(s), history, IT and subjects relevant to their training, to equip them for the demands of today’s rapidly changing product market. Teachers take their place in the classrooms, educated in their subjects, not indoctrinated in sociological theories of race, gender and class, respected masters of their profession or craft.

Nonetheless the UK has one great advantage over its two continental rivals, that of tax and regulation. Their economies are more centralised and more burdened by the rule books of the EU. Both are more highly taxed, France’s more so than Germany’s, with success penalised by heavy tax.

By contrast the ‘Anglo Saxon’ model is nimble, flexible and open to new entrants, underpinned by a preference for low tax, by the UK’s laws that allow for risk taking. In the 1980s and 1990s UK tax levels were cut. Though rising again from the end of the 1990s, nonetheless UK tax revenue even in 2019 was 33 per cent of GDP in 2019 according to the Institute for Fiscal Studies. The figure for France was 45 per cent and that for Germany 39 per cent.

That the UK has competed effectively with its nearest G7 rivals, France and Germany, owes much to its relatively low tax, market-friendly, open economy. It has done so despite the legacy of low productivity and the failure of the system to educate and train the young.  Boris Johnson is right to tackle this failing by plans to improve training and for ‘levelling up’. But if, as he now threatens, to tax and spend more, he will take from the economy with one hand what he gives with the other. He will lose the competitive advantage brought by a lower-tax economy.

Dr Sheila Lawlor

Dr Sheila Lawlor is Politeia’s Founder and Director of Research. Her background is as an academic historian of 20th century British political history, having started her working life as research fellow at Sidney Sussex College, Cambridge and Churchill College, Cambridge. Her academic publications include Churchill and the Politics of War 1940-41 and for Politeia she has written on social, economic and constitutional policy.

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