domingo, 30 de abril de 2017

Britain’s misplaced sense of economic superiority

Britain’s misplaced sense of economic superiority

The UK neither has US-style low taxes nor Germany’s level of public services
Chris Giles

APRIL 27, 2017 by: Chris Giles

Britain is traditionally confident about its economic place on the planet. With the fifth-largest economy in the world, the UK cleverly combines American levels of taxation with a European welfare state. Theresa May repeated 11 times in parliament on Wednesday that the country boasted a “strong economy” that depended on her “strong and stable leadership”.

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On some counts, the prime minister is correct. Britain’s economy is no basket case but as a nation we suffer from misplaced economic superiority and exaggeration of our success. It is time for some truth telling.

On current exchange rates, Britain is the world’s fifth-largest economy, but no one seriously believes it produces more goods and services than India, Brazil or Indonesia. On a purchasing power parity basis, which accounts for what money can actually buy, the UK comes ninth in the world. That is still big but not necessarily big enough to justify a single seat on the board of the International Monetary Fund when India, Brazil and Indonesia are forced to share. The UK’s prosperity level is not even in the top 15 per cent of IMF members.

While Britain enjoyed a relatively strong period between 1979 and 2007, the performance of the past decade, overseen by Labour, Conservative and Liberal Democrat ministers, was weak. That strong economy hailed by Mrs May had one of the deepest recessions and weakest recoveries of its peers. Greece is the only advanced nation with lower real wage growth since 2008.

Rather than enjoying US taxation levels with European levels of public services, the truth is that the UK sits uneasily between the two. At 36 per cent of national income, the tax burden is 6 percentage points of gross domestic product higher than in the US. Spending on public services is severely strained: at 39 per cent of national income, it is 5 percentage points below that of Germany.

The only way for Britain to be able to boast a US level of taxes with European service standards would be for it to have much higher productivity than both. That way, a low tax burden could produce so much tax revenue that the nation could buy the desired standard of public services with the tax rates it wants to pay. Much as it would be lovely to highlight Britain’s productivity as a national strength, it is actually Britain’s international weak spot. The US, Germany and France are far ahead of Britain in the productivity league table and output per head and per worker does not even match that of Italy.

After Brexit, public finances, taxation and services are likely to dominate the coming election debate as always. The political arguments will sadly be about the trivialities. Are the Tories breaking promises if they do not guarantee to lock the rates of income tax, national insurance or value added tax? Does Labour understand who in Britain is rich and can afford to pay a lot more tax? Should ministers guarantee the state pension will rise in line with the highest of prices, average earnings growth and 2.5 per cent in perpetuity?

These are all important questions, but cannot be answered unless Britain decides the sort of country it wants to be. We are stuck in the middle without low US tax rates, without German public services and without even Italian productivity levels. Once, this compromise seemed to satisfy the public. That is no longer true. The public become angry with politicians who contemplate higher taxes, are furious that public services are under such pressure and become incandescent if anyone suggests productivity-enhancing reforms that involve building projects near their homes or foreigners improving the dynamism of the economy.

Britain likes to look at the eurozone and laugh at its tendency to kick decisions into the long grass and stall necessary reforms. We need to get over

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