The Liberal Democrats should be applauded for focusing on business in their new policy paper, Enterprise in a fair society. In the context of the current economic crisis, the document reminds us that businesses produce the wealth that not only raises living standards, but also funds health, education and so on – a lesson arguably ignored by New Labour as they burdened firms with more and more taxation and red tape.
There are some excellent ideas. Of particular note is a proposal to incorporate a sunset clause into each new business regulation so that it is time limited. This could be an effective measure to rein back new rules that often prove costly and counterproductive.
Yet there is a problem here – that the majority of new regulation in the UK comes from Brussels. In this context the commitment to end the ‘gold plating’ of legislation from the EU is very welcome. Nevertheless, it is difficult to see how the sunset clause could be applied to directives set at supranational level. And while greater influence is sought over European policies, the experience of the current europhile government does not augur well in terms of the ability to prevent highly damaging EU initiatives.
The aim of cutting red tape is also rather undermined by a series of proposals to increase government intervention in the affairs of businesses. For example, there is the proposal to restore a public interest test to takeovers and mergers; the requirement for firms to produce a social responsibility report; a strengthening of planning laws (which are already among the strictest in the developed world and the strengthening of which will be a further impediment to competition in the supermarket sector); and far-reaching regulation of the banking sector. The approach to deregulation is therefore patchy and inconsistent.
More positively, there is a strong emphasis in the paper on reducing the budget deficit and bringing stability to the public finances. Indeed, it is stated that the emphasis should be on controlling spending rather than on increasing taxes – welcome recognition that raising taxes from already high levels would be counterproductive in the medium term.
When it comes to discussing concrete figures the document is divorced from reality, however. The £15 billion of savings identified are a drop in the ocean compared with an annual deficit of close to £170 billion. If the Lib Dems are to cultivate a reputation for honesty, they should be far more candid about the scale of reductions needed to balance the books. Unless economic growth over the next few years proves to be unexpectedly robust, severe cuts will be needed to the major areas of government spending – health, education and welfare.
The document also implies that cuts will be delayed until economic recovery becomes estabilished. It therefore appears to accept the Keynesian dogma that governments can spend their way out of recession. In fact every pound the government spends must be taken from the private sector through either taxation or borrowing. Worse still, the government spends this money inefficiently and public spending distorts the economy, making recovery more difficult.
Indeed, the emphasis on ‘picking winners’, whether through ‘balancing’ the economy away from the City of London or subsidising green businesses, is one of the most regrettable aspects of this policy paper. Clearly the Lib Dem leadership has still to learn that the best way governments can help businesses is by leaving them alone.
* Dr Richard Wellings is Deputy Editorial Director at the Institute of Economic Affairs and editor of the IEA Blog.
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