January 12, 2011 | Commentary on United Kingdom, Economic Freedom

Britain's Economic Freedom is Under Threat

The 2011 Heritage Foundation / Wall Street Journal Index of Economic Freedom, published today, should make indispensable reading for the Coalition government. The highly regarded Index, a data-driven analysis of 179 economies, tracks economic freedom in ten areas, from trade and fiscal freedom and public spending, to investment freedom and property rights. It is closely followed by governments across the world, as well as investment banks and global financial institutions, and is an important benchmark guide for US firms operating in Europe, Asia and throughout the globe.

This year, Great Britain, the world’s sixth largest economy, has fallen from 11th to 16th in the world rankings, significantly behind several European competitors, including Ireland, Denmark, Estonia and the Netherlands. This is the second year in a row that Britain has ranked outside the Top 10, which is currently dominated by former British colonies: Hong Kong, Singapore, Australia and New Zealand. Strikingly, out of the major Anglosphere nations, the UK is by far the weakest performer.

Britain still remains ahead of the other largest economies in the EU, including Germany (23), Spain (31), France (64), and Italy (87), but there is no room for complacency. The UK has been in relative decline in terms of economic freedom for several years, a state of affairs which David Cameron will have to address as Prime Minister.

The most important factor driving Britain’s decline in economic freedom has been the relentless rise in government spending under Labour, which rose from 37.5 per cent of GDP in 1997 to 47.5 per cent of GDP in 2010. Thirteen years of reckless government waste has taken its toll on Britain’s economy, and it will take several years to fully rebuild the country’s economic competitiveness. The last two years in particular have been particularly damaging, as Gordon Brown opted for Keynesian style stimulus spending in the wake of the global financial crisis, sharply widening the government deficit, and raising public debt to 70 per cent of GDP, while nationalising or seizing ownership positions in some major High Street banks.

The poor economic outlook has been exacerbated by the introduction of a new 50 per cent marginal rate of personal income tax, which came into effect last April, as well a 1 per cent increase in the National Health Insurance payroll tax – both taxes on jobs and wealth creation, and risky moves in the aftermath of a global downturn.

The new Conservative-led government faces massive challenges ahead if it is to restore Britain’s place as one of the world’s freest economies. Important steps have already been made to help achieve this goal. In October the Chancellor of the Exchequer announced a series of major austerity cuts aimed at eliminating Britain’s structural deficit by 2015, which currently stands at 11.4 per cent of GDP. The Coalition plans to shed 490,000 public sector jobs, as well as cut public spending by ₤81 billion over the next four years.

George Osborne has also proposed a cut in corporate income tax from 28 per cent to 24 per cent, an important pledge to a business community that has been battered in recent years by an overbearing left-of-centre government. Iain Duncan Smith, the Work and Pensions Secretary, has unveiled a bold vision for reforming Britain’s welfare system and tackling a suffocating entitlement culture in British cities that is strangling entire communities.

But still more needs to be done if Britain is to regain the position it once held as Europe’s freest economy. Cuts in public spending must be coupled with a powerful pro-growth and pro-entrepreneurship agenda aimed at creating private sector jobs, reducing red tape on businesses, attracting foreign investment, and maintaining the City of London as a world class financial centre.

This can only be achieved if the Prime Minister is willing to bring down the top rate of income tax as well as reverse the increase in capital gains tax. Britain needs to retain its leading entrepreneurs as well as attract wealth creators from across the world, and a low tax strategy is surely the best way to bring this about. In addition, the Coalition must be willing to stand up to the menacing tide of European Union regulations which threaten the competitiveness of the City in areas such as hedge funds. The deathly hand of Brussels poses a huge threat to Britain’s long-term economic growth and freedom, and must be fought with vigour by the UK’s political and business leaders.

Great Britain has thrived for centuries as a beacon of free enterprise, free trade and innovative thinking. Economic freedom is today under threat from excessive levels of government spending, over-taxation, a bloated welfare system, and EU interference. The UK is at a critical stage as a world power, and faces a clear choice between decline or economic rejuvenation. There can be no doubt that David Cameron seeks the latter, but in order to achieve it he must reject the Big Government policies of his Labour predecessors, and advance the principles of economic liberty, the surest path to Britain’s long-term prosperity.

Nile Gardiner is the Director of the Margaret Thatcher Center for Freedom at the Heritage Foundation.

About the Author

Nile Gardiner, Ph.D. Director, Margaret Thatcher Center for Freedom
The Margaret Thatcher Center for Freedom

First appeared in The Telegraph