David Davis: If we can be competitive, then Britain will get back to growth

There is the borrowing, but it is not just that. The structural deficit passed on was much bigger than anyone understood at the time.

That is just economists’ technospeak for a society that has too much welfare dependency throughout, including even the middle classes, and too much inefficient delivery of public services.

There is also the international backdrop. We are in a circumstance where world growth is probably about six per cent, but that divides sharply into two sectors.

The Far East, the BRICs – Brazil, Russia, India, China-Vietnam, Indonesia and so on – have growth rates approaching 10 per cent or thereabouts. In the developed world, of which we are obviously a part, the growth rate on average is nearer to one per cent. So we are in a one per cent world, and the reason for that is pretty straightforward: it is the dramatic change in competitiveness between ourselves and the Far East and other developing countries.

That does not mean that it is inescapable, but it means that competitiveness has to be at the centre of the strategy that we undertake – competitiveness, pure and simple. Everything else, all the other macro-economic tricks, frankly do not work.

Opposition MPs have talked about stimulus, and about this being a balanced Budget. It is about £100-odd billion off being a balanced Budget. There is a vast amount of deficit finance in there. But my point is that, if we look at the historic examples of countries that have been knocked off the historic growth rates — three or four per cent — down to something lower and at what has been done with them, there are clear examples of success and failure.

The biggest failure in modern times was Japan some 20 years or so ago, which went from a four per cent growth rate, pretty much for all the post-war years, to a one per cent growth rate after a financial crisis not unlike our own.

What did it try? It tried Keynesian expansion. It now has pretty much the biggest public debts in the world, with an annual deficit of 10 per cent of GDP in recent years. Did it work? No, it did not. It also tried monetary activism. It had effectively zero interest rates for a decade. Did it work? No, it did not. It also went in for infrastructure spending – the fashionable item this week – on a grand scale. It spent 40 per cent of its government budget on infrastructure investment, more than was spent to build the entire Panama Canal, in one year. Did it work? No, it did not.

I am afraid that those macro-economic polices that people love because the arithmetic seems to work are a dangerous allure. We must focus first and last on competitiveness, because without that we will not be able to earn our way in the world.

The problem with actions to promote competitiveness is that they are not always politically popular. Very often, they are politically unpopular.

The other element about growth – everyone agrees that growth is necessary – is that it is also important to the deficit reduction policy.

In effect, if one per cent is taken off the growth rate, the Office of Budget Responsibility’s rule of thumb says that within a year or so that adds £10bn to the deficit every year thereafter – not once, but every year thereafter. So growth is fundamental to the central fiscal policy as well.

As such, the Chancellor is absolutely right not to hesitate or flinch in the deficit reduction programme. That is absolutely essential. Canada, Germany and Sweden, which are all successful examples – Japan is not – managed their deficit reduction unflinchingly, and in all of them it delivered three per cent-plus rates of growth within a few years. Indeed, Canada had the fastest growing economy in the G8 when it carried through. The simple fact is that, even with the deficit reduction programme, we will be £600bn more indebted at the end of this Parliament than we were at the beginning, and that is a devil of a burden for any country to carry. Clearly we cannot hesitate on deficit reduction.

One of the critical drivers of competitiveness is tax policy. I wholeheartedly welcome the actions announced on corporation tax and National Insurance, although I would like them to go further.

The simple truth is that expensive, complex and high levels of tax returns are very damaging to a country’s economic competitiveness. We should be looking hard at the tax categories that are most responsive to lower rates.

We have heard, even from Labour, about a couple of measures – on beer, I think – that will deliver more money for the Exchequer, not less, so even Labour MPs recognise dynamic tax strategy.

Another key element is deregulation. The most successful recovery in Europe in the past decade was Germany’s. The Germans took it upon themselves to dramatically deregulate their employment market for small companies. That is key, because small companies are the biggest employment creator in the economy, bar none.

The Germans effectively removed employment law for companies with fewer than 10 employees and created mini-jobs and other mechanisms to reduce the bureaucracy and legislation surrounding employment. That is massively important. It is one very effective way of creating new employment, and it is something we should undertake as dramatically as we can.

Another item is the question of carbon tax and carbon floors. In the next month or so, the changes that are being introduced will give us a disadvantage of £10 a ton, and not against China or India, but against Germany, Holland 
and France. We will see a transfer of heavy industry from this country to Europe. There will now be an 
exemption for ceramics, but frankly there are many other businesses – they employ about 600,000 people – in the energy intensive industries. We need to address that.

The previous Government was very happy to deliver golden rules of one sort or another. I would like to suggest a rule for us on environmental and energy policy: we should not introduce any environmental policy that is not matched by our European colleagues. That would ensure that we do not do ourselves huge harm.

Let me move on to infrastructure. What I do not want to see is massive expenditure for its own sake in the expectation or hope that that will simply generate employment by itself.

The Japanese experiment demonstrates that this does not work. What we want to see is de-bottlenecking of our railways and road systems and underpinning of things such as broadband.

The Government can make some 
good claims in that area, but we need 
to do more. That is what will fundamentally allow growth to take off in Britain and get us back to the three per cent level of growth.