Without a plan to reopen the economy there won't be one to reopen

A new paper from the Adam Smith Institute accuses the OBR of downplaying the lasting risks of the ongoing economic shutdown and challenges the government to come up with a plan for after the end of the lockdown.

• The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment.

• The longer the lockdown, the more businesses will run out of cash, lose hope, and shut down. This will cause substantial unemployment – the extent of which may currently be hidden by the ability to furlough employees. 

• The OBR’s scenarios are underestimating the network effect of the economy and the risk of systemic economic decline if lockdown is sustained. 

• The UK is behind countries across Europe including Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic in developing a plan to exit lockdown.

• ‘Lives versus livelihoods’ is a false dichotomy — a strong economy is what keeps people fed, housed, and ensures we can afford quality health services.

• The UK should remove barriers to investment, reduce taxes on employers, cut corporation tax, reduce the burden of red tape, and remove transaction taxes to boost the private economy after the lockdown. 

The outbreak of a deadly pandemic has necessitated the forced closure of one-third of the economy – causing a sizeable immediate decline in incomes and rise in unemployment. The Adam Smith Institute argues that if we’re to lessen the damage to people’s lives and livelihoods, the UK government needs to develop a plan for the phased end of the lockdown to implement when medically sensible. 

There is broad consensus on the negative immediate economic hit from the lockdown, and support for the government’s public health oriented aims.The free market think tank argues, however, that analysts such as the Office for Budget Responsibility who have “assume[d] no lasting economic hit,” have significantly underestimated the damage being done to firms. They argue that the challenge of reanimating the economy after the lockdown has not been fully understood because of the interconnected nature of the economy.

Ordinary people looking to their own finances, jobs, and businesses take quite a different view. According to a recent YouGov poll: just 11% think the economy will bounce back quite quickly, 42% say it will be worsened for a few years and a further 41% say the economic damage will be much more long term.

The impact of the lockdown grows deeper and faster over time, with each business that closes causing knock-on issues for their staff, suppliers and customers, shareholders and creditors. The more businesses that fail, the more in turn come at risk and pass their risk onto others — just like how a virus can multiply through a population. 

High profile businesses like Debenhams, Laura Ashley, and Flybe that have already called in administrators will be the tip of the iceberg, says the think tank, as it warns that these businesses will pass on disruption to other companies integrated into their offer to clients or reliant on their custom.

The longer that a lockdown goes on, combined with the slow rollout of emergency grants and commercial loans, the more businesses will run out of cash and be forced to close. The country’s 5.9 million small and medium firms are most at risk. The British Chamber of Commerce has found that a majority (57%) of businesses have three months or less in cash reserves, while 6% of firms have already run out of cash. Unsurprising when we think just £8.7billion of the £330bn in emergency loans announced by government have been paid out.

A phased plan would allow companies to assess the feasibility of their operations and calculate the worth of borrowing; the longer lockdown continues, the less feasible an option this is. The greater the systemic loss of industry and mass unemployment, the deeper the risk of depression and the harder any economic recovery will be. 

The Adam Smith Institute’s challenge for a phased plan to end the lockdown comes in the wake of a similar call by the Labour Leader Keir Starmer. An open and transparent exit plan is more likely to ensure a broad public and that measures, such as strict social distancing, can be maintained for as long as is necessary. 

The ASI are also calling for the reopening strategy to focus on how to ensure the return of jobs and growth, by removing unnecessary barriers and excessive state involvement in the economy. 

If the Government wants to safeguard the people’s lives and livelihoods they must, the think tank argues:

1. develop, and release, a phased plan for lifting the lockdown to provide greater confidence for businesses and citizens:

   • following the best possible public health research and latest evidence;

   • explicitly aiming to prevent subsequent mass outbreaks and loss of life;

   • including a strategy for decentralised mass testing, and isolation and tracing of cases while protecting privacy;

   • encouraging physical distancing, maintaining limits on mass gatherings and special measures for at-risk groups in early stages;

   • allowing as many businesses as possible, as quickly as possible, to reopen their operations;

2. scale back the state's extensive role in the economy after the crisis to avoid crowding out the rebooting of the private sector; and

3. introduce policies, both permanent and temporary, that will enable the economy to bounce back after the crisis, including cutting excessive red tape and taxes that discourage investment.

The think tank stresses that the government should only begin lifting the lockdown following the advice of clinicians that the outbreak is under control. However they argue that the clinical priorities need to be set and stated much more clearly: not only so that people know why the economic pain must be endured, but to allow debate on how much economic pain should be endured in return for the clinical benefits.

Countries across Europe including: Germany, Italy, Norway, Austria, Spain, Denmark and the Czech Republic have announced reopening strategies and even timelines; Britain is falling behind and businesses are being held back from planning at the most crucial moment. 

Dr Eamonn Butler, Director of the Adam Smith Institute and co-author of the report, said:

“The dislocation that is ripping through the economy because of lockdown is like the virus ripping through the population. Each business failure produces many more, just as each infected person infects many more. Unless you get to grips with it fast, things soon escalate out of control. Business failures, bankruptcies and unemployment rocket. So we have to lay plans for how we are going to unwind the lockdown, and do it now.”

Matthew Lesh, Head of Research at the Adam Smith Institute and co-author of the report, said:

“The limbo must come to an end. The closure of one-third of the economy has been necessary to slow the spread and protect the health service — but it cannot last forever. We need a route out of this mess: a strategy to protect from this virus while allowing life to progressively return to normal. This will mean testing and tracing capabilities ramped up, maintaining physical distance in shared spaces, but allowing as many businesses as possible, as quickly as possible, to reopen their operations.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Tone-deaf timing on HS2

Following the utterly tone-deaf timing of the government announcing HS2 entering construction phase, Matthew Kilcoyne blasted the wasteful spending and questionable economic benefits of HS2:

"The benefits of HS2 won't just be delayed and overpriced, they'll now likely never arrive. COVID-19 is already undermining the economics of the  project: with faster broadband and new technologies like Zoom fewer people will want to spend hundreds of pounds commuting across the country.

"We've got an economic crisis that's going to cost taxpayers billions. We can’t afford vanity projects like HS2. We need to get back onto a sustainable financial footing.”

For further comment, or to arrange an interview please phone Matthew on 07904099599 or email matt@adamsmith.org

ASI welcomes Hancock COVID-19 testing plan

The Adam Smith Institute, who today released a report calling for companies, universities and charities to be given permission to test for COVID-19 have welcomed Hancock’s remarks.

The ASI’s Head of Research Matthew Lesh said:

“We’ve wasted too much time with an excessively centralised, bureaucratic approach to testing. It’s welcome news that the Government will be allowing the private sector to begin testing. Lives are on the line and this couldn’t come soon enough. We will need both fast-track approval for labs and new tests in order to reach the ambitious 100,000 tests per day target.

“There is no time for usual bureaucratic delays or power grabs. PHE must stop trying to do everything themselves, we need to fast-track approval of companies, universities and charities. Importantly, we should be using every type of machine and every type of reliable test.”

Testing times in this coronavirus crisis

A new report by the Adam Smith Institutes argues that if the UK had followed the USA's CDC in allowing private lab testing, and stopped confirmatory testing at a single site (Colindale) then we could have ramped up testing to the same per capita level as those three countries have done. South Korea has tested four times as many people as the UK, Germany almost three times and the United States now almost twice as many, per capita. 

The UK is now in the bottom quarter of OECD countries for COVID-19 diagnosis testing.Since 16 March, the United Kingdom has just over doubled daily testing capacity. In the same time period, the United States has increased daily testing by a factor of 21.

The free market think tank argues that the UK is failing to make use of the over 600 accredited medical laboratories in the kingdom, of which 474 are NHS, 120 are private, and 12 are PHE and Public Health Wales. As well as the dozens of University labs that are suitable for testing. 

Former Health Secretary Jeremy Hunt reiterates his call for a more co-ordinated and sped up approach, saying:

"A mass community testing plan is challenging but not impossible if we mobilise in the way we have to produce ventilators. That means tapping into every laboratory, every pharmaceutical company and every university in the country without delay."

The Adam Smith Institute believes that the UK Government can meet its testing targets and save lives, if it is able to:

1. Fast-track approval for private sector laboratories to conduct COVID-19 testing;

2. Substantially expand usage of NHS and university laboratories to conduct COVID-19 testing;

3. Undertake rapid approval of private sector developed tests, including mutual recognition of tests approved by other regulatory bodies such as the FDA; 

4. Reduce testing red tape, including the requirement that all initial tests must be retested centrally by PHE; and

5. Explicitly call on companies to help make testing kits and develop lab capacity for COVID-19 testing, modelled on the successful call for businesses to make ventilators.

For further comment, or to arrange an interview with report author Matthew Lesh, please contact Matt Kilcoyne via email (matt@adamsmith.org) or mobile (07904099599).

ASI comments on new housing reforms

The Adam Smith Institute has strongly welcomed the Government's housing reforms announcement by Secretary of State Robert Jenrick today.

The ASI’s Head of Research Matthew Lesh said:

“The Government’s housing reforms will improve the lives of millions by providing access to quality, affordable housing while substantially boosting the economy. They could finally succeed where others have failed: solving the housing crisis.

“The focus on densification, building around stations and on brownfields will make a real difference. The ability to demolish vacant buildings for new developments without lengthy bureaucratic processes will not only reduce antisocial behaviours but also provide more places for people to live.

“These reforms will enable more people to live where they can be most productive and earn the highest incomes while helping reduce commuting and carbon emissions. 

Adam Smith Institute budget comment: 'spending like drunken sailor' won't work

The Adam Smith Institute has raised concerns about today’s big-spending budget. They have called for tax cuts and reform to create the foundations for sustainable growth.

The ASI's Head of Research Matthew Lesh said:

“It is seriously concerning that the Government is looking at ripping up the fiscal rules. A Conservative Government should not implement debunked Keynesian stimulus theories. Some infrastructure and public services spending, as well as supporting individuals and businesses during Covid-19, is necessary.

"But in the longer-run, spending like a drunken sailor will not create a thriving entrepreneurial economy. Expansive vanity projects won’t make us better off. Bureaucrats picking winners does not support risk-taking by entrepreneurs — the Government should be cutting red tape on innovation like limits on biotechnology, not presuming to know what is best.

“The tax burden is already at the highest it has been in forty years. We spend an extraordinary 5 months of the year working for the state before earning for ourselves. We should welcome the increase to the national insurance contribution threshold, the fuel and alcohol duty freezes, and maintaining the Entrepreneurs’ Relief albeit in a scaled-back form. But it is disappointing that the Chancellor has not used this opportunity to take more radical, longer-term steps to reduce the burden of the state and reform taxes. The targeting of environmental bogeymen, like increasing the gas levy and tax on plastic packaging, is not the right approach to environmental concerns — we need a broader approach.

“The structures and buildings allowance increase from 2% to 3% will help stimulate investment, but we need to go further. The Chancellor should remove barriers to investment by fully abolishing the Factory Tax, which holds back spending on buildings and machinery. The business rate review is a welcome opportunity to consider moving to a system that taxes on the basis of land value."

ASI comments on new immigration system proposals

Responding to the Government’s new plans for a post-Brexit immigration system, Daniel Pryor, Head of Programmes at the Adam Smith Institute, said:

“The Government’s post-Brexit immigration proposals represent a welcome shift away from the economically illiterate approach that characterised the May era — but we should be honest, all attempts to end free movement of workers will reduce productivity and growth, and represent a step back to central planning of the economy by Whitehall.

“Salary is not synonymous with skill shortages. Lower, looser salary thresholds will help relieve some pressure on businesses: although ideally they should be scrapped. Quadrupling the seasonal agricultural work scheme will help British farmers and introducing a route for highly skilled workers without a job offer removes expensive, bureaucratic hassle that stands in the way of attracting top international talent.

“There are still major issues. Around 70% of EEA citizens who arrived in the UK since 2004 would likely be ineligible for the most common visas under the new system. These people have massively contributed to the economic and cultural life of the UK—and concerns about future skill shortages remain paramount. This is especially true for regions like Scotland that rely on EEA workers for key industries like health and social care. The Government embraces market forces when it comes to the free trade debate, but they're still struggling to extend that logic to immigration.”

Abolish the Factory Tax to level up Britain

A new paper from the neoliberal think tank the Adam Smith Institute says that if the Prime Minister is serious about boosting wages and levelling up; then he needs to Abolish the Factory Tax. 

• The UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7 for over two decades 

• Abolishing the Factory Tax by allowing businesses to immediately write-off capital expenditures, would boost investment by 8.1%

• Annual rate of growth in output per hour since the financial crisis has been 0.3%. Abolishing the factory tax would boost labour productivity by 3.54%, the equivalent of £2,214 per worker, in the long run

• UK is currently ranked 33rd (out of 36) in the OECD on the Tax Foundation’s Capital Cost Recovery index

• The Factory tax accelerates deindustrialisation and holds back growth in parts of the country that are relatively more dependent on manufacturing, including the North and Midlands 

In the Prime Minister’s first speech to Parliament after winning the leadership of the parliamentary Conservative Party, Boris Johnson made boosting the productivity right across the country a central pillar of agenda. In the upcoming Budget, the Adam Smith Institute argues that new Chancellor Rishi Sunak should commit to Abolish the Factory Tax.

The Factory Tax is the inability to fully expense investments in machinery and buildings — that encourages low-capital intensive knowledge economy businesses in the South East and London over high-capital intensive businesses in the Midlands and North that need to invest in long-run assets.

At the heart of the UK’s recent productivity issues, the authors argue, is a lack of investment. Every year since 1998, the UK has had the lowest level of private investment in fixed capital as a share of GDP in the G7. This low level of investment has contributed to the rapid downfall of the UK’s manufacturing sector, which has declined by more than any other G7 nation. 

The UK’s tax treatment of capital investment is in effect a Factory Tax, the free market think tank argues. According to the Tax Foundation’s Cost of Capital Recovery index, the discounted value of the deduction for plants and machinery in the UK is just 75.6% of its total cost. As the costs of capital investment, unlike other costs, cannot be fully recovered capital-intensive businesses are penalised. 

The think tank says the tax system should not discriminate between day-to-day spending and long-term investment, that it should not favour one form of financing over another (such as debt rather than equity), and that it should be sector-neutral. Investing in capital means not spending today in order to get more in return tomorrow. High taxes on capital discourage saving, and mean taxing consumption at a later date higher than just spending the money now. In the long run this means the lower wages and lower growth the UK has experienced in the past few decades. 

The amount of revenue raised from corporate tax has remained relatively stable despite substantial reductions in the rate over recent decades. This is largely because of decisions to make the system less friendly to investment. 

The UK’s headline corporate tax rate was reduced from 30% to 19% from 2018 to 2017. But the headline rate cut was financed by reductions in the value of capital allowances. The rate at which investments in plants and machinery can written-off has fallen from 25% to 18%. These changes have led to a dramatic fall in the value of investment deduction.

On top of this the fall in the value of the UK’s capital came at a time when “all other G7 countries have seen their present value of capital allowances increase.” In the United States at both a state and federal level the Factory Tax has been reduced in recent years, leading to the conclusion by economist Eric Ohm that full expensing increased investment by 18%. 

The authors set out three recommendations to Abolish the Factory Tax:

1. Allow businesses to immediately deduct capital expenditures on plants and machinery from their taxable income by making the Annual Investment Allowance (AIA) unlimited.

2. Allow businesses to immediately deduct expenditures on non-residential structures and buildings as well.

3. Allow trading losses to be carried forward to compensate for inflation.

Allowing firms to write-off the costs of new investments immediately would unlock 8.1% in additional investment and boost labour productivity by 3.54%, with most of the benefits going to places outside London and the South-East. Abolishing the Factory Tax, the Adam Smith Institute argues ahead of the Budget on March 11th, would help the Prime Minister ensure that the campaign promise to “level up” the economy becomes more than just a slogan.

Sam Dumitriu, Fellow of the Adam Smith Institute and co-author of the report, said:

“Beneath Britain's internationally-competitive Corporation Tax rate lurks one of the most restrictive treatments of investment in productivity-boosting equipment in the OECD. We should follow the lead of Canada and the US and move to a system where businesses can write-off new capital expenses immediately. Ending the Factory Tax would unlock investment and raise productivity in the long-run.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, Head of Communications, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world.

Business rate cuts won't help the high street

Responding to new recommendations on cutting business rates from the Retail Sector Council, Daniel Pryor, Head of Programmes at the Adam Smith Institute, said:

“There are no economists on the Retail Sector Council committee—and it shows. Business rate cuts are a sop to landlords and do nothing to adapt to the fact that fewer of us are working, living or traveling to the high street. Landlords have reacted to previous rate cuts by increasing rents and within a few years any savings for businesses evaporated. 

“Funding this misguided policy through corporation tax hikes will subsidise landlords while punishing companies that have been the backbone of the British jobs miracle. Hiking taxes now would hurt jobs, growth and investment across the country: all for very little benefit.”

E-Scooters are a wheely good policy

A new paper from the neoliberal think tank the Adam Smith Institute comes hot on the tail of the UK Government’s announcement to consult on legalising e-scooters and argues that a liberal approach would provide low-cost, environmentally friendly last-mile transport for Britain’s towns and cities. 

• One-third of e-scooter rides replace car rides, the ASI has calculated, helping reduce CO2 emissions, NOx pollutants and busting congestion;

• The UK Government must amend the outdated Highways Act 1835 and the Road Traffic Act 1988 to legalise e-scooters; 

• In just over two years e-scooters have become available in over 350 cities worldwide and are available in over twenty European countries;

• Two-thirds of car trips in cities are under three miles and replaceable by e-scooter;

• E-scooters are safe, presenting a comparable risk to bicycles. They will become safer over time due to increased familiarity of passengers and other road users;

• E-scooters address economic immobility by serving areas lacking in traditional transport options;

• The Government should take a devolved approach to legalisation, empowering cities to decide the specifics within a broadly liberal framework.

The UK Government’s move to consider legalising e-scooters brings into sharp focus the need to ensure that regulation is well thought-through and evidence based. 

Instead of succumbing to moral panics on safety that have plagued launches of every new travel technology from the bicycle to cars, the Government should look at how e-scooter legalisation will help meet environmental targets, reduce costs of congestion to the economy, and give more people choice over how they get around our major cities.

New research by the Adam Smith Institute has shown that, where legal already, one third of all e-scooter journeys have replaced car rides — reducing CO2 and congestion in major cities. If legalised they could help the UK meet the country’s climate change and air pollution targets. 

Cars are the most popular transport method in the United Kingdom, with over two-thirds (70%) of trips to work undertaken by car. A majority (58%) of car journeys in the UK are for a short distance, with 7% of car journeys below one mile, 18% between one and two miles, and 33% between two and five miles. The free market think tank argues that there are therefore millions of journeys that green modes of short transport that could be made by e-scooters or bikes that are currently made by car.

While rentable bikes have been slow to take off, e-scooters have been a hit with passengers. In the United States it took seven years to go from the launch of docked bikes to having over 30 million rides per annum, e-scooters surpassed that in their first full year of launching with over 38.5 million rides in 2018. 

The think tank argues that we must avoid the moral panics over scooter safety, noting that every transport innovation, from bikes to cars and even trains suffered from hysteria over their introduction before widespread acceptance. The report also notes that the injury rates for e-scooter use so far are comparable to bicycles and that legalisation could increase safety with clear rules. 

There is also a well observed safety in number effect: where higher numbers of road users have been shown to bring down the number of accidents. Doubling the number of people walking or bicycling increases the number of people struck by just one third — with cars the number of crashes grows in equal proportion to the number of extra journeys. The same logic should apply to e-scooters where, as they become a regular sight for motorists, we should expect to see an increase in the responsiveness of other road users and substantially reduce the likelihood of crashes.

The Adam Smith Institute warns that the UK is falling behind in the development of this new technology, with producers in other countries having a significant first-mover advantage due to the UK’s Government's slow take-up of the technology. 

The report sets out six clear and simple rules for e-scooter use under legalisation: 

1. Only ride on bicycle paths and on the left-hand side of the road;

2. Riders must be 16 or over;

3. One rider at a time;

4. Do not ride on the sidewalks unless specified;

5. A speed limit of 15-20mph; and

6. Do not ride while intoxicated or affected by drugs;

In addition, the think tank says the parking rules should minimise disruption, suggesting four rules with consequences for licence retention should they not be met by companies providing scooters:

1. Do not block sidewalks, allow at least two metres of free passage. 

2. Park only near the curb or adjacent to a building. 

3. Do not block bus stops, entrances to houses and buildings, on public gardens or parks, in the middle of bicycle paths, or on car parking areas. 

4. Do not block access for people with disabilities.

Matthew Lesh, Head of Research at the Adam Smith Institute and author of the paper, says: 

“E-scooters are reducing emissions and busting congestion in more than 350 cities worldwide. The multi-billion pound e-scooter industry has safely provided hundreds of millions of rides - including for communities and routes underserved by traditional public transport. 

“In the United Kingdom, outdated laws from as far as 1835 are preventing e-scooters from being used on public roads, bike paths and pavements. The UK should immediately legalise e-scooters and begin sharing scheme trials, with the locally appropriate regulatory regime."

Mayoral Candidate Shaun Bailey said:

“London urgently needs a solution to the clean air crisis and e-scooters should be part of that solution. As the ASI report outlines, e-scooters get people out of cars; ease congestion and reduce carbon emissions which all help to improve our air quality. “As Mayor, I will show the leadership London has lacked for four years, by embracing innovative technology, such as e-scooters, if it can help make our city a cleaner, prosperous and safer city.”

Notes to editors:  

For further comments or to arrange an interview, contact Matt Kilcoyne, matt@adamsmith.org | 07904 099599.

The Adam Smith Institute is a free market, neoliberal think tank based in London. It advocates classically liberal public policies to create a richer, freer world