Study shows alarming decline in UK competitiveness

Britain has been tumbling down all the main competitiveness tables. Radical reform is urgently needed, says Tim Knox of the CPS think tank.

Is Britain fading in the final furlong?
Tim Knox
On 10 June 2011 11:36

In Mosaic law, it is decreed that cases should be heard by a tribunal of three judges. Why three judges? Because, as is written in the Talmud, “You should not judge alone, for there is none qualified to judge alone, only the One.”

This requirement for three judges often holds true today. Three judges normally sit on cases heard in the Court of Appeal and in the Supreme Court.

There also happen to be three “judges” who adjudicate on global economic competitiveness. Each judge comes with a slightly different perspective, with their own sense of what is most important in determining what is essentially a subjective question.

But, as a new report from the Centre for Policy Studies shows, what is so depressing for the UK is that these three judges – highly reputed international bodies -- have passed a unanimous verdict (see table below) that the UK is guilty, guilty of hurtling down the league tables of economic competitiveness since 1997.

Take the Global Competitiveness Report, published by the World Economic Forum (WEF). There the UK has fallen from 7th to 12th in the rankings. We have been overtaken by developed nations such as Sweden, Germany, Japan and the Netherlands.

Yes, the WEF highlights some strengths in the UK economy today: the efficiency of its labour market (ranked 8th), the size of its market (6th), and the adeptness of business in harnessing new technologies.

But these positives are undermined by a dreadful record in government macro-economic management: ranked 72nd of 139 on wastefulness of government spending; 89th for the burden of government regulation; 95th for the ‘effects and extent’ of taxation; 108th for government debt; and 117th for the government budget balance.

The second judge on our “panel” is the World Competitiveness Yearbook published by the Institute for Management Development. They say that the UK has fallen from 9th to 22nd (out of 59), being overtaken by Taiwan, Qatar, Malaysia and Israel.

This is in part due to our recent poor ‘Economic Performance’, although the UK is still 14th overall on this criteria (down from 7th in 2007).

More significantly, the UK suffers from relatively poor “Government efficiency” (26th) and “Business efficiency” (28th) – a reflection of both the unproductive nature of the government sector, and the burden of regulation on business.

The third member of the “tribunal” is the Index of World Economic Freedom published by the Heritage Foundation. It says that the UK moved from 5th to 16th between 1997 and 2011 (overtaken by countries including Bahrain, Chile, Mauritius and Estonia).

This index marks the UK amongst the world’s freest nations in terms of Investment Freedom (2nd), Financial Freedom (4th) and Business Freedom (8th). These high positions are undermined, however, by a lack of Fiscal (169th), Government (156th) and Monetary Freedoms (93th), as a result of the high budget deficit, the burden of taxes and high levels of government spending.

Common threads run through all these judgements. On the plus side, the UK is an established, mature market, which is easy to invest in, which is creative and which is open for business. But, far more worrying are the negatives: over the past 14 years the UK has become hampered by excessive regulation, higher and higher taxes and appalling management of the public finances.

These are dragging the country’s future down.

Politicians all over the world are now looking to economic growth to get their economies out of the dreadful economic and fiscal predicament that they face. And, in a time of overall low global growth, the key is international competitiveness.

In the UK, David Cameron’s Government is trying to reverse the appalling decline in government finances by eliminating the budget deficit over the course of this Parliament. It is also making business investment more attractive by lowering corporation tax. But much more needs to be done. Despite the Coalition’s efforts, public debt – in real terms – will still be 24 percent higher in 2015/16 than it was in 2009/10.

So, as our Founder Margaret Thatcher used to say, more, much more needs to be done. In order to return the UK to its competitive position achieved in the late 1990s, the Coalition will need to implement far-reaching reforms to open up public services to competitive pressures, to deregulate enterprise and to lower the tax burden. Our fall down the league tables shows that these are steps we cannot afford not to take.

Tim Knox is Acting Director of the Centre for Policy Studies which has published How to reverse the UK’s declining competitiveness by Ryan Bourne and Jon Wilson:

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