Progress Prize!

TxP, in partnership with Civic Future and New Statesman Spotlight, has launched an essay competition encouraging responses to the question: "Britain is stuck. How can we get it moving again?" 

I am not entering the competition, for a number of reasons: I think Britain is not especially stuck and seems to be moving pretty normally (8 years behind the USA, as usual); even if it were stuck then I don't think that my suggestion for jogging it along would be in line with what the judges want; and I don't think I'm eligible anyway. 

Nonetheless, in the hope that I can inspire others, I have set out 1200 words below with the right answer to the question: feel free to steal it if you want.

The answer to the question “how can we get moving again?” is, obviously, “by investing in the right things”. Equally obviously, without saying what the “right things” are, that’s just another way of re-stating the question. Nonetheless, I think it is helpful, as I shall explain.

Broadly speaking, we all know what the currently fashionable ideas are for “the right things to invest in”. There is the gamut of YIMBYist solutions, from expanding and densifying London’s suburbs, through massive expansions of Oxford and Cambridge (and Milton Keynes too), up to and including a devil-take-the-hindmost (i.e., newts and bats) approach to all the country’s green belts. There’s fast trains across the country or slow trains in Leeds; nuclear power and fracking; something something AI and/or biotech; “skills” galore. “Another runway for Heathrow” seems to have dropped out of fashion and been replaced by “more reservoirs”, but perhaps I’m behind the times and some new bit of infrastructure is the cool new thing now: reclaiming Doggerland?

In short, the judges of this competition are bound to be wading through the familiar litany of “Japan solutions” that I mocked here: if they have ever tried it in Japan then you can be sure that someone is now suggesting that it should be tried in the UK – regardless of how it worked out first time around.

The essential problem with all of these suggestions is that you don’t know what the right thing to invest in is going to be – if you did then you’d be doing it (or at least investing in it), not writing policy papers about it. Maybe British AI will be the next big thing, but perhaps it’s biotech: Denmark is currently booming on the back of a weight-loss drug (without Wegovy the country would be in recession, apparently) and perhaps the next blockbuster - a better anti-depressant? a cure for grey hair? – will be made in the UK. Or maybe you think the next big thing will be in aviation. Even if you’re right about that, do you know whether will it be short-hop eVTOLs, new commercial supersonic jets or hypersonic aircraft? I don’t know and neither, if you are honest, do you. Unless you have proof that the organs of the UK state (or you) are better at picking winners than the very clever people who set up  British Leyland then any investment in a particular “industry of the future” is at high risk of being a waste of taxpayers’ money.

Much the same is true of basic infrastructure investments. It’s better, all things considered, if roads don’t have potholes and the trains run on time. But don’t expect noticeable productivity improvements to come from making it marginally easier to get from A to B – the trick is to make A or B themselves more productive. Basic infrastructure is to a country what a car or travelcard is to an individual: you might need it to get around but it won’t make you rich. And when it comes to cutting edge infrastructure, we’re back in the territory of picking winners and buying white elephants: will nuclear fusion make your fancy new fission power stations obsolete? Or will we just get electricity via undersea cables from solar panels in north Africa? Back the wrong horse and you’ve thrown away billions of pounds.

So how do we find the “right things” to invest in? I’m afraid the only way to go about this is the only way that has ever worked: let the market decide. We need to let a thousand flowers bloom; we need to let the people who really can see the future get on with building it. What we need to do is eliminate capital gains tax.

Capital gains tax (CGT) raised £18bn last year. That may sound like a lot, but it’s only 1.7% of total tax receipts – it’s not a big deal for the state. Even that sum may be a bit of blip: back in 2009, CGT raised only about £2.5bn, and it never raised more than £10bn until 2020/21. 

While it’s not a big deal for the state, CGT is a big deal for individuals. For very good reasons, I won’t give you tax advice but, broadly speaking, any profits you make from investments not in pensions or ISAs in excess of £6,000 get taxed at the rate of 20% (except for residential property, which is taxed at 28%). It’s a faff to keep the records and deal with the taxman (and you should never underestimate the faff factor) but, more importantly, it’s a big financial disincentive to investing. 

Think about concrete examples: invest in your own home and the capital gains are tax-free; but risk your hard-earned cash in your child’s business, your friend’s start-up, or just a cool company you heard about on the internet and you’ll get taxed if you succeed. Which are you going to do? And which one is more likely to get Britain moving?

There’s a reputable economic argument that taxes on capital should always be zero. But in circumstances where a country needs to gee-up its investment record (i.e., the whole premise of this exercise) one need not rely on economic theory: common sense tells us that reducing the tax on an activity will result in more of it happening, and if we want more successful investments – that’s where capital gains come from – then we ought to tax them a lot less. The state has no real incentive to find the next blockbuster invention, but a number of driven and rather hard-nosed venture capitalists do: let them get on with it and become filthy rich in the process.

Would it distort activity? Probably. But that’s part of the deal with any tax break. The tax breaks for the film industry have prompted countless schemes for weird and wonderful investments in films for tax reasons – but also helped the British film industry. The advantage of abolishing CGT is that fiddling at the margins – trying to make income look like capital – is probably best done in precisely the kind of investment jobs we want to encourage: ones in venture capital, private equity and start-ups. Making this kind of activity more attractive is a feature, not a bug.

What about the residential property rate? That should be abolished too. Do you want more residential property to be built? Probably. So why punish people who invest in residential property? The older family with a big garden or a garage who could put up a new dwelling and sell it for profit: that’s something we want more of, surely, not less.

No doubt the investments that people will make with no CGT to pay will be a little different from the AI and fusion-type whizzbang ideas that get essayists excited. But they are more likely to play to our real strengths. We are (famously) a nation of shopkeepers: so people will invest in new boutiques. Great! We’re also a nation of high-quality professional services, and investing in those will help ensure lucrative and interesting jobs for many people for years to come. 

Oh, and while we’re in the business of removing disincentives to investment, let’s scrap inheritance tax too.