From the financial crisis of 2008 until last year, the debate over fiscal policy was driven by one central principle: Inflation was low, so governments needed to boost spending. Around the rich world, central banks print money accordingly and politicians spend the money. But today, with inflation above demand, the economic outlook has changed. Central banks are expensive, and politicians who refuse to control the budget incur the wrath of the markets.
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In Britain, this idea has already called for the return of the terrible taxes that brought down Sunak’s predecessors. If he’s smart, Sunak will now do a complete 180 and announce tax hikes, including wind taxes for high-profit energy companies. The extra money could free up Sunak to avoid political pressure on public services: Here, National Health Service waiting lists are long. The increase will also help to overcome Sunak’s major political weakness. He is a helicopter plutocrat, and he needs to show that he understands the needs of ordinary voters.
But higher taxes and severe financial penalties may not be enough. To convince both investors and voters to believe in a post-Brexit Britain, Sunak needs a convincing growth plan. Since tax cuts are not possible, the plan must include legislative reform. Sunak needs to be as bold on micro-economics as he is on macro.
The good news is that law is a very rich area here. Contrary to the myth that the Anglo-Saxon economy is an unregulated free-for-all, Britain has rules and restrictions, which is one reason why British productivity has fallen from the top of the Group of Seven countries to the bottom. Red-tape issues with the army: First-time recruiters are frustrated when they find that they don’t show up for months, with inconsistent terms that force them to “leave the field” in the middle of the appointment. But of all the anti-growth issues, that is the most worrying.
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There are approximately 500 houses per 1,000 people in the European Union. France and Italy have about 600. Thanks to more urgent legislation, Britain has less than 450. Britain is not just a NIMBY country – as in, Not in My Back Yard. As an Economist complained recently, it’s BANANA land: Build Nothing Anywhere Near Everything.
The problem is particularly acute in cities – precisely the places that would generate economic growth if more people could move there. Every major city in Britain is surrounded by a “green belt” – an area that is not green but where there is very little construction. The belt around London is three times larger than the capital itself. Across England, almost one in eight properties are not permitted for builders.
The result is that rising housing prices in cities are a central problem. In the early 1990s, as a 20-year-old journalist, my journey from my two-bedroom apartment to my London office was less than 30 minutes. Today, my grandson of the same age would not expect to buy anything similar.
Even before covid threats encouraged remote working, London’s long commutes created empty spaces. A few years ago, I gladly accepted a visiting position at the London School of Economics and Political Science. Soon, I gave up the “visiting” job because there was no one else.
Housing restrictions in Britain go beyond housing. No reservoirs or nuclear power plants have been built since the 1990s. Rail and road projects are rarer than the wildlife that defies its name. The city of Leeds, which has a population of over 700,000, was promised a transit system in 1993. So far you haven’t.
Dealing with this confusion is not for the faint of heart. But Sunak, despite his financial acumen, was a supporter of Brexit, perhaps because he hoped that leaving the deal would free up Britain to pursue prudential policies. Now it’s up to him to prove that he was right about it.