By Daniel Hunter

Publishing its 2012 Budget Representations, the Institute of Directors (IoD) is calling on the Chancellor to announce a radical shift in policy aimed at boosting the size of the economy in the long term.

The policy shift requires two new economic targets, to be monitored by the Office for Budget Responsibility (OBR).

“When you strip down future prospects for the British economy two problems are laid bare," IoD Director-General Simon Walker said.

"Long-term growth is too slow and the Government is too big. We need to tackle both issues and that means targeting them explicitly and charging the OBR with the job of saying whether or not Government policy is making the long-term economic outlook better or worse.

“We can’t sit still any longer. 91 per cent of company directors think the Government could do more to encourage business growth. We need a supply-side revolution with less tax, less public spending, fewer regulations and less burdensome employment law. The time for tinkering on the supply-side is over.

“One in two company directors think GDP growth over the next decade will be lower than over the past decade, which included the 2008-09 recession. Without radical reform we risk a lost decade.”

The new economic targets wanted by business leaders are:

· A 3% sustainable GDP growth target — Sustainable or potential growth is the rate of growth determined by supply-side influences such as investment, education & skills, competition, innovation, enterprise, taxation and regulation. The sustainable growth target zooms in on the long-term sustainable rate of GDP growth. It is not a short-term GDP growth target. The job of the OBR would be to assess what the potential growth rate is at present and then, on an annual basis, assess whether or not government policy is pushing long-term growth prospects up or down. The 3% target was chosen because it’s doable and because we’re also conscious that without a radical policy shift soon, underlying growth could fall to half this rate.

· A 35% public spending to GDP ratio for 2020 — Whilst certain aspects of public spending, such as key infrastructure, can be positive for long-term growth prospects, the general rule is that a bigger state means a lower long-term GDP growth rate. A 35 per cent ratio would be amongst the lowest in the world and position the UK to compete strongly through the 21st century. The long-term costs of an ageing population mean that there is strong underlying pressure for the ratio to rise, making it even more important to achieve the 35 per cent goal by 2020. The OBR would assess whether or not fiscal policy was set to achieve this target. The greater the success in raising underlying trend growth, the easier the 35 per cent of GDP public spending target would be to hit.

“The OBR would have a powerful ‘name and shame’ role. It would make politicians and civil servants think twice before introducing policies which might later be flagged by the OBR as having damaged future growth prospects and the incomes of voters,” Simon Walker also said.

Other measures in the IoD’s Budget Representations include:

· The tapering away of the personal allowance once income exceeds £100,000 — The taper creates a ludicrous 62 per cent marginal rate for those affected. We urge the Government to reverse this policy and recognise that the personal allowance is a nil rate band which should be available to all. This change would cost roughly £1.5 billion, a relatively modest sum which should be affordable.

· The 50 per cent Income Tax rate — This may or may not have raised revenue in 2010-11. But even if it has raised money, we believe this will only be a short-term effect and that it will be a revenue loser in the longer term when taxpayers have had a chance to adjust behaviour. We urge the Government to state the date on which the 50 per cent rate will be abolished. The 50 per cent rate sends out to the world the signal that the UK is a high tax economy.

· Corporation Tax — If there is any undershoot in net borrowing which facilitates modest tax cuts, we believe the priority should be accelerated reduction in the main Corporation Tax rate. If possible we propose an extra 2 per cent reduction to 23 per cent in 2012-13 then 22 and 21 per cent in the following two years. These changes would boost the supply-side of the economy and help achieve the IoD’s long stated goal to reduce the rate to 15 per cent by 2020.

· No taxes on “expensive” houses — Taxes on residential property are meant to fund local services. No ratepayer gets services worth more than a few thousand pounds per year from a local authority (education being funded separately). A new tax would break the link with services and undermine the legitimacy of taxes on houses. We are therefore opposed to a so-called mansion tax or extra council tax bands.

· Restricting pension tax relief — There has also been speculation about possible moves to remove higher-rate tax relief on pension contributions. A recent IoD survey of over 1,000 company directors found that 65 per cent were opposed to removing higher-rate tax relief on pensions, with only 19 per cent in favour. In short, in the absence of a very substantial offset, the IoD would strongly oppose the abolition of higher-rate tax relief on pension contributions.

· No fiscal fine tuning — Fiscal policy should not be used to try to fine tune aggregate demand - that role should be taken by monetary policy. The Government is right to stick with fiscal Plan A.

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