Welfare reform is a good start, but tax reform will promote real growth.

Western governments generally seem to think about our economic problems in purely monetary terms. However, it is clear that in order to promote real economic growth, the whole of society must become more efficient. To this point, a couple of weeks ago in the UK it was announced that Iain Duncan Smith would be unveiling plans for welfare reform. These plans include simplifying the benefits system and requiring the long-term unemployed to participate in work placements. Reform is certainly needed, and simplifying the benefits/tax system and realigning work incentives is at the heart of accomplishing this. What is really needed, however, is finding ways that more people can contribute economically without costly direct public intervention.

I believe that in the present circumstances, any solution based purely on monetary analysis of our economic problems is doomed to failure because money is not the key problem - in my opinion, the key problem is how adults collectively elect to spend their time - under this scenario, it is necessary to analyse a) how time is being spent, b) the amount of reward/income being received in respect of how the time is spent and c) whether the people ultimately funding that income are getting good value for money. It’s not necessary to analyse all time, but rather to find a few significant areas where the reward and the value provided are significantly out of kilter (e.g. long term unemployment).

Furthermore, in order to increase the chance that people across demographic lines choose to work instead of receive benefits, it is necessary to also consider likely future changes in employable time and the change in employment opportunities required to absorb these anticipated changes - based on my experience of talking to both young people and those aged 55+, there is an urgent need to grow employment opportunities at both ends of the age range.

Iain Duncan Smith’s plans for welfare reform are reassuring but, although it should help change work incentives, the following questions struck me:

i) how will civil servants know what jobs we collectively would like done?

ii) what is the cost of supervising jobs under this scheme?

iii) could there be a more effective way of dealing with the above two issues?

I suggest that issues i) and ii) could be more effectively dealt with if the cost of employment by an individual (the Payer) of a person with, say, no more than five customers was tax deductable for the Payer (this limit has been set in order to avoid the cost of, say, the tyre fitter being tax deductable!). This would ensure both that a person's paid for time is more likely to be usefully deployed and also that supervision ceases to be a cash cost to the public sector. In order to obtain the tax deductibility, the Payer would have to provide HM Revenue & Customs with details of the payee and the amount - this in turn would help to shrink tax leakage through the black economy.

Why is all this relevant to investment? I believe that the UK faces a huge challenge in creating more businesses which increase the sustainability of the economy in terms of shrinking the trade deficit and providing worthwhile employment. The more of our income which gets taken as taxes to support the underemployed, the less cash we collectively have available to deploy as capital to support the development of such businesses.