Prime Minister Tony Blair's proposed new budget highlights Britain's lead over the Continent in crafting pro-growth policies for an entrepreneurial society. While Germany and France expend tremendous energy in creating a single currency in the hope that it will eventually make their economies more competitive, Britain is taking the direct route. Conservative German Chancellor Helmut Kohl and Socialist French Prime Minister Lionel Jospin talk about reducing unemployment and reinvigorating their economies, but so far only the center-left Labour Party under Blair is doing something serious about it.
The new budget focuses on microeconomic reforms that are designed to improve labor market flexibility while boosting tax incentives for growth and job generation. The overall goal is to raise the economy's potential growth rate. The budget proposes to spend $6.7 billion to move people off welfare into the workplace. The aim is to promote skills in the unemployed by getting them into training programs or entry-level jobs. Blair is shifting from old-fashioned welfare payments to a new tax credit paid to low-income working families so they keep more of what they earn. The tax burden will be cut for the working poor, as well, with the starting rate for income taxes cut to only 10%. Low-income families will also get a break on their national insurance contributions. For business, there are tax breaks for small and midsize companies to promote expansion and generate new jobs. Blair wants to reduce the cost of hiring young people.
Compare these policies to the Continent's recent moves. For the euro, countries coordinated fiscal policy and tamed burgeoning budget deficits. But Germany, France, and Italy raised taxes rather than shrink government spending, crimping growth. To deal with unemployment, France made its labor market less flexible and more costly by moving to a 35- hour workweek. Germany and France raised taxes to pay for expensive social welfare payments to the growing army of unemployed (they have nearly twice the unemployment rate of Britain).
Both countries passed laws and regulations unfriendly to entrepreneurs, making stock options, for example, nearly impossible to use for start-up companies. Indeed, one reason why Blair does not want to be in the first wave of those countries entering the new European Monetary Union is the fear that the Continent will impose heavy tax and regulatory burdens that could hurt Britain's economic growth.
Blair is right to wait it out. The Netherlands, Denmark, and Sweden are all moving toward more flexible labor markets, lower taxes, and increased entrepreneurial activity. They are making hitherto unpalatable "Anglo-Saxon" policies acceptable on the Continent. German and French politicians are beginning to talk about lessons to be learned from Europe's periphery of smaller nations. Pity that they cannot bring themselves to go immediately to the source--Britain.