Select Committee on Treasury Fourteenth Report


Prospects for globalisation
1.There are signs of increasing protectionist sentiment, in Europe and, not least, in the United States of America. In the long-term, open markets best serve the interests of the global economy, and an increase in protectionist measures, and a retreat from multilateral trade agreements, would endanger the progress of globalisation and have an adverse impact on economic development in the United Kingdom and other nations. (Paragraph 15)
2.The Government is correct to note the risks to globalisation that would arise from a disorderly unwinding of global imbalances. While the probability of such a disorderly unwinding may seem low, its impact on the global economy, and on that of the United Kingdom in particular, would be very considerable. (Paragraph 17)
3.Convincing evidence is emerging that an inexorable shift in economic power from West to East is underway. It is unlikely that any national economy will follow a steady and predictable growth path over a twenty to fifty year period, but there is a strong likelihood that western economies, including that of the United Kingdom, will play a diminishing role in the global economy over time, and that China, India and other emerging nations will play a growing role. This will have policy implications because of different operating regimes in those countries. Although much public and political attention has centred on China, in the longer term, India is especially well-placed to be a powerhouse of the global economy in the middle part of the twenty-first century. The shift in economic power from West to East poses fundamental challenges for economic policy-makers in the United Kingdom in relation to communities and their economic prosperity and employment prospects. (Paragraph 28)
Impact on the United Kingdom's real economy
4.Evidence highlights the competitive advantage United Kingdom businesses potentially enjoy in establishing business relationships with Indian partners. The Government should examine how this advantage may be retained and deepened. (Paragraph 30)
5.Globalisation is having a profound effect on the United Kingdom economy and is likely to have a greater effect in coming years as the global economic landscape changes dramatically within a 10 to 20 year period. The economic impact of globalisation is likely to be felt unevenly across the economy, and not always in predictable ways. The notion that globalisation will have the greatest impact upon low-skilled employment is no longer appropriate. International competition will have a growing impact on highly-skilled areas of the labour market. Some low-skilled areas that are not tradable are unlikely to be greatly affected. The adverse effects of globalisation on individuals in the United Kingdom may in many cases be more tangible and immediate than the wider benefits for society and the economy as a whole. The policy challenges for the Government will relate to maximising the benefits of globalisation, and public understanding of those benefits, while seeking to minimise the adverse effects and ensuring that economic and social policies are suitably responsive in the face of such adverse effects. In particular, public policy needs to respond to the likely intensification of the impact of globalisation upon highly-skilled sectors of the labour market. (Paragraph 41)
Economic policy challenges
6.We welcome the Government's endeavours to analyse globalisation and its implications for the United Kingdom's economy and Government economic policy. In order to promote understanding of the impact of globalisation on jobs and communities, we consider that there needs to be an annual analysis on a consistent basis of new developments affecting the Government's assessment of the impact of and prospects for globalisation, reflecting the dynamic nature of the changes arising from globalisation and its increasing importance in policy formation. We recommend accordingly that the Government publish an annual review at the time of the Pre-Budget Report covering prospects for the globalisation, evidence on the impact of globalisation on jobs and communities and the Government's economic policy response. (Paragraph 43)
7.We referred earlier to signs of increasing protectionist sentiment and the risk that an increase in protectionist measures, and a retreat from multilateral trade agreements, would endanger the progress of globalisation, and pose a threat to both developed and developing economies. A successful conclusion to the World Trade Organisation negotiations would be of crucial benefit to globalisation, to developing nations and to the United Kingdom, and promotion of such a conclusion should continue to form an important element in the Government's economic policy response to globalisation. Without such a conclusion, all nations, and developing nations in particular, face a more uncertain future. (Paragraph 44)
8.The success of the International Monetary Fund in coming years will undoubtedly be judged in relation to its performance of its core and critical function in ensuring that global imbalances are properly addressed. We welcome the Government's efforts to secure reforms to the International Monetary Fund's surveillance and we recommend that it provide an update on the progress of those efforts in its response to this Report. (Paragraph 45)
9.The United Kingdom's influence in relation to international action against climate change, and the relationship between such action and the progress of globalisation, is likely to be affected by the appropriateness of the domestic policy response to climate change. That policy response, and its linkage to international developments, are matters we will explore further in our Report on Climate change and the Stern review. (Paragraph 46)
10.We may explore the role and effectiveness of Research and Development tax credits in a separate inquiry in due course, examining the linkages to levels of innovation in the economy and to the wider system of business taxation, as well the levels of R&D tax credit and its administration. (Paragraph 50)
11.We expect to explore the Government's ambitions to make public procurement more supportive of innovation as part of our Sub-Committee's regular scrutiny of the work of the Office of Government Commerce. (Paragraph 51)
12.Analysis of the global competitiveness of United Kingdom businesses and of the United Kingdom as a business location has an important role to play in decisions about corporate tax rates and about the administration of the business tax system. Globalisation has enhanced incentives to develop a competitive corporate tax system, while at the same time enhancing the challenge associated with ensuring that all businesses pay a fair share of overall taxation. Simplicity is likely to be crucial to the effectiveness of a corporate tax system in an increasingly globalised economy. We consider that the Government should provide a more thorough and systematic analysis of these matters and of the effectiveness of its measures to create a simpler and better administered tax system—not least through the annual review on globalisation that we recommended earlier—and we expect to bear these factors in mind in our continuing scrutiny of tax policies and tax administration. (Paragraph 54)
13.We recommend that the annual review of globalisation by the Government which we have already proposed include an assessment of the specific roles of regulation generally, and the level and operation of planning controls and environmental regulatory standards specifically, in relation to the United Kingdom's global competitiveness. (Paragraph 58)
14.The Government is right to place its policy on skills at the centre of its economic policy response to globalisation. There remain a number of unresolved issues about the best way forward for such a policy. There is firm evidence of some of the beneficial effects of inward migration for the United Kingdom economy, but we remain to be convinced that sufficient analysis and debate has taken place on the economic effects of migration and on the role inward migration might play in enhancing the skills base of the United Kingdom which faces skills shortages and an ageing population. We expect to undertake further work relating to the economic effects of migration later in this Parliament. (Paragraph 63)
15.The need to respond to globalisation and to its adverse effects may be a factor in welfare policy and other social policies, although it is not immediately evident how far that need can be separated from other policy considerations. We recommend that the Government, in its response to this Report and in the annual reviews on globalisation that we earlier recommend, set out its views on the links between globalisation and the formulation of welfare and other social policies. (Paragraph 64)

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Prepared 16 October 2007