The 2010 Index of Economic Freedom rankings have just been released, and the results are far from flattering for the United Kingdom. The U.K., the world’s sixth-biggest economy and home to its largest financial center, has fallen out of the top ten for the first time since the Index was launched by the Heritage Foundation and the Wall Street Journal 16 years ago.
The U.K. comes in this year at No. 11, behind European competitors Ireland, Switzerland, and Denmark. Granted, Britain remains well ahead of the European Union’s other major players — Germany (ranked 23rd), Spain (36th), France (64th), and Italy (74th) — but its steady decline as a free economy over the last few years should be a major concern in a nation that for centuries has prided itself as the global center of free enterprise, free trade, and free markets. (Just as worryingly, the United States fell to No. 8 in this year’s rankings, dropping into the “mostly free” category.)
This year’s fall for the U.K. is due to several factors, including the nationalization of several failing banks, a marked deterioration in public finances, rising welfare expenditures, a spiraling government deficit, and a mounting public debt that has now reached a staggering 60 percent of GDP. The new 50 percent top individual income-tax rate tax introduced by the Labour government will further damage Britain’s economic competitiveness.
These latest findings are a damning indictment of Gordon Brown’s handling of the British economy and his dismantling of the Thatcher reforms. There is a direct correlation between the decline of economic freedom in the U.K. and the rise of 1970s-style big government. In the area of government spending, the U.K. scores just 41.9 out of a possible 100.
The Index’s scorecard on Britain should be read in conjunction with a hard-hitting report by my Heritage colleague Robin Harris, who has advised Margaret Thatcher for more than two decades and served in the Downing Street Policy Unit. Harris provides a searing analysis of Labour’s attack on capitalism and offers some devastating statistics, such as the ones below:
Public expenditure as a share of GDP is forecast to rise from 48.1 percent in 2008 to 52.4 percent this year, and 54.1 percent in 2010. That is a higher figure than at any time since the highest spending year of the Second World War (1944), three percentage points above the Euro area, and eight points higher than the OECD. Even Russia would blanch at the prospect: President Medvedev has called in his latest state-of-the-nation address for a reduction of the state’s 40 per cent share of the economy.
The budget deficit in 2009/10, on British Government figures, is set to reach 12.4 percent of GDP. That is higher, according to both cyclically-adjusted and non-adjusted measures, than for any other OECD member. It is also much higher than when the Callaghan Government endured the humiliation of being bailed out by the International Monetary Fund in 1976.
Economic freedom is under threat on both sides of the Atlantic. Harris’s paper should serve as a wake-up call for the Obama White House and U.S. policymakers who seek to go down the British route. As Harris writes:
Understanding the costs that the UK is paying, and will continue to pay, for unlearning the lessons of the 1980s should, therefore, provide a cautionary lesson against Americans going in the same direction. If that lesson is learned, at least the British bad example could do some good. Perhaps even, in the end, with America’s core values reasserted and endorsed by America’s performance, it may result in some good for Britain too.
– Nile Gardiner is director of the Margaret Thatcher Center for Freedom at the Heritage Foundation.