Sir David Davis looks towards the 2013 Budget

As in The Sunday Times;

“‘We are in a global race today. And that means an hour of reckoning for countries like ours. Sink or swim. Do or decline.” So said David Cameron at the 2012 Conservative party conference. He was right, but it is time the policy matched the rhetoric.

With the shift of competitive advantage to the East, the western economies may all be facing a future of depressed growth expectations. We may be living in a 1% world. As Britain teeters on the brink of a triple dip recession, even a return to 2% annual growth looks optimistic. To achieve it, we need a bold budget that makes Britain competitive — a good place to live, work and do business. We cannot afford a Gordon Brown budget, high on soundbites but low on substance. Without radical steps to restore competitiveness, we risk facing a decade, or decades, in the doldrums. So what should these steps be?

The first thing to understand is that we must earn our way out of this problem, not spend our way out of it. The answer to too much borrowing cannot be more borrowing. Seeing the UK’s growth rates bobbing along the bottom, those who want more public spending blame austerity but cannot explain why the government’s £375bn quantitative easing “stimulus” has clearly been nothing of the sort.

So the chancellor is right to attempt to bring down government spending (albeit rather slowly), but that alone is not enough. The idea that the private sector would expand to fill the space vacated by the retreating state was attractive, but in our overregulated, overburdened, overtaxed economy it cannot happen fast enough.

We need to take strong action to spur that expansion of the private sector. That action must liberate individuals and companies from the impediments that are undermining their confidence and limiting their freedom of action.

The natural instinct for politicians is to focus on big business. The opening of a new factory or signing of a big contract on a prime ministerial trade mission makes for good media coverage. But the roots of the recovery lie in the 4.5m small and medium-sized enterprises (SMEs) that in this country employ the majority of people and create almost all net new jobs. Jump-starting the economy will above all else involve liberating this sector to do what it does best: create jobs and wealth.

When Gerhard Schröder’s government launched its growth agenda in 2003, it gave SMEs special exemptions from employment law, eased laws governing dismissals and redundancies, protected companies from vexatious employee lawsuits and reformed the welfare system to improve incentives to work. It was hugely successful — both unemployment and government borrowing fell sharply.

After overregulation, overtaxation is the biggest enemy of growth and the biggest killer of jobs. Yet since 2010, inherited tax rises from the Labour government and tax increases from the deficit reduction plan have squeezed the private sector. We’ve seen the continuation of a higher band of additional income tax, an increase in employers’ national insurance contributions, a VAT hike from 17.5% to 20% and increases in stamp, fuel and air passenger duties. Even the much-vaunted tax cuts for the least well-off have been handicapped by the tangled maze of tax credits.

A country cannot tax its way to prosperity. Income taxes, employment taxes, capital taxes and sales taxes are all too high and too complex. We need to cut taxes and we need to take a sharp knife to the Gordian knot of the British tax code.

What should we do about it?

We should cut or eliminate those taxes that deter all we want to encourage: income tax that drives wealth creators away; employers’ national insurance that prevents entrepreneurs creating new jobs; capital gains tax that discourages savings and skews investment decisions.

We also need to accelerate reform of the nationalised banks. The government has two main options. One is to keep control of the “bad bank” within each one (including the toxic assets) and return the “good” retail bank operations to the private sector to lend to the market. That is what Sir Mervyn King, the outgoing Bank of England governor, has recommended for 82% taxpayer-owned RBS.

Alternatively, the government could introduce a programme of recapitalisation that will allow the nationalised banks to lend to the SMEs we need to grow. Without this drastic action, we risk Britain’s economy becoming like that of Japan in the 1990s, where zombie companies were propped up by zombie banks.

If the chancellor fears to change course because other policies are too “risky”, he should start by facing up to the real risk that inaction could deliver decades of decline and disappointment. In the OECD, only Greece and Spain have higher youth unemployment than Britain. One in five recent graduates is out of work. It is our moral duty to create opportunities for our children’s and grandchildren’s generations, not leave them saddled with our debts.

Wednesday’s budget cannot just be an exercise in numbers. It must shake Britain out of its defeatism and despondency. It must be politically bold, economically effective and psychologically inspiring.”