How we can create more jobs and cut the deficit at the same time

Only once in 800 years has a government avoided default once its debt reached 90% of GDP. That's according to Carmen Reinhart and Kenneth Rogoff in their study of financial crises in their book, This Time is Different. That was Britain after the Napoleonic wars, when some of the repayments were made with the spoils of war.

Why does this matter to you? Because, if you include public sector pension liabilities, current UK debt is well past 90% of GDP. There's still much complacency about our debt problem. We have been lulled into a false sense of security by ultra-low interest rates. And many other countries have the same problem.

History suggests that sovereign defaults happen several years after recessions. During the downturn, the private sector stops borrowing, and lenders prefer the security of debt backed by government; so there are plenty of buyers and gilt yields are low. But a few years into the recovery, the lenders get indigestion. Renewed borrowing by companies and individuals provides competition for government debt. That's when yields rise and governments default.

The UK coalition government appears to understand the severity of the problem. But it remains to be seen how determined and effective they will be in implementing spending cuts over the next few years. And reducing debt is only half the problem.

Unemployment is already very high. On 5 November, the Financial Times reported startling figures from the Office for National Statistics: one third of homes in major cities including Liverpool, Nottingham and Glasgow have no-one who is employed. And government cuts threaten to send unemployment soaring higher. If it goes too far, we'll be in a vicious circle: further cuts reduce tax revenues; more spending raises interest costs - Ireland seems to be getting to that point right now. In Japan, interest payments and social security spending alone are already higher than tax receipts. There is no way out from there; both will default.

We need to encourage job creators more

I reckon I know something about job creation; I've been an owner of several small businesses. I founded a software company in 2002. Most people especially politicians who have not been entrepreneurs cannot possibly know how hard it can be to create jobs. We could prove that our software boosted company profits by up to 40%; we did a pretty good job of managing the company. And yet twice we came within a few months of failing.

Nine months after launch, we had no customers. We were still developing the software at that stage. So it was tough to persuade companies to buy something that did not yet exist. We nearly ran out of cash. Sales also came to a grinding halt in 2009. Our existing customers paid an annual licence fee, so we still had revenue from them - that's how we survived at all. But three of our 12 customers went bankrupt and stopped paying. We had to make half our 100 employees redundant. We were again just a few months from running out of cash.

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Our society undervalues job creators. Our tax system carries incentives for corporate investment including capital allowances and interest on debt. We have tax breaks on individual savings accounts (Isas) and pension contributions. Over the years, there have been incentives for home buying. The coalition would like to bring back a married persons allowance.

Economists from the right-wing argue for low marginal tax rates which benefit higher income groups. Left-wingers argue for higher benefits and government spending which favours lower income groups. Trade unions fight for the low-paid. But who lobbies for the no-paid?

The economic recovery is clearly too feeble to reduce unemployment. And yet the tax treatment of job creation is appalling. Companies have to pay 12.8% of wages in employers' National Insurance contributions. Many also make pension contributions for staff and provide other benefits. Employment laws make it expensive to shed labour. So when the economic outlook is so uncertain, is it any surprise that companies are reluctant to hire?

We've got the economic, political and social debate all wrong in this country. It should not be about capital versus labour, or rich versus poor. It should be about job creators and job takers. I don't care how rich or poor you are, if you create jobs, you are a hero. You are a hero if you are self-employed, creating a job just for yourself. You are a hero if you're an entrepreneur. And you are a hero if you run a company trying to grow.

In short, we need to support job creators far more than we do. That means radically changing the tax code. Here are just four moves that would help:

Abolishing employers' National Insurance surcharge Sweeping away regulations which make hiring harder or less attractive Granting entrepreneurs the right to charge their investment against personal income for tax Lower personal tax rates for the self-employed and entrepreneurs

Of course, this would all have to be paid for given the debt situation. But I would rather raise any other tax to release the surge of job creation that these changes would bring about. There are two types of tax I'd target specifically.

In the interest of balance, tax breaks on capital could be eliminated. Companies would be getting a reduction in employment costs so an offsetting rise in capital costs would be fair. After all, not all investment promotes jobs. Labour-saving machinery actually destroys jobs. I'm not saying for a moment that companies should never invest in productivity-boosting technology, but why actively favour capital investment at the expense of job creation? That way lies the path of Japan. The world's best manufacturers have so automated their factories that they employ virtually no-one. So capital allowances can go.

An increase in corporation tax would be justified. And a reduction in the deductibility of interest payments might also be needed, just so that the net effect of all the changes is small. And capital gains tax could be allowed to rise - it's still below personal income tax rates. This wouldn't discourage entrepreneurs. When you start a company, you're not worried about whether you'll pay 28% or 40% on your eventual millions, you're far more worried about paying the bills in the next year. So give the tax breaks up-front by allowing investment in start-up companies to be charged against personal tax.

Britain looks likely to be short of jobs for the foreseeable future. We need to recast the tax code to encourage job creation. Let's also start celebrating job creators: the self-employed, entrepreneurs and companies of all shapes and sizes that are growing jobs. They're all heroes. We need so many more of them.

What do you think of Simon's views on job creation? Have your say in the comments below.

Simon Caufield edits the True Value newsletter, which is currently open to new subscribers. Find out more here

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