Tax and bureaucracy send UK down world league table of competitiveness

The UK has dropped from second to ninth place in the world league table of competitiveness, according to the latest report from the World Economic Forum, the international organisation of business leaders best known for its star-spangled annual conference in Davos. The United States once again tops the overall ranking in its Global Competitiveness Report. Switzerland is in second position, followed by Denmark, Sweden and Germany. China and India continue to lead the way among large developing economies.

In sub-Saharan Africa, only South Africa and Mauritius feature in the top half of the rankings. Italy (46th) was a notably weak contender among western European economies, hampered by weak public finances. Estonia (27th) leads the pack of 12 nations that joined the EU since 2004. Bottom of the table are Zimbabwe, Burundi and Chad, in descending order of competitiveness. Some 131 nations were surveyed.

The British decline seems to be largely down to the activities of Government and officialdom. Despite the relative success of monetary policy under an operationally independent Bank of England, the UK's worst ranking among the various measures of competitiveness is 46th – for macroeconomic stability. When asked about the problems of doing business in Britain, the WEF's panel of respondents, comprising business people and economists, were clear that tax was the principal obstacle; both tax rates and tax regulations were cited as off-putting, with government bureaucracy not far behind.

An inadequately trained workforce with a poor work ethic is also apparently a reason for steering clear of the UK. The picture is strikingly similar to that identified in the WEF's profile of the US economy, though in America inflation is perceived as a much more potent danger. On the plus side, the UK ranks second in the world on the sophistication of its financial markets. The efficacy of corporate boards, legal rights and scientific research are also advantages. The WEF also found that wage levels in the UK, given its competitive position, were a disadvantage for the British economy.

Germany's formidable performance, rather against the image of a chronically uncompetitive economy, rests on its excellent infrastructure, ranked first in the world. The size of the German market and the sophistication of its business climate were also regarded favourably. Somewhat predictably, though, the German labour market represents a significant obstacle to the nation's progress. By contrast to the UK's 10th ranking for its flexible labour markets, Germany came in at a remarkably low 115th, perilously near the bottom of the pile. WEF respondents ranked restrictive labour regulation, tax regulations and rates, and bureaucracy as their bugbears.

Xavier Sala-i-Martin, Professor of Economics at Columbia University and co-editor of the WEF Report said: "The US confirms its position as the most competitive economy in the world. The efficiency of the country's markets, the sophistication of its business community, the impressive capacity for technological innovation that exists within a first-rate system of universities and research centres, all contribute to making the US a highly competitive economy. However, some weaknesses, particularly related to macroeconomic imbalances, continue to present a risk."

The UK can take some comfort from being well ahead of France, which ranks 18th in the Global Competitiveness Index. French infrastructure is among the best in the world (ranked second), with outstanding transport links, energy infrastructure and communications. The high degree of sophistication of its business culture and its leadership in technology are important attributes. But a number of weaknesses are hindering the country from unleashing all of its potential: France's labour market ranks a low 129th for its lack of flexibility, and 114th for red tape. Another area of concern is the macroeconomic environment, with the government budget deficit and the related public sector debt ratio still remaining high.

The WEF's bad news for Britain comes despite the UK's 12 years of uninterrupted economic growth and (long-term) historically improved competitive position. A Treasury spokesman said: "As this report clearly sets out, the UK remains one of the most competitive economies in the world and one of the best places in the world to do business, with continued rising investment in education, skills, R&D and business infrastructure. Thanks to reforms to the tax and regulatory regimes, including the lowest corporation tax rate in the G7, the UK is well placed to benefit from the opportunities of globalisation. This year the UK is forecast to be the fastest growing economy in the G7."