Britain’s safety-first state is smothering growth

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For most of the post-war period, each generation in Britain could reasonably expect to be materially better off than the last. Since the financial crisis, that has changed. Productivity growth has been exceptionally weak and improvements in living standards have stagnated.

This was the starting point for ‘Boosting Britain: A blueprint for radical financial and tax reforms to improve economic growth’, the new report launched by Centre for a Better Britain this week. Over the last nine months, we brought together a series of working groups drawing on senior figures from financial services, business, economics and think tanks, as well as former civil servants and Treasury officials.

A distinguishing feature of Britain’s economy today is the extent to which rules divert economic activity into compliance and distort the decisions of businesses and investors. Banks are not lending enough to growing businesses, while Britain’s public markets have steadily declined – leading promising businesses to sell early or grow elsewhere. Pension funds have become increasingly focused on minimising short-term volatility and are constrained by factors such as ESG, rather than maximising long-term retirement outcomes. And Britain now has one of the world’s longest tax codes (if not the longest) at more than 20,000 pages, absorbing inordinate resources in compliance and advice while also distorting economic decisions.

Moreover, Britain has become a less predictable jurisdiction for long-term investment. The problem is not simply changes in policy, but uncertainty over how rules will be interpreted and enforced – all of which can be reflected in the risk premium investors attach to Britain, raising the cost of capital and making otherwise viable businesses and projects harder to finance. Britain managed to build a world-class cluster in financial services, but risks missing out on the industries of the future – AI, quantum, life sciences, digital assets and advanced manufacturing – which are internationally mobile and deciding now where to establish themselves.

The output of our work is more than 150 policy recommendations across regulatory simplification and institutional reform; SME and growth capital; pensions and savings and tax reform – all designed to attract investment, reduce the time and money spent on unproductive activity and ultimately raise living standards by enabling more businesses to start and scale, and British pensioners to retire on better incomes.

At the heart of our diagnosis – and one which applies well beyond financial services – is the state’s approach to risk. Since 2008, an understandable desire to avoid another taxpayer-funded bank bailout has developed into a broader ‘precautionary’ approach in which almost every risk is treated as something to be mitigated. While there are risks which we should minimise including taxpayer bailouts (recognising that risk can never be zero), a healthy and functioning economy must also accept that investments will lose money and pension funds will experience volatility.

No-one specific is to blame for how we got here. Regulators and other arm’s-length bodies are hauled over the coals in front of select committees when something goes wrong, but not when good things don’t happen. No-one is fired due to businesses not starting, or because homes are delayed by the possible presence of a great crested newt. The rational response is therefore to minimise every visible risk within each body’s own remit, regardless of the wider societal cost. The point is not that prudential rules or environmental protections are bad; it is that ministers must own and articulate the trade-offs between those protections and their respective costs.

Critically, ministers must also defend those trade-offs when things go wrong, providing political air cover to the regulators and other bodies. Otherwise, every adverse outcome risks being treated as a scandal, and the system simply reverts to precaution.

This is not a theoretical exercise. Without addressing this governance problem, any attempt to go through the FCA Handbook or tax code line by line will simply result in each rule being defended on its own merits, often rationally.

We approached the project on the basis that we are beyond the point of incremental reform, and some of our proposals are politically difficult – for example, reducing corporation tax from 25% to 15% and abolishing capital gains tax will be portrayed as giveaways to the wealthy, but we argue they are necessary to make Britain more attractive to investment, while political bravery is needed to introduce a Lifetime Investment Account and phase down National Insurance and the role of the state pension – essential not only for improving retirement provision but also building a larger pool of long-term capital, and reducing long-term pressure on Britain’s public finances.

Of course, financial reform is only one part of the puzzle. A return to rising living standards will require equally ambitious reform across other areas holding Britain back, including energy, planning, welfare and public-sector productivity. But much of the framework and principles set out in this paper will apply equally to these wider challenges.

Who would have thought that governance, risk and compliance could matter quite so much to Britain’s economy?

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