20 November 2023

In the hunt for tax cuts, the Chancellor must not forget regulatory reform


In the lead-up to this Wednesday’s Autumn Statement, much of the conversation amongst pro-growth voices in Westminster has focused on tax cuts. That’s no surprise when our current tax levels are so high. But, as important as reducing the tax burden is for unlocking economic growth, proper regulatory reform is also essential. 

At the independent Growth Commission, we have been using our new econometric model to understand the impact of Anti-Competitive Market Distortions (ACMDs) on our economic growth – and the results are both startling and cheering. We have found that, with the right regulatory reforms, we can deliver an additional 12.7% of GDP growth over the next 20 years. That’s more than the 6% additional growth we can realise through cuts to government spending and the 4.7% additional growth we can realise through the cutting of onerous taxes. 

By tackling the microeconomic problems in our economy caused by our restrictive planning system, needlessly expensive energy, tight labour market and crumbling infrastructure we can put thousands of pounds more in the average person’s pocket. 

Any plan to unlock growth in Britain must start with fixing our failed planning system. It has pushed prices for our existing housing stock higher, sucking capital away from more productive uses and severely limiting growth. It has also made it harder for businesses, especially new ones, to expand and grow – leading to limited competition and less vitality in our markets. Our analysis reveals that planning reform alone could deliver an additional 6.4% GDP growth over the next two decades. 

High energy prices have been another barrier to growth in the UK. Many have sought to frame these issues as the inevitable consequence of geopolitical uncertainty, ignoring the fact that the current system forces British households to fund unproven technologies for reducing emissions leading to higher bills and debt. Rules governing connections to the grid have created bottlenecks and monopolies. Adopting a twin-track ‘smart green’ approach, that focuses on allocating spending to low-carbon technologies as they prove themselves, while also encouraging competition in the sector, can reduce market distortion from the push to Net Zero ultimately leading to lower prices. This smarter approach could deliver a further 2.2% additional GDP growth. 

Of course, one of the biggest inputs into any business is labour, and this is another area where anti-competitive regulation is holding back growth in the UK. The data shows that the UK is a poor performer compared to G7 peers and has been for some time. A whole host of labour regulations in the UK – from the high minimum wage to the EU-derived working time directive – makes employing staff more expensive and less flexible. This doesn’t just harm our businesses, it harms workers too as they see less money in their pockets due to sluggish economic growth, and It actually prevents businesses from hiring workers as they fear the consequences of wrong decisions. This chills the labour market and prevents people, especially the young, from getting good jobs. 

Nobody relying on the rail network in the UK in recent years will have failed to notice deteriorating infrastructure, poor service and high costs. Delays and other issues are common, but the harms go much deeper than just inconvenience. Crumbling infrastructure compounds so many other issues: it increases the costs for businesses to transport goods; it restricts the supply of workers to businesses; and it forces businesses to congregate in areas where good links do exist, leading to overheating and uneven growth. By matching Investment with serious regulatory reforms to unlock competition and drive down price, we can deliver a much better service for all. Nor are we the only people to have made precisely this argument. The Competition and Markets Authority has done so, yet sadly its recommendations have been ignored.

Planning, energy, labour and infrastructure are all vital arteries of our economy, but our current regulatory approach constricts each of them. Yet politicians in the UK frequently fail to prioritise the supply side when it comes to delivering economic growth. If the speculation in the media is correct, Jeremy Hunt is focusing on economic growth in this Autumn Statement, and he is right to do so, but he shouldn’t forget to look beyond cutting taxes. Without regulatory reform our economy will continue to stagnate, choking off opportunity for all our people.

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Shanker Singham is Co-Chair of the Growth Commission.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.