31 July 2017

Why is Philip Hammond refusing to make Britain richer?


Imagine that you are the head of a firm, and one of your senior executives marches proudly into your office. “Boss, I’ve come up with a way of increasing our profits and market share by a significant amount,” he says proudly. “But I’ve decided not to do it, because it would be bad for our rivals. Can I have a promotion?”

It sounds ludicrous. But that is exactly the position which Philip Hammond is taking. And not just taking – positively boasting about.

In an interview with Le Monde, he has reassured his European audience that the UK does not plan to embrace “unfair competition” in regulation and tax after Brexit. He added that “I would expect us to remain a country with a social, economic and cultural model that is recognisably European” – not least in terms of the share of GDP taken in tax.

I’ve always had a soft spot for Philip Hammond, not least because of the nerdily enthusiastic way he goes on about productivity statistics. But this position is not only economically illiterate, but potentially economically disastrous.

Hammond has, to be fair, said similar things before. Part of his and Theresa May’s Brexit negotiating strategy was to tell Europe that if we didn’t get a good deal, we would have no choice but to become a turbo-competitive Singapore-style state, leaching business and talent from the rest of Europe. But, they added bafflingly, all this extra growth was the very last thing they wanted.

The latest quotes, however, represent a hardening of his position. Yet there are so many things wrong with them, it’s hard to know where to start.

For one, there’s the idea of “unfair competition”. Competition isn’t just fair – it’s natural and necessary. It’s what pushes companies to make better products, and enables countries to deliver better lives for their citizens. If Germany is growing faster than us, then we need to make ourselves more competitive to compete. The clue is kind of in the name.

So what is “unfair” competition? When one side is bound by rules that the others are not? That might make sense – except if those people have explicitly agreed to be bound by those rules. Which is what the European Union is all about. And is also, for many people, exactly why we needed to leave it. But if we’re going to accept the full set of rules – not just grudgingly, but enthusiastically – what’s the point of leaving in the first place?

It’s the same with Hammond’s comments about the level of tax. The justification the Tories have until now used for not lowering taxes is that we need to clear the deficit first – fix the roof while the sun is shining and all that. But there was always the promise that beyond that, when the money was there, taxes would be lowered. Theresa May might have campaigned on the most statist Tory manifesto in a generation, but even she insisted that the party’s heart was in the right place. Because the more people keep of the money they earn, the better – for themselves, and for the wider economy.

There’s also a case – which I’ve heard argued by some very clever people – that we can’t actually get back to a low-tax state even if we want to. That the cumulative cost of the state as it stands, and of the promises we’ve made in the future, means we can’t cut back spending. In particular, the ageing population and growing dependency ratio mean that we will need to spend ever more on health and social care, even if we can shrink spending further in other areas.

But both of these arguments are very different from Hammond’s. What he seems to be saying is that taxes are in just about the right place. That’s a place, let us remind ourselves, where the tax burden is set to be the highest since 1969-70 by the end of the decade. And Philip Hammond, a Conservative Chancellor, appears to be saying not that this is an unavoidable necessity, but that it’s just fine by him.

But the crowning folly of Hammond’s comments is what they reveal about Brexit.

For starters, there is the issue of regulation. Even if you do not believe that British business would be more competitive with a lower regulatory burden – and therefore more successful, and prosperous, and able to generate more profits, jobs and taxes – promising to keep current arrangements undermines one of the basic pillars of the Brexit case.

To an unusual extent, Britain’s economy is based on services rather than goods: services are now responsible for some 83.5 per cent of jobs (compared to 63.2 per cent back in 1978, when the ONS started collecting the figures).

Therefore, as Shanker Singham of the Legatum Institute has pointed out on CapX, any trade deal we sign needs to cover services as well as goods. But that means that regulation has to be on the table. We need to be able to adjust our regulations to fit our new partners’ and vice versa, even if it will often be a case of just recognising that the other has acceptable standards, so that an accountant or lawyer or hedge fund that’s approved in Country A will also be able to set up in Country B.

But there’s a bigger point here. Like Hammond and Theresa May, I was one of the 48 per cent of Britons who voted Remain – not because I had any illusions about the European Union, but because I thought the short-term trauma of untangling ourselves from it would outweigh the medium- and long-term gains.

As I wrote at the time, given the inevitable costs, Brexit only made sense as a kind of shock therapy – a way of galvanising the British economy into becoming truly competitive, of pushing firms to look to export markets, of forcing us to face to up the flaws in our own economic model, such as our failure to build enough houses or give many young people the skills they need.

It was a point echoed by Dominic Cummings, campaign chief for Vote Leave, recently on Twitter. Brexit, he said, was necessary – but not sufficient.


In other words, if you’re going to do Brexit, the only way of making the pain worthwhile is to really go for it – to use it to make yourself more attractive to business and trade. And that’s why Hammond’s comments are so alarming – because they effectively ignore the part of the equation about making Britain fit for Brexit (or perhaps through it). In order to avoid some of the pain, he sacrifices all of the gain. Indeed, he denies that there is any gain to be had, because the increased competitiveness it would be based on is “unfair”.

I completely understand the need for as close as possible a trading relationship with the EU, and for minimal disruption and maximum certainty for Britain’s businesses – even to carry on paying for the bits of the EU that we like or need.

But by decrying the importance of competitiveness – by deploying it almost as a rude word – Hammond is not just being foolish. He is effectively promising to make sure Britain and its citizens remain worse off than they otherwise would have been. He is also sending exactly the wrong message to business, both in Britain and abroad. The one reason for firms to invest, despite the uncertainty of Brexit, is the promise of a more favourable business climate. All Hammond is offering them, however, is an eternity of grey skies.

The irony of all this is that Hammond is actually promising to make Europeans worse off too. Without competition from Britain, Europe will feel less need to become competitive itself. And the growth that competition generates will not be stolen from the Continent, as Hammond seems to think, but used to enrich it, due to the magic of the process of mutual specialisation and exchange. Britain might end up with a bigger slice, but there will be a larger pie, too.

After recent months, I didn’t think it was possible to get more depressed about the state of British politics. Congratulations, Chancellor, on proving me wrong.

Robert Colvile is Editor of CapX