Ruth Lea: Radical policies are required to rediscover Britain’s lost competitiveness

Ruth Lea is Economic Adviser and Director of Arbuthnot Banking Group.

One of the joys of being an economist is that there is never a shortage of material to read and figures to ponder over. A new report by the CBI entitled "Making the UK the best place to invest" struck me as of particular interest. It concluded that “much more needs to be done to improve the investment landscape to retain companies based here and attract fresh inward investment”.  Note the words “much more…”

The CBI’s report contained no surprises but its confirmation of what has been said many times before is not without value. Basically Britain has lost competitiveness in recent years with the top concerns being high personal and corporate taxes and the increasing regulatory burden.

This suggests that we need nothing less than a tough programme of tax cuts and a major reversal of the previous Government’s regulatory agenda if the country is to regain its lost competitiveness. I’m aware of the state of the public finances and the Chancellor’s tax-cutting measures in the Budget, but the 50% personal tax rate is an own goal which should be reversed.

Regulations have been heaped on businesses over the last 15 years. The British Chamber of Commerce has estimated that the total gross cost of regulations introduced since 1998 was around £88.3bn in 2010. Small businesses find the increasing cost and complexity of regulations especially burdensome, especially employment regulations. A true “bonfire” is required and vested interest groups need to be tackled.

Granted, the Chancellor announced some relief in the Budget, including dropping existing proposals for regulations that would have cost business over £350m a year to implement. But note that the EU’s Agency Workers Regulations are being implemented in October this year and will cost business nearly £2bn a year. So we have one step forward and ten steps backwards. Of course, we are impotent to repeal EU regulations whilst we remain committed to EU membership. But it’s time to break the chains and negotiate a Swiss-style relationship with the EU. Incidentally the latest WEF competitiveness report shows Switzerland in top spot – surely no coincidence.

High taxation and heavy regulations are just two of the factors, though probably the most important two, chipping away at this country’s ability to grow. The CBI also quoted planning restrictions, inadequate infrastructure and skill deficiencies in the workforce. I would add at least one more – and that is our competitiveness-destroying high cost energy policy.

Government energy policies are of course inextricably intertwined with climate change policies and the very ambitious, uniquely ambitious, targets for reducing CO2 emissions and increasing the role of renewables. Whatever one’s views on the efficacy of our ability to influence overall global CO2 emissions, where we lead many others are emphatically failing to follow, one thing is crystal clear. Green energy policies have already added a considerable “stealth tax” on electricity prices of over 20% for business consumers - which could rise to 70% by 2020 on DECC’s own figures.

This “stealth tax” undermines the competitiveness of all British business by raising input costs. But it is especially damaging to energy-intensive manufacturing industry such as chemicals and steel, which are all too frequently disparagingly (and wrongly) referred to as “sunset industries”. Britain’s chemicals and steel industries are currently competitive. But they are vulnerable to high energy costs and they must have a reasonably level playing field if they are to thrive. High energy costs will block their expansion at home and, worse still, drive these industries abroad to more cost-competitive regimes. It is sheer folly to undermine these businesses with mistaken energy policies when they have a vital role in Britain’s recovery.

This brings me to the current debate on “rebalancing the economy”, the topic of the CPF’s latest Discussion Document. Specifically there is much talk in policy circles on the need to build up the manufacturing base in order to reduce the country’s dependence on financial services. And there is particular enthusiasm for “modern, hi-tech” products at the expense of the more traditional industries including chemicals and steel.

But technical wizardry does not, in itself, guarantee economic success and, conversely, well-established manufacturing industries (which incidentally are frequently hi-tech in their processes) contribute significantly to the economy and should not be dismissed as old-fashioned and irrelevant. The relevant criterion for a successful business is not whether it impresses with cutting-edge modernity but whether it produces goods and services that consumers want to buy at the right price. This is basic economics at its most basic.

Back in the 1980s the Conservative Government introduced supply side reforms intended to raise the overall macroeconomic competitiveness of the economy. Their strategy was to get the “conditions right” for business to thrive and let business do the rest, with minimal direction from Government. It worked.

The Government must heed this message and seriously start working on getting the “conditions right”. They need to take a hard, deep look at the competitiveness-implications of all their policies that affect business – taxation, regulation, EU commitments and energy policies to name but four. And they must be prepared to take some very radical decisions. If they do not, Britain cannot regain its lost competitiveness and growth can only falter. There is really no “third way.”