Here’s the real Plan B for Britain: We need a competition revolution
NO ONE can dispute that the UK economy needs more growth. It seems that the coalition’s essential austerity measures are not enough. But despite its cheerleaders, the usual Plan B, based on debt-financed infrastructure spending, won’t make any difference to growth – while denting confidence. One such plan suggested £30bn in spending. Over three years, this would barely register on GDP. Yet last week even Justin King of Sainsbury’s seemed to suggest that more government “investment” on big infrastructure bets was part of the answer. Such advocates are selling a line in economic boomerangs.
Competition is key to growth, not government spending. And recession hits small firms and new entrants more than the brand names. Small firms depend more on bank funding, as larger firms can use cash reserves. They also face higher sales risks, so labour regulations impact more on hiring decisions. They do not have the cash reserves or contacts to move to emerging markets, where returns require high initial marketing spend. Recession sharply increases these problems for new entrants.
That matters, as we can learn from the 1980s and 1990s, when new entrants contributed more than two thirds of total growth – mainly due to the scrapping of nationalised industries. For a long time, UK air policy was focused on protecting British Airways routes. The gap left by denationalisation opened the way for better service and more jobs by the low cost airlines. And the main benefits went to people with lower incomes, not to business class users.
Consider mobile phones as well, where a old BT-style monopoly would have slowed down development, and where remarkable new types of service and virtual infrastructure haven’t cost the taxpayer a penny.
Competition lowers prices. Even in the current recession, and against the rising price of raw materials, competition from Aldi and Lidl has benefited supermarket shoppers. Monopoly and protection lead to higher prices, reducing demand for a wide range of goods. The Anti-Corn Law League got it right — high corn prices reduced demand across all markets, as the workers lost purchasing power. After repeal, the UK population doubled while the price of wheat halved.
We need a Queen’s Speech for competition, starting with the banks. We’ve had a raft of regulation and a lot has increased risk. The Co-op should be given the green light for entry into banking, instead of being delayed by the FSA, and others should be encouraged to move in.
The Polish economist Michael Kalecki showed that recession helped increase monopoly power. This has certainly been the case with banking in the UK since 2010.
We need a more dynamic competition policy, to challenge market power and encourage new entrants despite the recession’s chilling effects. The end of the BAA monopoly on airports has already brought a wave of new investment, and better service. There are many other areas, including healthcare and transport, where competition would have highly positive effects.
Planning restrictions have boosted monopolies in construction, one of the worst hit areas of the recession. Drawn-out wrangles raise costs and uncertainty about returns. The only bright spot has been the entry of small building firms, increasing customer access. We need to push ahead with reduced controls.
Lastly we must increase incentives to recruit staff. We should move towards an Irish rate of capital gains tax, one paid by all firms without exemptions. If 12.5 per cent is right for a left wing party like Sinn Fein, then why should we set it higher? For the next five years, there should be a virtual enterprise zone, where new entrants and small firms would not pay employers’ national insurance contributions. Small firms could form networks to enter emerging markets overseas.
In the last two years, the UK has seen lower growth than expected. But growth depends on promoting competition, not more spending.
London residents can at least be grateful to Justin King for opening a Sainsbury’s by Richmond station. Prices at Marks and Spencers nearby have since fallen by 20 per cent.
Nick Bosanquet is professor of health policy at Imperial College and an associate at Volterra Consulting.