There are three key elements in the economic case for leaving the EU: the saving of our net contributions to the EU budget; escape from the EU’s protectionist trade policy, enabling us to operate our own; and the freedom to diverge in our regulatory systems.
All along, our net budget contributions, amounting to about £10bn per annum, have received an amount of attention out of kilter with their economic significance. More recently, trade policy has been at the forefront of the debate. It is widely believed that trade brings enormous benefits and that in order to secure these you need trade agreements. In fact, advantageous though trade is, its effects on economic growth have been seriously exaggerated. And it should be blatantly obvious that you don’t need trade agreements to trade. But what about the third element, regulatory freedom? It has received comparatively little attention. Yet it could turn out to be the most important.
Although some private sector economists have forecast substantial benefits from regulatory reform after Brexit, most economists, and all official ones, have come up with only minor gains. This is partly because they assume that in practice the UK will not choose to diverge much from EU regulations. But it is also because their modelling typically shows little gain from regulatory changes when they happen. I suspect that they are fundamentally wrong. Although the costs of regulation may be difficult to measure, they can be substantial.
It is not unusual for something that is important but difficult to measure to be glossed over. In the early Eighties the dominant view among economists was that the ownership of industry didn’t really matter. The first of Mrs Thatcher’s administrations did not have privatisation as a primary objective. It was stumbled into as a way of raising cash and broadening share ownership. Only subsequently did it become apparent just how inefficient state-owned enterprises had been and how their privatisation could improve productivity. I suspect something similar will prove to be true of our regulatory system.
“Regulation” sounds like a good thing. Similarly with the often associated word “standards”. Who wouldn’t be in favour of tight regulation and high standards? Yet it is all about balancing the benefits against the costs. You can have regulation that is too tight and standards too high. This is what has happened with the health and safety culture which has gone mad, leading to barmy results.
And it is what has happened in the EU. Why has the EU’s economic performance been so poor relative to other economic areas? Over the last two decades the answer has mainly been the euro. Yet the EU’s underperformance goes back further than the formation of the euro and even now encompasses more than just that self-inflicted wound. The reason is surely the EU’s regulations.
These tend to be worse and more damaging than elsewhere in the world because the EU’s regulations are conceived in an anti-business spirit by an unaccountable bureaucracy and imposed across 28 member countries with very different conditions.
There has been an inbuilt tendency to over-regulate, not least because this increases the influence and power base of the central regulating authorities. Moreover, regulation pushes in the direction of the EU’s cherished objectives of harmonisation and integration, whereas the free market let-it-all-hang-out approach pushes towards divergence. Examples of where the EU has overstepped the mark include the Working Time Directive, the Agency Workers’ Directive, and the Clinical Trials Directive. Businesses across the country could doubtless come up with umpteen others that particularly cause them much trouble and expense.
Of course, in a modern economy you need some sort of regulation. Markets aren’t perfect and consumers need some protection from producers and even from themselves. The key question has always been how much regulation and of what sort?
So even the most hardened of Brexiteers will not be looking for a bonfire of all regulations but rather a scaling back and a reworking of what we currently have, fashioned specifically for the UK and paying full regard to the consequences of regulations, both intended and unintended.
Such an agenda is apparently too much for the Chancellor of the Exchequer. He wants to reassure our European partners that we do not intend to diverge from “the European social model”. (Indeed, he has been trying to ensure that we can’t.) Yet what is “social” about 9pc unemployment in France, or 37pc youth unemployment in Greece? Keeping UK regulations post-Brexit closely aligned to the EU model would have the effect of throwing away a substantial part of the potential gains from Brexit.
In this debate, there has often been reference to Singapore but few people have fully understood the way that country really works. It is certainly not a paragon of laissez-faire. Indeed, the state is extremely powerful and plays a major role in the economy.
But the key point is that Singapore’s regulations are made by Singapore for Singapore, with a keen eye on promoting growth and fully aware of the economic consequences of excessive restrictions. The excellence of its economic governance is the reason why this tiny island has transformed itself into one of the world’s most prosperous countries. Do you imagine that it could have achieved this if it had been trapped inside the European Union?
Effective economic governance is also critical to growth here. In the Eighties Mrs Thatcher’s governments embarked upon a series of radical domestic reforms, including privatisation, control of the unions, reductions in some key tax rates – and deregulation. The result was that the UK went from being one of the worst performing countries in Europe to one of the best.
Provided that we leave the EU with full control over our destiny, including our regulatory systems, we will have the opportunity to secure a second supply-side revolution.
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