Ten steps which should change the British economy
A return to the pre-Covid status quo ante is not good enough. We need to substantively rewire our economy, our society, and our lives. We need to do address our productivity crisis, open up new markets, and sustainably increase our trend growth rate.
There is a demand for reform. From London to the (post-)industrial North, people want to see change, even if it is not always well-defined what kind of change that is, and how it should be delivered. To meet the expectations of many the government will need concrete, innovative, and indeed revolutionary new ideas and policies. In this article, I want to offer a few thoughts for a new economic policy agenda.
Boost housing supply via New Cities
All the estimates show that we have a shortfall of millions of homes, especially in high-demand areas – the cumulative result of more than three decades of systematic under-building. This has led to escalating rents in the private rental sector, escalating waiting lists in the social housing sector, and significant financial barriers to home ownership, especially for our younger generation.
“A nation of homeowners” was once a political objective shared by people from across the political spectrum, left, right, liberal, centre or whatever. At some point, we seem to have quietly given up on it. We have become a nation of NIMBYs instead, a nation of naysayers and obstructionists.
Radical reform is needed to bring down the cost of home ownership and renting, whilst also increasing employment opportunities in construction-related sectors in the process. There are many thousands of jobs that could be created in the auxiliary services around housing development.
We could, in principle, do this by expanding existing cities such as London, Cambridge, Oxford, Manchester, Birmingham, and Newcastle. But this would be quite the logistical challenge, and without major reform, planning constraints and entrenched political resistance to housebuilding make it nigh-on impossible.
A potential way to side-step these issues is the creation of New Cities, a revitalised, modernised and scaled-up version of the New Towns that were built after the Second World War (such as Milton Keynes, Peterborough, Stevenage, Basildon etc).
This does not mean repeating the central planning of the post-war years. It can be very much a market-led process, driven by competing private sector providers. The idea is simply to provide an empty space far enough removed from the NIMBYs, infrastructure, and above all, legal certainty, and the freedom to build. New Cities could be centred around new universities and other education providers, which would be am initial focal point for providing jobs, and a sense of community. The rest remains to be seen. Communities cannot be “planned”. They can only be given the space and the freedom to develop.
Sam Bowman, formerly of the Adam Smith Institute, has recently proposed a “Hong Kong 2.0”, in the form of a charter city. I like it. But why stop there? Let’s throw a Hong Kong 3.0 into the mix, while we’re at it, as well as a Singapore 2.0 and a Dubai 2.0.
Private healthcare – a lucrative growth market
A flipside of our quasi-religious reverence of the NHS is our intense ideological hostility to private healthcare, which leads us to unnecessarily constrain a potentially lucrative growth sector.
The private healthcare sector in the UK is tiny, compared to its counterparts elsewhere. In Australia, more than half of the population have private health insurance. This is not because the public system is so terrible, or so patchy, that people have to seek alternatives elsewhere: Australia has a comprehensive, universal public health insurance programme, which delivers, if anything, higher standards of care than the NHS. But some people still want to go beyond, and in the Australian system, they can quite easily do that. Even in Switzerland and Germany, which have some of the most generous healthcare systems in the world, about one in three people still have some form of private insurance. In Britain, only about one in ten people do.
Demand for healthcare is increasing globally, as a result of a combination of demographic factors (population ageing) and economic ones (the rise of formerly poor countries, which we now think of as emerging markets). In addition, healthcare is becoming an increasingly globalised sector, with more people seeking treatment across borders.
Some countries see this as an exciting new business opportunity. In Britain, we see it as a terrible threat. Where others see a thriving growth sector, we see increased pressure on our beloved NHS. When we hear a term like “medical tourism”, we don’t think of a dynamic new global market – we think of foreigners coming here to take advantage of our NHS.
It’s not that we’ve got the wrong mindset. In higher education (a sector undergoing similar changes), we have been better than almost anyone at capitalising on the new opportunities offered by the emergence of a global education market. We’ve got what it takes. But in healthcare, we’ve got the wrong structures. I want our hospitals to be able to do what our universities are already doing very successfully. I want us to attract medical tourism from around the world, instead of losing enormous amounts of money to Germany, Switzerland, Israel and other medical tourism destinations. I want us to become a medical tourism hotspot, with all of the export revenue, dynamic innovation and research that this brings.
How can we get there?
A first step would be to learn a few lessons from Australia, where a comprehensive publicly funded healthcare system, and a thriving private healthcare sector, coexist side by side. The Australian government recognises the fact that if you have private health insurance, you will, in all likelihood, use the public system less – and this is reflected in Australia’s tax and transfer system. More specifically, if you have private insurance, you will receive a tax rebate to compensate you for some of the foregone public healthcare. The rebate can be worth up to a third of your private insurance premium.
If done well, a system like this could take pressure off the NHS, leading to a decrease in waiting times and an increase in the quality of care. The NHS would remain free at the point of use for all who need it, while benefitting from a reduced caseload, and, in per-capita terms, increased budgets. At the same time, a private healthcare sector would be allowed to grow alongside it.
Airports are a key piece of infrastructure for any modern globalised economy. Businesses rely on global connectivity, and increasing the capacity of regional hubs would serve to boost productivity by making markets and cities more integrated. As a side-effect, it would also provide employment opportunities to thousands of people, both during the course of construction and long afterwards.
Britain was once a global leader in the liberalisation of air travel. We got there before the rest of Europe caught up, and we benefit from that to this day: if you compare European airports by indicators such as passenger numbers, you will find that Britain still punches well above its weight.
However, our biggest airports have long been bursting at the seams, and by not allowing them to expand, we are choking one our most successful industries.
We need a world-beating hub airport in the vicinity of London. Personally, I am not convinced that our legacy airports, Gatwick and Heathrow, are up to that job. I think it is more likely that an entirely new airport, connected to London’s transport hubs via high-speed-rail, is the way to go. But I don’t want to second-guess the market outcome. Give them all permission to build or expand, and then let the market decide. I just want to see an end to all the dithering and wavering, the excuse-making and the procrastination. I am not asking them to build a space station – just for a bit of tarmac on the ground, like they have already done years ago in Frankfurt or Amsterdam. After liberalisation began in the mid-1980s, the aviation sector witnessed a prolonged period of spectacular growth. We could repeat, and even surpass that success story.
Water, oil and energy
There are plenty of smaller-scale, less spectacular initiatives that could boost growth, alongside other benefits.
Infrastructure needs to be significantly expanded. A series of water-based green infrastructure projects – the creation of systems of canals, lakes, dams and reservoirs, connecting economic hotspots in Britain, could bring a range of benefits. It could help in the prevention of both floods and droughts, “upgrade” parts of the countryside, as well as improving transport infrastructure. Where possible, this should be private sector-led. Where not, it should be funded from local taxation, to improve accountability.
Decommissioning aging energy infrastructure in the North Sea is a market projected to be worth £15.3 billion over the next decade. The potential opportunities that will arise from the development of a world-leading domestic decommissioning industry are vast. However, we will not be able to deliver a well-functioning industry whilst operators remain siloed when it comes to the operating model they intend to deploy or the network of contractual relationships they wish to pursue. The Government needs to provide certainty and clarity on the expectations of the decommissioning supply chain.
The supply of electricity between the UK and continental Europe via interconnectors has been an incredible success story. It allows for efficient market coupling and the reduction in electricity price peaks and troughs caused by demand and weather-dependent supply.
Building further interconnectors would help secure a reduction in the price of electricity, delivering significant savings for the British consumer. Additional interconnectors would also improve energy security. Access to electricity from other markets is essential to balance the grid as intermittent renewables continue to come online.
Finance and business
One of the most widely believed myths in British politics is that the quarter-century or so leading up to the financial crisis has been a period of “financial deregulation”, giving rise to a Wild West “Casino Capitalism”.
Nothing could be further from the truth. Yes, of course, the crude capital controls of the 1970s are no longer with us. But whether you look at the number of people employed by financial regulators, or at the volume of the statute books, the overall trend has clearly been one of more regulation.
Some of this may well be justified, and sensible. But on the whole, it is simply not true that adding more and more rules to the statue book, and hiring more and more regulators, creates a safer world. It certainly comes at a cost, though.
Our banking and industry systems seem to exist in parallel universes. Banking restrictions and regulations have virtually paralysed direct lending. The only types of private lending that still operate at real scale are mortgage lending and bank lending to traders. This calls for a new, streamlined regulatory framework for bank lending to businesses.
Finance is the life-blood of the economy. Lending needs to be revived by making it worthwhile both for banks and for borrowers. Lead-times of years are unacceptable and holding back our economy. A light-touch regulatory regime to accelerate the approving of funding, so that wait times can be brought down to between six months and one year, would unlock a huge amount of investment in the UK. A wide range of regulations should be simplified or removed.
Money is the lifeblood of business, but banks today are not only financial institutions. They are an arm of the tax authorities, they undertake anti-money-laundering and corruption work, in many ways they act as an extension of the state. Such activities are necessary, but they are more properly the responsibility of the state itself. The banks should be returned to being financial institutions, that promote lending, security and creation of business.
Banks should be uncomplicated institutions focused on providing the necessary capital to support British businesses; their primary capability is weakened by the burden of secondary responsibilities better carried out by the police, auditors and other authorities.
There’s a lot more. As already mentioned in my last blog, we also need a smarter, simpler, less distortionary and more investment-friendly tax system. We need to strengthen the local level and the regions, through a proper combination of political and fiscal centralisation, so that autonomy, responsibility and accountability go hand in hand. And we need a smarter and more liberal immigration system, which makes it easier to attract the best and the brightest.
The measures outlined here touch all areas of the UK economy, and they are radical. They are also necessary to deliver real improvement and growth. They speak as well to a societal change, shifting the entire nation towards a new dynamism and a willingness to engage in ambitious wealth creation projects. The resultant economic shifts would have societal benefit, as well. They would provide a clear vision for the future of the UK and foster hope for a different and better future.
If we want to come out stronger on the other side, we have to radically restructure our nation. This is a change to recapture the innovative, world-leading economy that we have been in the past. The government has spent a huge amount attempting to mitigate the coronavirus crisis – we must now move beyond mere crisis management, and think about what kind of economy we want to be in ten or twenty years’ time. If we don’t want a repetition of the miserable decade that followed the crash of 2008, we need to act fast.
Alexander Temerko is director of Aquind Ltd, and a member of the IEA’s Advisory Council.