Matthew Oakley is the Director of WPI Economics
Smart regulation is essential to Britain’s future growth prospects. If we want to level up the country, promote a more competitive economy, and protect consumers, then it is essential that our regulators are at the top of their game.
However, experience from recent years suggests that is not always the case. Across a range of sectors, regulators are making judgements that are detrimental to business investment, consumer choice and Britain’s global competitiveness.
For some, the detriment is caused by poor conceptual underpinning. For example, the premise that an effective market could be built by opening up the energy market and relying on customers voting with their feet has ultimately led to company failures and bail outs that we’re all now paying for.
Others are about distinct choices or approaches of the regulator. For example, the Prudential Regulation Authority, which oversees our financial services industry, is currently under pressure from the Treasury to reform the EU’s Solvency II laws. The fear is the regulator is too risk averse when it comes to the amount of capital British insurers should hold in reserve for a rainy day.
This cultural antipathy to growth and investment could prevent billions of pounds of long-term funding from British institutions being unlocked to the benefit for a whole host of projects in communities across the country, from new housing to renewable energy projects.
Most recently, WPI Economics published a report last week showing how the Civil Aviation Authority is putting the recovery and the Government’s efforts to promote Global Britain at risk.
The CAA is in charge of setting airport charges at Heathrow, Europe’s most expensive airport. This year, at the start of a new regulatory period, it has allowed charges to be raised by 56 per cent.
Most worryingly, this choice was made contrary to advice from independent research that it commissioned to inform the decision. It is now deciding whether to keep, or even increase, that rise over the next four years.
As with all regulatory matters, this is a complex issue and some will argue that the immediate costs to passengers may be relatively small compared to the cost of a ticket.
But the truth is that the long-term impacts could be significant. The difference between the CAA’s proposal and those suggested by independent analysis amounts to some £5bn of extra charges on airlines over the period.
This matters. Post-Brexit success and Global Britain are reliant on airlines being able to open new routes to new markets and attract new skills, investors and businesses to the UK. This is only possible through the scale and connectivity made possible by the “hub airport” model run by airlines at Heathrow.
It is not feasible at any other British airport, and this makes Heathrow a vital asset for the UK’s global competitiveness.
Increasing charges by £5bn could undermine all of this. Any increase in passenger costs will mean fewer people choosing to connect through Heathrow (more than half of UK’s regional connecting passengers already do so through a non-UK hub airport).
Coupled with falling demand, increased charges will also make new and more marginal routes less viable, meaning that airlines will consolidate around existing profitable routes. Airline groups will also be incentivised to base more of their network at rival European and international hubs.
Both would mean fewer new routes to new markets from Heathrow and a loss of the connectivity we need to drive economic grow. In short, it would be a major blow to Global Britain.
So what can we do?
First, we need more and better oversight of our regulators. As Theresa Villiers wrote on this site earlier in the year, parliamentarians hold the key. Strengthening our select committee system, with more available data and evidence over the work of our regulators, will enable people to assess their performance in a more transparent way.
Strengthening parliament’s ability to hold regulators to account is essential, but unlikely to be enough if we are serious about economic recovery and future growth. That will mean direct action from theGovernment.
Of course, independence of regulators is a core part of a strong economic system. But that doesn’t mean that the regulatory system should not be open to change. Where regulators are so obviously failing to meet their core objectives to current consumers and future consumers (through growth and competitiveness), government needs to step in.
For some, this could mean a revision of objectives to ensure the balance between consumer, economic and business objectives are balanced correctly. For others, more fundamental change should be considered.
In the case of Heathrow, it is not the regulators job to line the pockets of shareholders of a vital British asset. If the current operators cannot deliver without uneconomic increases of charges, perhaps it is time to open up competition and see whether someone else can.