Stephen Booth is Head of the Britain in the World Project at Policy Exchange.
The fallout from Liz Truss’s short-lived premiership and the September “mini” budget mean that Rishi Sunak’s Government will now need to operate within narrow macroeconomic tramlines. Preparing the public for bad news, the media has been briefed by Treasury officials of the need to fill an “eye-watering fiscal black hole”.
The Chancellor’s Autumn Statement in two weeks’ time will set out a mix of tax rises and spending cuts designed to return the public finances to good health. Policy Exchange’s recent report, Balancing the Books, presents a non-exhaustive menu of potential revenue raising measures and spending efficiencies that he should consider. These include imposing an additional windfall tax on energy companies, raising between £9 and £16 billion; replacing the energy price guarantee with a progressively tiered energy subsidy scheme, saving £12.9 billion; and/or ending the triple-lock and instead linking pensions to average earnings, saving £11 billion in 2024-25.
Clearly, there is a vital and immediate need to regain international trust in the UK’s fiscal discipline and restore economic stability. But the risk is that the fiscal errors made by the Truss administration tarnish the vital goal of improving the UK’s sluggish long-term growth rate.
Truss’ government was due to bring forward regulatory proposals to liberalise planning, infrastructure, and childcare. However, “There are no plans for supply-side reforms as we previously discussed,” the new Prime Minister’s Spokesman said last week. He added, “That’s not to say there won’t be elements the Chancellor may or may not wish to come forward with in his autumn statement.”
It is understandable that the new occupants of Downing Street want to distance themselves from the economic errors of the previous regime. But the limited room for macroeconomic manoeuvre makes the long, hard work of improving microeconomic policy, including regulatory reform, even more important to boost the UK’s long-term post-Brexit growth prospects.
Sunak has inherited the Retained EU Law (Revocation and Reform) Bill, which passed its second reading in the House of Commons last week. The proposed Bill will abolish the special status given to retained EU law and will enable the Government, via Parliament, to amend, repeal and replace retained EU law more easily. The Bill was intended to be deregulatory and provides mechanisms to use regulatory reform to support growth.
The Bill will sunset the majority of retained EU law, so that it expires on 31st December 2023, unless it is actively preserved. Although the sunset may be extended for specified pieces of retained EU Law until 2026, this is a rather blunt instrument. Given that the Bill is yet to be enacted, the end of 2023 presents an incredibly tight timescale to review and propose amendments to inherited EU regulation.
Critics of the Bill have described the process as a waste of civil servants’ time and suggested that the question mark hanging over 2,400 regulations is contributing to further uncertainty for business. However, the political reality is that it will be difficult to remove entire regulations wholesale and, given the limited time available, the strong forces of inertia within departments means much of this regulation is likely to be kept in its present form. The bigger risk is that the opportunity for reform is missed.
Therefore, the Government should make clear that the review of EU law sits within the context of a wider plan for growth, rather than a dogmatic quest for divergence for divergence’s sake, and that it will prioritise its efforts where they can have the most impact.
The majority of retained EU law is concentrated among relatively few Departmental areas: (DEfRA – 570; Transport – 424; Treasury – 374; Business – 318; HMRC – 228). Financial services regulation is already being dealt with separately by the Treasury under the Financial Services and Markets Bill – and the Government is correct to identify reform of Solvency II as a means of unlocking greater infrastructure investment.
Before the end of 2023 deadline, these other departments should be required to consult with business and present their top priority reforms to EU law. For example, DEfRA should be tasked with assessing how the cumulative impact of environmental and habitat regulation increases delays to planning decisions – many of these rules stem from retained EU regulations and case law.
In 2022, a growing number of local planning authorities have been informed by Natural England that development in some catchments can only proceed if it is evidenced as “nutrient neutral”, despite the sector’s contribution to the issue being marginal in comparison to that of agriculture. The House Builders Federation estimates that “at least 100,000 new homes across 74 Local Authorities are unable to proceed” due to the requirements.
There are, of course, other vital regulatory reforms, unrelated to Brexit or EU regulation, which should be prioritised to address key UK economic challenges. For example, childcare reforms to increase carer-to-child ratios and reduce the bureaucratic burden on childminders, as set out in the Policy Exchange paper Better Childcare, would both assist households with the cost of living crisis and support parents back into the workforce.
Equally, reforming the planning system to end detailed land-use allocations and move to a zoning-led system of development would boost growth and help make housing more affordable.
With an ageing population placing greater demands on public services, raising productivity and growth are vital to avoid ever-rising taxes. The UK’s core economic weaknesses preceded Brexit but, with trade barriers with the EU increased, there is now a greater need to address them. Getting the public finances in order is necessary but not sufficient to meet the growth challenge.