We cannot regulate our way to growth

The UK economy is in trouble. The latest GDP figures showed zero growth in the last quarter of 2024. This week, the pound slumped to a two-year low and borrowing costs reached their highest levels in 16 years. As such, the Labour government’s repeated promises of ‘growth, growth, growth’ seem further out of reach than ever.

Even before this week’s market turmoil, the government tacitly acknowledged that not all was going to plan. Over the Christmas period, in an apparent act of desperation, UK prime minister Keir Starmer, chancellor Rachel Reeves and business secretary Jonathan Reynolds wrote a letter to the UK’s biggest regulators to ask for help. Regulatory bodies such as energy watchdog Ofgem, water regulator Ofwat, the Environment Agency and the Financial Conduct Authority were urged by the government to submit proposals on how best to boost the economy. Ostensibly, Labour’s ‘growth’ mantra remains, with the letter asking for suggestions to make the regulatory environment ‘more pro-growth and pro-investment’. But for the government to turn to the regulators, of all people, is not an encouraging sign.

Of course, government ministers should always be engaging with their functionaries for advice. But to openly admit they have had to grovel to them for help to meet their central policy commitment was an extraordinary testament to Labour’s lack of ideas. It is even more depressing that the government felt it had to seek guidance from organisations with such records of failure as Ofgem and Ofwat.

This plea to the regulators demonstrates that managerialism is a core feature of this Labour government. It would prefer to manage what already exists, aided by ‘expert’ technocrats, than attempt to change things, which would need political vision. In earlier times, a government in trouble would usually persevere with its political programme, reassuring the electorate that the benefits would come later. Or it might come up with better policies to achieve its goals. In contrast, a manager in trouble will often turn to other managers for advice. Starmer’s letter should extinguish any lingering illusions that the debacle of Labour’s first six months were just teething problems. It confirms that there is no transformative plan waiting to be unveiled and that Starmer is a managerialist to his core.

Starmer has tried to pretend otherwise at times. He has even given tubthumping speeches bashing ‘the regulators, the blockers and bureaucrats’ – or what he called an ‘alliance of naysayers’ – for stopping investment and growth. In December last year, he infamously blamed Britain’s sluggish growth on the ‘people in Whitehall [who] are comfortable in the tepid bath of managed decline’. While this is not entirely untrue, the prime responsibility for this really rests with the politicians who pass the laws, set the rules and pay the wages of these regulators and bureaucrats, rather than the functionaries themselves.

Unfortunately, these politicians have internalised the zero-sum thinking created by decades of economic sloth and stagnation. Despite knowing that the UK needs additional wealth to fix many of its problems (hence all the rhetoric about growth), the political class still goes along with the fatalist notion that we shouldn’t expect to resume even late-20th-century levels of economic growth.

A key problem here is that politicians have grown too reluctant to upset the status quo. They have become thoroughly uncomfortable with the risks of undertaking significant change – hence their safety-first inclination to put more and more regulatory guardrails in place. This is what has been driving the tentacles of the administrative state further and further into business and into our lives.

The ascendancy of this risk-management ethos helps to explain why previous attempts to reduce the cost of business regulation have all failed to hit their targets. Between 2015 and 2023, the Conservative government set itself the target of a £19 billion reduction in business costs through deregulation. Instead, the Regulatory Policy Committee watchdog calculated that, even exempting most Covid legislation, the regulatory burden actually increased by £18.4 billion in that period.

This sorry record suggests we shouldn’t hold our breath waiting for Starmer’s administration to deliver on his pledge to get rid of regulation ‘where it is needlessly holding back the investment we need to take our country forward’. The reality is that his government, like its predecessors, will only add more to the regulatory burden. Indeed, Labour’s manifesto explicitly promised tougher systems of regulation on a huge spread of businesses, including energy suppliers, water suppliers, the private rented sector, builders, the children’s social-care sector, further- and higher-education providers and gambling firms.

Unlike its supposedly ‘fundamental mission’ of securing growth, the government has already started to make good on its regulatory plans – not least by introducing tougher employment laws on businesses. In an act of almost self-parody, Labour has even set up another regulatory body, the Regulatory Innovation Office, designed to promote coordination between regulators. Its aim is to cut red tape, but in practice this has just created yet another team of technocrats to help existing teams of technocrats be more effective regulators.

Other recent Labour announcements include extending public-procurement rules to give greater weight to ‘social value’ when choosing suppliers for government contracts. The government also plans to introduce ‘binding regulation’ on technology companies to emphasise the ‘safe development and use’ of artificial-intelligence models. And, of course, we will see further regulatory measures to achieve zero-carbon electricity by 2030, as part of Labour’s Net Zero aspirations.

This wave of regulations is piling ever more strain on businesses. ‘Pro-investment’ or ‘pro-growth’ regulation is oxymoronic. Regulation necessarily brings higher business costs, adding to the constraints on businesses investing. Compliance costs money and employees’ time, diverting resources from more productive activities. To the detriment of disruptive new businesses, regulation also benefits larger companies that are better able to absorb this drain.

What’s the alternative, given that technocratic governance has become the norm in Britain? If Labour is serious about growth, there are a number of things it could do. It might offer new businesses an immediate regulation ‘holiday’ within their first 10 years of incorporation – save for basic employment rights and welfare standards for workers and consumers, as agreed by parliament.

It could also introduce parliamentary (instead of behind-the-scenes) approval for all new major regulations, along the lines of the 2021 US Regulations from the Executive in Need of Scrutiny (REINS) Act. This would demystify the regulatory system and help to hold regulators to account.

As part of this comprehensive regulation review, Labour should also consider jettisoning the UK’s adherence to the ‘precautionary principle’. This prevents policymakers and businesses from taking risks if any future harms to the environment cannot be precisely calculated in advance. This principle has applied to the UK since it was enshrined into EU law via the Lisbon Treaty in 2007. Following the UK’s exit from the EU, it was incorporated into the Environment Act 2021. This law has been used to justify the costly ban on fracking, essentially prioritising environmental benefits, real or imagined, over lowering energy costs and boosting economic growth.

Instead, the government should embrace a culture of permissionless innovation. Experimentation with new technologies and business models should be permitted by default – unless a compelling case can be made that a new technology will bring serious harm to society, innovation should be allowed to continue unabated.

As none of this is likely to come from Starmer’s band of managerialists, we will need to elect governments with a political purpose again. Only then can the UK get back to growth.

Phil Mullan’s Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Amazon (UK)