Everything they tell you is wrong

The Coalition Government is out to smite the ‘red-tape’ beast reared by the ‘enemies of enterprise’. It has launched a ‘red-tape’ challenge to identify the pointless regulation that is strangling entrepreneurship, innovation and investment. It is doing so because economic orthodoxy is unequivocal: lightly regulated labour and product markets are a prerequisite for success in the globalised economy.

In his 2011 Budget speech, the Chancellor put some meat on the bones by repeatedly referring to the nations which had overtaken the UK in terms of competitiveness: Germany, Finland, the Netherlands and Denmark (henceforth referred to as the competitiveness enhancing countries or CECs). The message was clear; if the UK is to regain lost competitiveness it is essential that business taxation and regulation are slashed.

The evidence strongly suggests that the coalition government has its priorities very wrong if it believes further undermining of employment legislation is the path to economic dynamism

Of course, Osborne is hardly alone in pursuing this agenda. All the main parties in Scotland have consistently pandered to employer characterisation of the Scottish and UK economies as over-regulated, over-taxed, overly-bureaucratic business dystopias. A cursory read of recent manifestos confirms this to be true, riddled as they are with silly commitments to percentage cuts in regulation (how is the baseline to be established?) and ‘one-in, one-out’.

It seems the political parties of our nation are determined not to learn lessons from the global financial crisis which surely must be understood, at least in part, as a failure of weak regulatory regimes and supine, captured regulatory authorities. More perceptive commentators have traced the origins of the crisis beyond financial market regulation, stressing the role of wider deregulation, particularly of the labour market, in creating the conditions (higher profit share = more damaging speculative activity; lower wage share = rising household debt) in which the crisis was incubated.

But is Scotland over-regulated? What does the comparative evidence tell us?

On any credible comparative measure, Scotland as part of the UK (please note – this is not an argument for or against any constitutional position; I use this phraseology because very little regulation that affects businesses directly is currently implemented or enforced by the Scottish Government) is a very lightly regulated economy. The OECD, routinely presented as unassailably authoritative when endorsing austerity, currently identifies the UK as the second most lightly regulated product market in the developed world and the third least stringently regulated labour market.

The OECD’s indicators of employment protection measure the procedures and costs involved in dismissing individuals or groups of workers and the procedures involved in hiring workers on fixed-term or temporary work agency contracts. The levels of employment protection afforded to UK workers are well below the OECD average and below all the CEC’s. Germany, which is widely perceived to have ‘reformed’ its labour market, retains levels of employment protection well above the OECD average and far above UK levels.

The OECD also publishes a comprehensive and internationally-comparable set of indicators of product market regulation that measures the degree to which policies promote or inhibit competition in areas of the product market where competition is viable. The indicators cover formal regulations in the following areas: state control of business enterprises; legal and administrative barriers to entrepreneurship; barriers to international trade and investment.

The OECD’s analysis of product market regulation 2008 found that, out of the 37 countries studied, only the United States regulated its product markets less stringently than the UK. The UK product market (score 0.842) was assessed as less stringently regulated then Netherlands (0.969), Denmark (1.057), Finland (1.188) and Germany (1.328). On the ‘barriers to entrepreneurship’ sub-indicator the UK again outscored the CECs: UK (0.824), Netherlands (0.871), Denmark (1.15), Germany (1.315) and Finland (1.36).

The World Bank ranks nations in terms of ‘ease of doing business’. A country’s rank depends on its performance against a set of indicators including starting a business, dealing with construction permits, enforcing contracts, paying taxes and trading across borders. The UK currently ranks seventh out of the 183 nations covered in the survey. (Hilariously, this represents a drop of three places since the Coalition set forth on its ‘red-tape challenge’; seems the Coalition has actually made the UK a harder place in which to do business!).

I guess this is why the Chancellor didn’t cite evidence from his favourite international institutions when making his 2011 Budget statement. However, he did cite the World Economic Forum’s Global Competitiveness Index, which he tells us shows the UK has lost ‘competitiveness’ in recent years. Competitiveness, a slippery concept at the best of times, is in Osborne’s world, a function only of tax and regulation.

Now let’s be clear, the STUC does not regard the GCI as a credible exercise. It is developed using data drawn from two sources:

• international organisations/national sources; and,
• the WEF’s Executive Opinion Survey. It is important to bear in mind that the scoring of many of the GCI indicators (e.g. Wastefulness of Government Spending) is dependent only on the answers of business executives to a single question.

However if we are to accept, for the sake of argument, that the survey does tell us something valuable about the concept of competitiveness, then it appears that the Government is learning all the wrong lessons:

• According to the GCI, the UK is clearly not over-taxed compared to the CECs;
• According to the GCI, the UK clearly has a much more flexible labour market than Germany, Finland and the Netherlands. The Danish labour market might be more flexible but it is also much more secure, which is why its singular system is described as ‘flexicurity’. The STUC considers it unlikely that the Coalition plans to deliver the level of benefits provided to redundant workers in Denmark anytime soon;
• The GCI pillar on which UK performance is poorest compared to the countries cited by Osborne is Infrastructure – an approach that focused on this ‘competitive disadvantage’ would look very different from the one offered in the Government’s Plan for Growth. Of course, the Government is currently slashing capital investment. Although it has sought to protect ‘growth enhancing’ infrastructure, the levels of investment remain weak compared to other nations; and,
• Although there have been some reforms to the labour and taxation systems, none of the CECs has pursued a ‘competitiveness’ first agenda based on tax cutting and deregulation. Neither have Switzerland or Sweden – the most competitive countries in the world according to the index. Sweden, a relatively high tax, high regulation jurisdiction is competitive because it has invested heavily and consistently in its people, research and infrastructure.

A Plan for Growth that genuinely sought to learn the real lessons of the Global Competitiveness Report could look something like this:

• Increase corporation tax to bring the UK in line with the mean for the CECs and high competitiveness countries like Sweden;
• The additional tax take should be devoted to improving transport and communications infrastructure in order to provide a direct boost to industry and increase the long-term capacity to grow; such investments would also assist in breaking down the regional disparities which supposedly concern the Chancellor. Of course, many would argue that now is the correct time to bring forward capital investment from future years given the very low cost of borrowing and low prices due to spare capacity in the construction sector;
• Meanwhile there should be a focus on improving the UK’s performance in other areas where the CECs perform better and which will exert considerable influence over the UK’s long-term performance on sustainable growth and job creation: innovation, corporate governance, skills training and intelligent procurement (to boost innovation). There should also be a review to ascertain the long-term economic impact of leaving UK companies considerably more open to foreign takeover than is the case in the CECs; and,
• Similarly, given the coalition’s concerns over happiness and social mobility as well as fairness and sustainable growth, there should be a review of the UK’s flexible labour market to ascertain its impact on these areas. The economic success of the CECs (as noted above Denmark’s flexicurity system makes it something of a special case) despite having much more rigid labour markets challenges prevailing anglo-saxon orthodoxy that flexible labour markets are a necessary condition for competitiveness.

The STUC accepts that the GCR can be used to tell many different narratives; but the one we have settled on above is, on the basis of the evidence provided, much more compelling than the Chancellor’s.

The STUC does not believe that a plan for growth based on deregulation and tax cuts is necessary or desirable; we believe instead that such an approach will undermine the type of investments – in people, infrastructure and research – required if the UK is to address its genuine economic disadvantages.

The international evidence on regulation and taxation provides no support for the contention, ubiquitous in the Scottish policy debate, that economic success in the globalised economy is dependent on low regulation and low business taxation. Some of the poorest nations in the world have the least regulation. Countries which are recovering strongly from the financial crisis-induced recession have levels of regulation and business taxation far in excess of the UK. Resisting, not joining the race to the bottom, appears to be the way forward for the economy.

The evidence strongly suggests that the coalition government has its priorities very wrong if it believes further undermining of employment legislation is the path to economic dynamism. The UK labour market is already very lightly regulated in comparison to our international competitors. Countries where debt is lower and exports higher as a proportion of GDP, and where manufacturing remains strong, often have comparatively high levels of employment protection. Of course, these countries tend to invest more in skills, employee engagement (Germany’s system of co-determination for example) and leadership and management thereby facilitating ‘high-road’ approaches to productivity growth.

Although a longer consideration of the causes and effects of growing income and wealth inequality is not appropriate in this article, there is a strong correlation between labour market deregulation and the falling proportion of wages as a proportion of GDP and the higher proportion of GDP accounted for by profits. It will be impossible to realise the coalition government’s ambition of building an economy with strong demand but less reliant on debt if wages continue to fall.

Deregulating product markets may appease those with a strong theoretical and/or ideological approach to economic development but it does not guarantee economic success. It is no accident that the UK and US, the most lightly regulated product markets in the developed world were at the epicentre of the global financial crisis.