Reeves Told to Be Honest About Political Risks of Deregulation
(Bloomberg) -- The UK government’s new idea to boost growth is in fact an old favorite: business-friendly deregulation. The appeal, for a cash-strapped Labour administration that’s already ramped up taxes, is that it’s free.
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Instead, the cost will fall on consumers, and senior regulatory figures have told Bloomberg that the government needs to be more honest about whose neck is on the line.
Chancellor of the Exchequer Rachel Reeves told Bloomberg News in Davos last week that she wants Britain’s watchdogs to regulate “not just for risk but for growth.” What she did not say is that more growth means more risk and more consumer harm: to the homeowner whose house is repossessed or the community that opposes the wind farm in their backyard.
Until politicians accept that, the plan will fail, former European Union finance commissioner Jonathan Hill said. “Risk appetite needs to be set by the politicians, who have to be more honest about failure,” Hill, who ran a review into the public listings regime for the last Tory government, told Bloomberg.
“We need politicians to take responsibility and recognize that regulation is politics because it’s ultimately about growth, jobs and investment.”
Addressing the House of Lords Financial Services Regulation Committee last week Nikhil Rathi, the Financial Conduct Authority chief executive, made a similar point. Deregulation, he said, “brings with it risk and that’s the conversation. Sometimes, particularly in the consumer space, harm occurs. Is that something that you are willing to give us cover for and accept?”
If so, he added, “then we can move forward. What is acceptable, politically, is the question we are asking.”
For one former regulator, better decision making will only come with political accountability. The technocrats who oversee vast swathes of today’s economy have become a shield for politicians to hide behind, the person said.
Reeves has a chance to put the record straight this week. In a major speech on growth planned for Wednesday, she will highlight plans to cut the burden on business, with regulators instructed to permit more “informed risk-taking.” A raft of transport infrastructure projects will be announced, including an increase in airport capacity that will reopen the debate over a third runway at London’s Heathrow hub.
A financing package, using billions of pounds of state-backed guarantees by the National Wealth Fund and co-investments by Homes England, will help lower costs to get a range of developments off the ground.
Planning officers will be instructed to give default approval to certain development schemes around commuter transport hubs. Smaller regulators known as “statutory consultees” that have a say on local developments may be closed, consolidated or have their wings clipped under a review Reeves will announce. Environmental impact assessments will be replaced with simpler outcome reports and the Planning and Infrastructure Bill will be scheduled for the spring.
There is a lot to do. Since Labour came to power in July, the economy has shrunk and both business and consumer sentiment has collapsed. Reeves is boxed in financially by her “iron clad” fiscal rules. She needs a surge in private investment if the party’s ambitious 2.5% GDP growth target is to be realized.
£70 Billion Burden
Tackling the regulatory state has clear attractions. A White Paper published by the former Conservative government in May last year, days before the election was called, put the annual administrative cost of red tape on UK business at £70 billion ($87.3 billion). The government’s most recent biennial Business Perceptions Survey found that 45% of firms believe regulation is a barrier to success.
Extensive deregulation promised in the US by President Donald Trump makes the program more urgent if the UK is to remain competitive. France is also considering a major reworking of European regulations to avoid falling behind in the deregulatory arms race.
Reeves has been quick off the mark, delaying the introduction of stricter bank capital rules by a year, to 2027, and axing Competition and Markets Authority chair Marcus Bokkerink because he did not “share the mission” of the government — setting an example for other regulators who may have been considering dissent.
“We’re ahead of the European Union in recognizing that the world has changed,” she said in her Bloomberg interview.
Deregulation can help growth directly, not just by cutting costs. Reducing banks’ loss-absorbing buffers, one of the Bank of England’s many powers, gives lenders tens of billions of pounds more to lend. Stripping back planning and environmental rules gets building projects off the ground. Encouraging pension funds to take more risks boosts investment.
But the plan requires a trade-off that Labour has yet to acknowledge, insisting there will be no race to the bottom on standards in exchange for faster growth. Trailing plans to speed up environmental planning assessments in Parliament last month, Housing Minister Matthew Pennycook said Labour would build 1.5 million homes and clear 150 major infrastructure projects by 2030 without any negative consequences. It will be a “win-win for the economy and for nature,” he said. Environmentalists opposing Heathrow expansion disagree.
Planning will be central to Reeves’ speech this week, moving toward Prime Minister Keir Starmer’s pre-election pledge to “bulldoze” through the rules and create a wider “pro-innovation regulatory framework.”
Starmer has already cleared some obstacles, announcing last week that housebuilding projects will no longer be hampered by on-site environmental mitigations, such as protecting newts. Developers will instead pay into a nature restoration fund that will do the work for them. He also cut the number of permitted judicial reviews against major infrastructure projects like nuclear plants to one from three.
Anyone for Cricket?
Reeves will impose a moratorium on new statutory consultees alongside her review into the bodies, which account for around 30 of the UK’s 130 regulators and include The Gardens Trust and Historic England. One of them, Sport England, last year threatened to stop a housing development on concerns that residents might be injured by flying cricket balls from a nearby pitch. The last Tory government considered shutting some down. Speaking to reporters in Davos last week, Reeves suggested there are too many regulators, which “adds to the problems and the overlapping burdens that businesses face.”
The chancellor’s pledge to axe red tape sounds determined, but has been heard before. The modern story of Britain’s regulatory state has been one of repeated political promises to shrink it while quietly doing the opposite. “Regulatory creep” was identified as a problem in a report by lawmakers in the UK parliament’s upper house as far back as 2004. The last 20 years have seen it expand as each major consumer protection failure becomes a political issue and ultimately another regulatory addition.
As long as politicians keep scapegoating the regulators, little will change, Hill said. “There is a fundamental question of accountability. What’s happened over a long period is that risk management has been a massive outsourcing project.”
--With assistance from Laura Noonan.
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