John Macdonald: Are the Tories becoming the party of high taxes and picking industrial winners?

10 Feb

John Macdonald is the Head of Government Affairs at the Adam Smith Institute.

The idea that British state should pursue an “industrial strategy” was a key feature of the Mayite years. But it has received a substantial boost as a result of the pandemic. Last week, Business Minister Kwasi Kwarteng announced that, now free from EU state aid rules, Britain would design a more expansive homegrown subsidy scheme to support British industry. On this site last week George Freeman set out his stall and personal record in picking winners as a guide to his expected future success as head of the new Taskforce for Innovation and Growth through Regulatory Reform (TIGRR).

The latest ambitions for government involvement in industry claim that Britain needs to be both more self-sufficient and can achieve success by focusing on certain industries, like vaccines but also environmental technologies, agriculture, and digital. If only they’d realise businesses mostly want to be a bit more free from government in all areas.

Some of the focus has been on reducing red tape — like unscientific restrictions on genetically modified foods. This is extremely welcome: now Britain is out of the European Union the Government should be doing everything it can to make the UK a more welcoming place for innovation and entrepreneurship. Reducing both homegrown and EU-derived red tape is key to that mission.

On the other hand, the focus on allowing greater use of domestic subsidies to back certain industries is retrograde. There are no doubt a number of fields with huge potential, but it is folly to presume that politicians and bureaucrats have the necessary skills and knowledge to assess which technologies and specific companies have the most potential. If they did have those skills they would perhaps be in the private sector, making lots of money. Inevitably state subsidies will be given out more for political reasons than good economic reasons.

The recent case study of vaccines — in which the Government provided advance order purchases and subsidised manufacturing — is now being trotted out as a counter example of how the state can do good.

The Government has good reason to feel chipper about the vaccine. Kate Bingham’s prepayment for vaccines will ensure the country access to seven vaccines: the three mRNA vaccines (Pfizer, Moderna and Curevac), the Novavax vaccine that has been shown effective against the South African variant, the Astrazeneca vaccine, the Valneva vaccine and the single-shot Johnson & Johnson. We’ll have an oversupply of doses that will enable a shot of vaccine diplomacy to deliver immunity to friends and allies of our choosing.

But we should be extremely cautious about applying the lessons from a once-in-a-century pandemic to every day policymaking. Vaccine Taskforce chair Bingham was successful because she, rightly, had a very clear short term goal and a practically unlimited budget to purchase lots of different vaccines.

There is a clear and obvious difference between buying a product from a company, and extrapolating this one win in a pandemic full of state-failures to think ministers or Whitehall have any grand oversight of the direction an economy of millions of people should go next as we reopen.

The pre-purchase of vaccines from companies with strong pharmaceutical track records, including the front-runner which took no public money to develop their product, is no reason to conclude that the Government should take equity stakes, engage in secured or unsecured lending, grant giving, or underwriting debt positions of whole industries just because someone has decided they’re sexy.

Even less so when they’re subsidy blackholes or nascent industries when the creative destruction of our market system and extensive financial industry’s risk taking is best placed to deliver.

The Government claims that the new state aid scheme is not “intend to return to the 1970s approach of the Government trying to run the economy or bailing out unsustainable companies”, in which taxpayer money used to protect certain businesses and industries, usually with little success.

But of course the intention is never to pick losers. That doesn’t make it so. Just last year the Chancellor launched Project Birch, a scheme intended to offer loans to (and in some cases a government-ownership stake in) companies deemed too big to fail. This was in addition to all the other state transfers and loans on offer to companies to make sure they could survive the Covid storm.

Just a quick glance at the industries Freeman listed as bets he’d like to see back has hydrogen, biofuels, and supposed “superfoods”. There is a qualitative difference between handing cash to companies in sectors you want to be seen with at a photo-op, and removing red tape from others you think might flourish without. Reviewing GDPR, expanding CRISPR research in agriculture and removing the precautionary principle might well be worth legislative change but need to be sold on their own merits, not as part of a package of subsidy for unrelated industries that have lobbied their way to prominence.

Even the UK’s existing programmes to support supposedly innovative companies are not achieving much success. A National Audit Office (NAO) report last year found most business support spending lacked measurable objectives, making it impossible to know if they provided value for money. In the one case that evaluation was available, Innovate UK’s flagship Smart Scheme, there was no statistically significant performance improvement between companies that did and did not receive grants — meaning they are not achieving very much.

A productive, high-potential enterprise can currently borrow at extremely low rates without the good graces of the Government (and without exposing itself to political risk). If the state begins offering a wide range of subsidies, it will inevitably chase those enterprises that are less efficient (in an attempt to, say, level up), wasting taxpayer money, crowding out private sector investment and potentially pushing up interest rates. There is also evidence to suggest it could lead to the growth of “subsidy entrepreneurship”, in which firms waste time seeking state aid instead of creating value.

This would be undesirable in normal circumstances, but here could seriously hamstring the post-pandemic recovery and return to growth.

Time and time again, we have been shown that the state fails to pick winners, wasting people’s money in trying to do so. Removing obstacles to growth, forgoing rumoured tax hikes that could choke it off, and giving the private sector new regulatory space to take advantage of innovations is the only way to truly “level up” — rather than through the artifice of taking from the taxpayer to give to the corporation.

It is time for the Tories to choose. This is not the time for policy experimentation or a new model of capitalism, like some have brazenly claimed. Excessively directing the economy, and pursuing policies that are either unproven or debunked, risks prolonging the downturn. They would do well to disabuse themselves of cronyism and reclaim their mantle as the party of low tax and free trade. Leave the case for subsidies and state intervention to Her Majesty’s opposition.

John Macdonald: Jenrick is right to ease the red tape burden on our high street retailers

4 Dec

John Macdonald is the Head of Government Affairs at the Adam Smith Institute.

Robert Jenrick is right. We should not give up on the high street. But when formerly hegemonic brands like Arcadia, Debenhams, and topshop are collapsing, it is clear that the vision of it as an expanding retail hub is no longer viable. Even before the pandemic, high streets were in decline, with falling rents and in many cases, excessive retail capacity. The trend towards online sales and automated delivery has whittled away its appeal. This is likely to accelerate given the entire population of the UK has had to shift shopping habits further online.

We should be under no illusions as to the scale of the crisis at the heart of our towns. Another 18,000 high street units could be left vacant this year, nearly double last year’s figures. These are not likely to improve in the very near term, particularly as Government support schemes start winding down around March. It is in times like these that the impulse to do something, to make a grand intervention becomes strong. After all, the high street is part of Britain’s identity, and the Conservatives will not want to be seen letting it fall to ruin.

In the short term, relaxing rules around opening hours will be a welcome reprieve in inhospitable trading conditions. But a barrage of big interventions would be misjudged. As Jenrick says, the rules, for as long as they have existed, have become more complex, more burdensome, costly and complicated. They have held back high streets, forcing them to conform to the misguided idea that they can only exist as yesterday’s retail and entertainment destined to compete against the rapid rise of today’s online sales and streaming services. If the high street is to survive, it must be free to remould itself around our changing needs and wants.

Unfortunately, the National Planning Policy Framework, in its current form, stands in the way. In effect, its guidance encourages local plans to restrict ‘town centre uses’, to make them more competitive by preventing retail development outside the ‘primary shopping area’ of the high street. While retail still has its place, it cannot alone provide a strong offering to residents and visitors. Trying to maintain its presence on the high street through artificial advantage is clearly no longer viable; the collapse of Debenham’s alone will leave behind an empty 14 million square feet on the high street.

Rather than allowing town centres to become mausoleums of empty retail units, Permitted Development Rights should be extended, facilitating the rapid repurposing of commercial into residential real estate. Where this occurs, councils should be allowed to continue to charge business rates to prevent significant revenue losses, although there is certainly a case for lowering them once relief ends next year.

Coupled with fast tracking this, the removal of the requirement to designate primary shopping areas must be removed to allow mixed-use development. This would entail the end of Article 4 Directions, which in principle are for protecting the character of an area, but in practice have often been used (particularly in London boroughs) to strangle development. High streets will be free to develop in the way they need to remain viable. This could also have the added benefit of increasing safety and security in town centres. Given that retail dominated spaces are inactive at night, they can become hotspots for crime. With a greater residential presence comes more natural surveillance and a reduction in crime. The future of town centres could be a return to being lived-in spaces.

To conservatives, I understand altering the rules underpinning the fabric of a beloved part of our culture is bound to raise a few hairs. But it needn’t be that way. With the implementation of a design code, and the replacement of Article 4 Directions with simple, broad minimal requirements for external facade, noise and parking. This is also not to say the high street must completely and utterly transform itself to survive.  For example, waiving the licence fee for a new pub that sets up on the site of a previous licence holding establishment could help preserve that vital staple.

Setting up a battle between the great British high street and large, multinational corporations could be politically expedient for the Tories, but it would miss the point. There is no need for a grand narrative of a struggle between the warm and familiar against the cold and new. As sentimental as we might be about the high street, trying to cling on to it with intervention and regulation will only see it slip further away. Liberalising laws, simplifying regulations, and removing outdated restrictions, will retain the essence of the high street while freeing it from the shackles of a bygone era. If this means a smaller retail presence and more residential space, so be it.