Professor Patrick Minford is Chairman of Economists for Free Trade.
One of the key issues in the referendum was the control of regulation in this country. Being in the Single Market means that essentially the whole of our economic lives comes under the control of the EU. In the future, because it is determined to become a federal state, that control could extend much further into these lives, and indeed well beyond.
This control is entirely unnecessary for us to sell in the Single Market. All non-EU countries sell in it freely, provided they meet the requiered standards on the products that they sell in the EU, just as they must meet product standards on the products they sell in other economies. You export something to country X; you meet its product standards on your exports. So really the whole panoply of EU regulation over our whole lives is not needed for us to do business in the EU. It is simply up to the businesses that export there to make sure that they comply with product standards.
Some seem to worry that if we are not ‘in it’, mysterious hold-ups might occur at customs; or officials might emerge from the woodwork claiming we have not satisfied their product standards. If such things did happen at customs border, for instance – let alone inside the border – they would be completely discriminatory and so against WTO law, which from now on will govern our relationship with the EU.
The extent of EU regulation and its effect on our economy has become alarming. In the City, the new MIFID 2 has just arrived – a monstrous and redundant new rulebook for financial behaviour. It is not the first and it will not be the last if we do not take back our regulative powers.
Then in labour law, the EU has issued numerous directives awarding rights to workers and to unions, and limiting working hours in contradiction of the reforms carried out in the Thatcher era. In energy, costs have been driven up by aggressive measures to promote and subsidise renewable energy sources. In business standards generally, uniform regulations have been brought in that have favoured large incumbent firms. In biotechnology and medicine, EU regulation has erred heavily on the side of caution, and the deferral of new products that could save lives and improve productivity.
The costs to business of regulation include widely-reported compliance costs; however, even without these, businesses’ costs can be raised by regulation – the essence of which is a hidden tax on business to provide benefits to particular groups, such as certain workers or consumers, for social or political reasons. The effects of such actions to the economy come through rises in business costs which impact on jobs and productivity, reducing employment and GDP. If the Government wishes to provide gains to any group in society, it is best done transparently and intelligently through benefits paid for out of general taxation, whose cost is spread widely across the economy and so does much less damage to business.
What happens first with a regulation that raises costs is that it lowers competitiveness (raises prices) and so employment and output. Over time, wages fall to restore jobs in total. But now with the same employment the higher costs imply less output, and so there is a hit to productivity. For example, if a regulation says workers must work fewer hours, then firms need to take on more workers to produce the same, raising costs and lowering output. Productivity per man falls. There is in this case still full employment, but less output is produced. Or again suppose union power (a major EU obsession) is strengthened, forcing up pay in unionised firms and reducing their output. Those laid off find jobs at lower wages and lower productivity. Productivity falls, and with it total output.
The research work that has uncovered these costs to the economy from the burdens placed on business by regulation was first developed to create the supply-side of the Liverpool Model, used to analyse the Thatcher reform programmes. The supply-side embodies links to output and employment from labour market regulation and other cost-raising measures such as occur with general tax rates as well as regulations. More recently, work in Cardiff has proceeded on a model of the UK linking the growth rate to supply-side policy on business costs. (For details, see Patrick Minford and co-authors: Should Britain leave the EU?)
We have now had three decades of EU regulations that have lowered productivity and real wages. Estimates using our Cardiff research over the years suggests that around six per cent (£120 billion) loss of growth has resulted – about 0.2 per cent per annum over 30 years. Evidence of these processes at work can be found in our weak productivity growth record, the huge rise in human resources and compliance departments and in the staff of regulators.
If we shake off EU regulation, we could reverse at least some of the six per cent hit to GDP it has caused so far. But if we continue to follow EU regulations after Brexit, these could cost the UK economy productivity growth of another 0.2 per cent a year over the coming three decades, as the EU continues on its chosen path of ever greater integration, uniformity and regulation. This cost would again come about insidiously, through the driving up of business costs to satisfy EU social and political objectives. The accumulated value of lost GDP due to EU regulation would at this rate come to around 12 per cent of GDP or £240 billion in all: half of this having already occurred, there is £120 billion potentially still to come. But even this may be an underestimate, given the EU’s commitment to an agenda hostile to business and innovation, and dominated by social and political aims.
Agreeing to stay subject to EU regulations could therefore cripple UK economic growth. The Government must rule out regulatory alignment after Britain leaves the EU.