Opinion | Rishi Sunak’s route to economic growth


LONDON — After an efficient selection process, Britain has acquired its third premier in two months: former finance minister Rishi Sunak. He is suited to a time of economic storms: An alumnus of Goldman Sachs and a couple of hedge funds, he has a grip on financial reality that is as firm as his predecessor’s was shaky. But like other rich-country leaders, Sunak will have to convince people of hard truths. The era of stimulus is over. The route to economic growth lies in smarter regulation.

From the aftermath of the 2008 financial crisis until last year, debates on economic policy were dominated by one central fact: Inflation was low, so governments needed to boost spending. Across the rich world, central banks duly printed money and politicians spent it. But today, with inflation way above target, the macroeconomic logic has reversed. Central banks are hiking rates, and politicians who refuse to discipline budgets invite the wrath of markets.

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In Britain, this logic has already required the reversal of the disastrous tax cuts that felled Sunak’s predecessor. If he is wise, Sunak will now perform a full 180 and announce tax hikes, including windfall taxes on energy companies earning super-profits. The extra revenue would free Sunak to avoid politically untenable curbs on public services: Already, waiting lists for the National Health Service are at record lengths. The hikes will also go some way toward remedying Sunak’s chief political weakness. He is a helicopter-riding plutocrat, and he needs to show he understands the needs of normal voters.

But tax hikes and macroeconomic discipline won’t be enough. To persuade both investors and voters to believe in post-Brexit Britain, Sunak needs a convincing growth agenda. Since tax cuts are unaffordable, that agenda must consist of regulatory reform. Sunak must be as bold on microeconomic strategy as he is on macro.

The good news is that regulation is a target-rich environment here. Contrary to the myth that the Anglo-Saxon economies are an unregulated free-for-all, Britain is rife with rules and restrictions, which is one reason British productivity growth has fallen from near the top of Group of Seven countries to near the bottom. The red-tape issues are legion: Start-ups that hire employees are dismayed to find that they won’t show up for several months, such are the noncompete clauses that enforce “gardening leave” between appointments. But of all the troubling anti-growth constraints, the most egregious concern building.

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The average European Union country has 500 dwellings for every 1,000 inhabitants. France and Italy have almost 600. Thanks to a plethora of overzealous rules, Britain has fewer than 450. Britain is not just a NIMBY country — as in, Not in My Back Yard. As the Economist lamented recently, it’s a BANANA country: Build Absolutely Nothing Anywhere Near Anything.

The problem is most acute in cities — precisely the locations that could generate extra economic growth if only more people could move there. Every major city in Britain is surrounded by a “green belt” — an area that is not necessarily green but on which construction is tightly limited. The belt that encircles London is three times the size of the capital itself. In England as a whole, about an eighth of all land is off-limits to builders.

The upshot is that soaring home prices in cities are a middle-class obsession. In the early 1990s, as a 20-something reporter, my commute from my two-bedroom apartment to the London office was under 30 minutes. Today, my professional niece of a similar age cannot hope to buy anything equivalent.

Even before covid risks encouraged remote working, London’s long commute times made for dispiritingly empty work spaces. A few years ago, I happily accepted a position as a visiting fellow at the London School of Economics and Political Science. Pretty soon, I gave up on the “visiting” business because nobody else was in attendance.

Britain’s restrictive building rules extend beyond housing. No reservoirs or nuclear power stations have been constructed since the 1990s. Rail and road projects are much rarer than the wildlife in whose name they are vetoed. Leeds, a city of more than 700,000 people, was promised a mass-transit system in 1993. It still does not have one.

Tackling this mess is not for the faint-hearted. But Sunak, despite his economic literacy, was a Brexit supporter, presumably because he hoped that leaving the union would free Britain to pursue smarter regulation. It’s now up to him to prove he was right about that.

Read More: Opinion | Rishi Sunak’s route to economic growth

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