Dame Minouche Shafik, Deputy Governor of the Bank of England, is leaving to become Director of the London School of Economics. Last weekend, she gave her final interview wearing her Bank hat.
Shafik issued what was described in the media as a “thinly veiled warning” to the Chancellor, Phillip Hammond. She stated that it was an “illusion” to believe that transforming the UK into a low tax, low regulation economy would give it a competitive advantage. Indeed, Shafik went further and offered the opinion that such polices risked “hugely disastrous consequences for the economy”.
We have heard such prognostications before. In the run up to Brexit, the Treasury claimed that unemployment would rise by 500,000 by the end of 2016 in the event of a leave vote. It actually fell. The Bank signalled a similar opinion, that Brexit would be bad. Doom and gloom was prophesised by the OECD and the IMF.
These institutions seem permeated by what we might call “Davos liberalism”, the sorts of opinions which would be congenial to George Clooney. Of course clever, well meaning people can design policies and regulations which will benefit ordinary people, who after all cannot be expected to understand these things and might hold incorrect views!
Shafik claimed that the UK economy has lost 16 per cent of GDP relative to trend because of the financial crisis. Looser regulation would run the risk of an even bigger loss in future. But the French economy is much more highly regulated than that of the UK. It has lost at least 20 per cent of GDP relative to trend, some £80 billion more than the UK. And France has at least 1 million more people who are unemployed.
Shortly after the Shafik statement, the government announced a major review of how the UK can become the world leader in artificial intelligence (AI) and robotics. We can take with a pinch of salt the unnervingly precise estimate that £654 billion can be added to the British economy by 2035 if the growth potential of AI is achieved. But we are clearly already a world leader in this area and, equally clearly, if we succeed in capitalising on this, GDP will be boosted by a very big number.
An essential ingredient for success is to attract the innovative thinkers who will push out the frontiers of the science, and the entrepreneurs who will help turn the ideas into practical tools. It is of course possible that a system of high personal and corporate tax rates could succeed in attracting such people. But it seems plausible that low tax rates are more likely to do the trick.
The high taxes imposed by President Hollande in France illustrate the point. Young French people have flocked to the UK. London is now the sixth largest French city in the world in terms of the population of native French speakers.
Our borders need to remain open to highly skilled individuals. But we need policies which continue to attract them rather than drive them away.
As published in City AM Wednesday 1st March 2017