Budget 2011: Cutting red tape isn’t a strategy for growth

Howard Reed exposes the flaws in the argument that deregulation is a straight road to higher economic growth.

George Osborne has spent the last few days claiming today’s budget will be a “budget for growth” – and, given that it is likely that the Office for Budget Responsibility will downgrade its growth forecasts today, the government badly needs positive news on this front.

So far, the coalition has been criticised for not having a “plan for growth” – and has readily provided ammunition for its critics on this issue. For instance, a white paper on growth, scheduled for last autumn, was shelved because the government didn’t have enough material to put in it.

Meanwhile, the size and impact of the spending cuts announced in October’s spending review have dominated economic discussions, resulting in a pervasive sense of doom and gloom – and a significant Labour opinion poll lead.

Anxious to find a more positive message to pitch to the voters, George Osborne is about to unveil a growth strategy based mainly on deregulation of the labour market, particularly for small businesses.

Some of the measures being trailed (many of which have been pre-announced by business secretary Vince Cable) include:

• A three-year moratorium on any new labour market regulation;

• The end of the right to request flexible working;

• The end of the right to request time to train;

• Reductions in maternity and paternity leave rights.

The principle that employment rights are a barrier to growth and employment, hence scaling them back or eliminating them altogether will increase growth, seems to be uncritically accepted by many media commentators, as well as business lobby groups such as the British Chambers of Commerce who are pushing for greater deregulation.

The problem for the government and its supporters is that a detailed look at the evidence suggests empirical support for the idea that deregulation promotes growth is weak, verging on non-existent.

Last year the TUC published a report (pdf) by Stewart Lansley and myself called ‘The Red Tape Delusion: Why deregulation won’t solve the jobs crisis’ – a detailed survey of recent empirical evidence from academia and organisations such as the Organisation for Economic Co-operation and Development (OECD) on the impact of deregulatory measures on economic performance.

Overall, the evidence shows no strong relationship between various employment rights measures – employment protection, the right to request flexible working, maternity and paternity leave, etc. – and economic performance measures such as output and employment growth, whether based on a comparison across nations or focusing on the impact of individual instances of regulation or deregulation in the UK and other countries.

Furthermore, on the OECD’s index of employment protection the UK is already the third least regulated country in its database of 25 countries – only the United States and Canada have lower levels of regulation than we do. Given that the UK is already so lightly regulated it is unlikely that further deregulation would give a substantial boost to growth, even if the evidence suggested that there were positive impacts of deregulation on growth – which it does not.

Given the findings of The Red Tape Delusion, it is hard to avoid the conclusion that George Osborne and Vince Cable’s deregulatory drives are a distraction which will not deliver any boost to growth. What they will probably do instead is make the labour market a less fair place.

For example, empirical evidence on the impact of paid maternity leave shows that it increases the chances of women being able to return to the same job they held before leaving work to have children. In the absence of paid maternity leave, mothers are more likely to end up in part-time unskilled work on returning to the labour market – an outcome which doesn’t make best use of their skills and experience, and which exacerbates gender inequalities in the labour market.

Similarly, ending the right to request flexible working has an impact on families with children or other caring responsibilities who are more likely to need flexible work in the first place.

Overall, the deregulatory measures which the Government plans to introduce are likely to make many workplaces less “family-friendly”, reducing quality of life for many families while doing nothing to solve the UK’s current problems of low growth and high unemployment – which are being exacerbated by George Osborne’s attempt to cut the deficit too far and too fast.

A less savage “Plan B” for reducing the UK’s deficit would do far more to improve growth than any deregulatory measures are likely to achieve.

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