By Luke Gardiner and Sam Bowman

Oxford University physicist (and Brexiteer) David Deutsch recently tweeted that “You can’t just make a wish-list of features you’d like a society to have. It’s all done by institutions. The nature of the institution is much more important than what it does on a particular day.” As well as coming up with good policy ideas, you need the right institutions to deliver them.

Although the Conservatives campaigned on a manifesto that was cautious to the point of being coy, they now have the opportunity to act ambitiously, or risk wasting a once-in-a-generation chance to remake Britain for the better.

This doesn’t have to mean making cuts to spending, or more borrowing. Rather, it means enacting the kinds of institutional reforms that will generate the innovation and productivity growth that will allow the government to deliver on its promises and stick to its fiscal rules.

With this in mind, we propose four areas for fundamental institutional reform to drive faster productivity growth, especially in parts of the country that have voted Tory for the first time: transport, innovation, competition and housing. Making bold reforms in these areas would move Britain to being the open, dynamic economy that it needs to be to make a success of Brexit and — crucially — to make good on the expectations of people who have voted Tory for the first time in their lives.

Introducing road pricing to relieve the burden on Britain’s roads

The government faces two headaches when it comes to roads. First, as electric vehicles replace petrol-driven ones, fuel duty revenues will fall, leaving government facing a serious shortfall. Second, road congestion is a serious problem in many parts of the country, making car-based commutes longer and more unpleasant for people. Part of the issue is that roads are, in most places, unpriced, so there is no effective prioritisation of road use, and little incentive for people to change their road use to quieter times (as with, say, peak and off-peak rail tickets). Road pricing (aka “congestion charging”) can help fix both of these problems.

The Congestion Charge in London reduced congestion by 30% and sped up average traffic speeds by 21%, although it is still likely underpriced — average road speeds in central London are just 7.4 miles per hour. Singapore, on the other hand, operates a dynamic system where roads are priced in real-time according to demand, and enjoys average rush hour speeds of nearly 20 miles per hour.

As well as relieving congestion, road pricing would raise significant revenues for the government that could (in part) be used to make up the coming shortfalls in fuel duty without raising new taxes on motorists (or even, if enough revenue is raised, also pay for further cuts in fuel duty). This would leave most motorists outside of dense cities better off. It could also be structured to encourage the most demanding road users — such as parcel delivery drivers and truck drivers (the latter of whom are responsible for most damage to roads) — to change their road usage to less disruptive times of day.

It would be particularly important to have this reform coordinated at a national level, so that central government can absorb setup costs and share out the revenue generated across the country, rather than letting richer local authorities use it to fund their spending priorities.

This reform would be the boldest, and requires careful thought and design, including on governance. But it could go the longest way to making Britain’s road network fit for purpose while simultaneously rebalancing the burden of tax away from fuel duty towards richer motorists in and around our prosperous cities. And the combination of quicker commutes and lower fuel tax would be a major boon to long-suffering road commuters from satellite towns who do not have the benefit of London’s rail network.

Accelerating innovation by opting startups out of regulation

Uncertainty over the regulatory framework can be a major barrier to innovation. The more novel and disruptive a piece of technology is, the less likely a business will know ex ante how existing regulatory frameworks will apply to its use — or even which regulators will have a mandate to oversee it. Businesses face the prospect of new products being caught in regulatory limbo for years, and see the value of their investments collapse.

One solution to this would be the creation of an “n+1 regulator”, so-called because its authority would temporarily supersede that of other regulators for innovative new businesses. This body would have two functions.

First, businesses with products that conflict with — or do not clearly fit within — existing regulatory frameworks, could apply to it for a licence. The licence would permit them to bring their product to market and test its viability, under the oversight of the “n+1 regulator” while free from intervention from other regulators.

This licence wouldn’t be a carte blanche: it would be valid for a limited period of time (e.g. five years), would not waive the need to comply with basic statutory law, and would come with a requirement to acquire liability insurance. Something like this already exists in a more limited form in several sectors in the form of regulatory sandboxes, which permit companies to test out new products without achieving all the usual approvals, under certain conditions.

Second, the “n+1 regulator” would have a responsibility for pushing for pro-innovation regulatory changes in discussions with other regulators and directly with government. This would cover specific changes needed to enable those companies operating under its temporary licences to gain a more secure regulatory footing. It would also cover a more general pro-innovation advocacy role, making the case for innovation-friendly policy changes in all relevant policy debates, on the model of the Competition and Market Authority’s (CMA) competition advocacy function, and dovetailing with some of the responsibilities of the new Regulatory Horizons Council.

Regulatory reform to drive competition in utilities

Sector regulators like Ofwat (for water) and Ofgem (for energy) have an outsize impact on the economy. This impact is not always positive, and these regulators have become bloated after decades of mission creep, and the sectors they regulate sclerotic.

These regulators were originally set up as temporary bodies to manage the transition from state ownership to private competition. But they have become permanent parts of the landscape and their industries are now heavily regulated. As they have expanded their reach they have lost sight of some of their core responsibilities: in particular they do not use their competition powers, so in practice competition enforcement in British utilities is far behind that of our European neighbours.

This means that there is far less competition enforcement in these sectors than would otherwise be the case. In the past decade, sector regulators have made four references to the CMA and just seven Competition Act infringement decisions. During the same period, there have been hundreds of these across the EU. This setup has resulted in a powerful pro-growth, pro-consumer tool being left by the wayside.

To fix this, the government should first return responsibility for competition enforcement in these sectors to the CMA (i.e. end ‘concurrency’ of competition powers) — which can act independently of the industries it is regulating. The sooner this is done, the better.

Next, it should be clear about what it wants to do about consumer protection. The CMA has asked for new consumer powers and there is widespread agreement that devolving Trading Standards did not work while the rise of e-commerce meant that less and less trading was being done locally. A strong consumer champion agency could be popular, and would give businesses powerful incentives not to treat their customers badly.

As David Stallibrass has written, the UK is likely to be the first country to introduce legislation that imposes the same fines on firms who treat their customers unfairly as firms that treat their competitors unfairly. It would make sense to introduce these reforms at the same time as the consumer protection powers of the sector regulators are being moved to another agency. Since privacy is ultimately a consumer protection issue, not a competition issue, rolling the Information Commissioner’s responsibilities into this agency as well would also be logical.

So, to recap, if the government is ambitious about reforming Britain’s regulatory system, the government should redesign regulation in the UK so that the utilities sector regulators’ responsibilities are moved to cross-sector regulators:

A beefed-up Competition and Markets Authority, with new responsibilities to promote competition in regulated utilities as well as the wider economy; A new national consumer enforcement agency, replacing Trading Standards and including the ICO’s privacy enforcement powers; And to accompany these, it could create a single access regulator whose job is solely to manage monopoly infrastructure, preventing abusive pricing and working to ensure open access where appropriate (e.g., in the case of railroads, the energy grid, and broadband).

Dominic Cummings’s admirable desire to overhaul Whitehall should not stop at ministerial departments — to get competition and innovation in regulated sectors, Britain’s regulatory state needs to be streamlined as well.

Helping people take back control of their neighbourhoods: street votes

Everyone knows the housing market is a mess, and the planning system is the main reason for that. We cannot expect the Conservatives to fight vested interests and liberalise planning head-on. But, led by London YIMBY (“Yes In My Back Yard”), a number of pro-reform groups have hit on what may be a politically popular way of getting more housing built.

They propose that residents of individual streets be allowed to take control of how their neighbourhoods are developed. Residents could be empowered to hold votes on their planning rules, within certain bounds, so that some could choose to change their height, infill or other rules to allow more densification to take place. The benefits to homeowners would be that their homes would immediately become more valuable — planning permission accounts for most of the value of property in prosperous cities, and being able to build more on a plot of land makes that land more valuable to would-be developers. And empowering people in this way would also help localise decisions about aesthetics, leaving residents less at the mercy of planners.

Making this happen would require the development of a voting mechanism (e.g. by adapting the process already in place for neighbourhood development orders), making an explicit provision that the vote can override the local development framework, and preventing MHCLG from overturning any such decisions, to keep politics out.

Street votes would end the one-size-fits-all approach to planning rules that holds back development in many parts of the country without removing the protections that many people want from overdevelopment near them. Given the large financial rewards to streets that did choose to allow denser development, we would expect to see more development taking place, adding more housing in the places people most want to live.

Conclusion

The government is rightly wary of spending large amounts of money that would vindicate Labour’s absurdly profligate spending plans. But that does not have to mean doing nothing. Pressing ahead with these institutional reforms early in this Parliament will make a big difference to the lives of people across the country, and give them a reason to vote Conservative even without Jeremy Corbyn on the ballot paper.

Further reading:

The other costs of nationalisation, by Luke Gardiner

Reviving economic thinking on the right, by Sam Bowman and Stian Westlake