So, this is how you re­vi­talise the dig­i­tal econ­omy Mr Ham­mond

His Bud­get was cau­tious on tech, but sees where the Chan­cel­lor could still shake things up

The Daily Telegraph - Business - - Business - Tim Wal­lace

Philip Ham­mond wants a chirpier rep­u­ta­tion. “Spread­sheet Phil” is not the most ex­cit­ing nick­name, so the Chan­cel­lor has sought to cast him­self as a politi­cian with a grand vi­sion, and to taunt his shadow on the Labour benches at the same time.

John McDon­nell’s Who’s Who en­try in­cludes “gen­er­ally fer­ment­ing the over­throw of cap­i­tal­ism” as his pas­time. “Mine is ‘rein­vig­o­rat­ing cap­i­tal­ism for the dig­i­tal age’,” the Chan­cel­lor said.

Yet moves to un­leash a cap­i­tal­ist rev­o­lu­tion in the Bud­get were few and far be­tween. A short-term tax break on in­vest­ment was off­set with a new tax on big dig­i­tal com­pa­nies. It was pitched as a way to bring the tax sys­tem up to date with the dig­i­tal econ­omy, but an ex­tra tax does not sound like the work of a man who is “re­vi­tal­is­ing cap­i­tal­ism”.

Here are a series of ideas that could free up the dig­i­tal econ­omy, re­vi­talise cap­i­tal­ism and, cru­cially for the Chan­cel­lor, cost the tax­payer very lit­tle.

Su­per-charge fin­tech

Luigi Zin­gales, pro­fes­sor of en­trepreneur­ship and fi­nance at Chicago Booth, be­lieves more com­pet­i­tive reg­u­la­tion would let the UK seize a key role in the emerg­ing fi­nan­cial tech­nol­ogy in­dus­try.

“The UK is suf­fi­ciently [ex­pe­ri­enced] in the fi­nan­cial in­dus­try. It is in quite a unique po­si­tion to take ad­van­tage of be­ing a small player with cred­i­bil­ity,” he says.

This could be par­tic­u­larly cru­cial once the UK has left the EU. “With Brexit it may be more dif­fi­cult for the UK to do fi­nan­cial busi­ness the tra­di­tional way, so [we may see] a push to do it the fin­tech way, where lo­ca­tion be­comes less of an is­sue,” Zin­gales says.

“It is a huge op­por­tu­nity, if it is ex­ploited well.” This means en­sur­ing reg­u­la­tion that al­lows mar­kets to thrive. “Fin­tech is an in­dus­try with­out bar­ri­ers but the United States, para­dox­i­cally, has not shown such open-mind­ed­ness,” he says.

More broadly, Zin­gales fears a lack of com­pe­ti­tion is the key prob­lem fac­ing the modern econ­omy. Con­sumers often end up pay­ing higher prices than they would in a truly free mar­ket.

The pro­fes­sor says it is too soon to know to what ex­tent dig­i­tal tech­nolo­gies con­trib­ute to this prob­lem, given it is a young in­dus­try that often of­fers ser­vices with­out charge. If there are dan­ger­ous mo­nop­o­lies, it is tricky to work out how to in­ject com­pe­ti­tion.

‘The UK is in quite a unique po­si­tion to take ad­van­tage of be­ing a small player with cred­i­bil­ity’

Take con­trol of data

The 20th-cen­tury so­lu­tion of break­ing up mo­nop­o­lies may not help here; dig­i­tal gi­ants work well be­cause of net­work ef­fects, which make scale valu­able to con­sumers, and be­cause it is rel­a­tively cheap to serve bil­lions of cus­tomers dig­i­tally.

In any case, the UK is go­ing to strug­gle to break up Amer­i­can tech gi­ants. In­stead, Zin­gales says data own­er­ship is key.

“Who owns the data, and can we think of re­al­lo­cat­ing it? Europe is at the van­guard in this with Open Bank­ing: your trans­ac­tions with your banks? You own it. You change banks? You can give an or­der to trans­fer that to your new bank,” he says.

“That changes the com­pet­i­tive dy­namic dra­mat­i­cally, and that is very im­por­tant.”

This is some­thing the UK could re­in­force “to stim­u­late com­pe­ti­tion”.

“Be­tween the law and the prac­tice there is a lot. One thing Ham­mond could look at very care­fully is how easy it is to make that data por­ta­ble,” says Zin­gales.

Break open tra­di­tional in­dus­tries

On the other hand, reg­u­la­tions may also be pre­vent­ing big tech firms from en­ter­ing tra­di­tional mar­kets, again to con­sumers’ detri­ment.

Prof Colin Mayer, a fel­low at the Bri­tish Academy, sees dig­i­tal tech­nolo­gies re­shap­ing in­dus­tries rapidly, with reg­u­la­tion fail­ing to keep up. He also uses fi­nan­cial ser­vices as an ex­am­ple.

“The whole na­ture of the mar­ket is chang­ing and it makes reg­u­la­tion based on the in­sti­tu­tional form of banks no longer ap­pro­pri­ate – you have to think in terms of their func­tion, so these new en­trants will per­form sim­i­lar func­tions to ex­ist­ing banks,” he says. Ob­serve “the way in which Ama­zon has moved into gro­ceries; it has es­sen­tially trans­formed the na­ture of the play­ers within that mar­ket”.

“The same thing will hap­pen in bank­ing,” Mayer adds. If the rules are not changed, the dig­i­tal rev­o­lu­tion will be held back. “What is go­ing on is cre­ative de­struc­tion, but reg­u­la­tion risks de­stroy­ing the cre­ation,” he says.

Shake up ed­u­ca­tion

An al­ter­na­tive idea is to up­date the ed­u­ca­tion sys­tem. Bet­ter ed­u­ca­tion helped power eco­nomic growth in the 19th and 20th cen­turies, and mod­ernising the cur­ricu­lum to teach more dig­i­tal skills could help un­leash growth again to­day.

Dom Hal­las, of the Coali­tion for a Dig­i­tal Econ­omy, sug­gests the Gov­ern­ment could put pri­vate cod­ing schools “on to a more for­mal foot­ing”.

“I would sug­gest this means some kind of ac­cred­i­ta­tion for the cod­ing schools that would al­low them to tap into gov­ern­ment fund­ing, and let stu­dents use the nor­mal stu­dent loan sys­tem just like at uni­ver­si­ties and more. This would recog­nise and lever­age the suc­cess of our pri­vate­sec­tor cod­ing schools by bring­ing them into the for­mal ed­u­ca­tion sys­tem,” he says.

“There would also be op­por­tu­ni­ties for gov­ern­ment to fund these schools to run cour­ses at dis­counted rates in places where there is a clear skills need but where the mar­ket wouldn’t sup­port it – lev­er­ag­ing the data gov­ern­ment holds on skills gaps.”

Philip Ham­mond, the Chan­cel­lor of the Ex­che­quer, has claimed to be ‘rein­vig­o­rat­ing cap­i­tal­ism for the dig­i­tal age’ – but is he on the right track to free up the dig­i­tal econ­omy or does he need to be more am­bi­tious?

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