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
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.
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?