Solution to too much government is not more regulation

Every interference to private enterprise reduces freedom to operate and adds costs for consumers

Spiralling inflation, the threat of nuclear war and industrial strife have left commentators asking whether we’re heading back to the 1970s, while Tory leadership contenders are promising Thatcherite solutions. But though there are parallels between our current cost of living crisis and the economic challenges the Iron Lady faced upon assuming office, the climate then was very different than today.

At the time, our economy was heavily state-controlled with a large number of nationalised industries. The first step for those seeking to shrink the size of the state was to remove swathes of industry from government management. It was a controversial, yet comparatively simple, policy agenda.

But in today’s mixed economy, small-state advocates have a different problem. Regulation has become a thicket rather than a very obvious set of controls, allowing the Left to blame “market failure” whenever prices soar.

So when four fifths of adults say their cost of living has increased in the last month, anti-capitalists can call into question whether economic liberalism is really working for the benefit of us all. And their solutions – more taxpayer-funded cash transfers, more state spending on services, higher minimum wages, price controls – fall on sympathetic ears.

But new research from the Institute of Economic Affairs pushes back against the fallacy that the answer to too much government, must be more government. It points out that, while many of the factors driving up the cost of living are outside any politician’s control, much of our current pain is self-inflicted. It finds that, were we to deregulate across childcare, energy, housing, food, employment, the average family could save up to £9,000 a year.

Over the past two decades, prices in highly regulated fields have seen a real-terms increase. But in sectors relatively open to international trade, competition and innovation, prices have dropped.

Appliances, TVS and cameras are easily affordable mass market products. There was a 1,118pc decline in camera prices between 2000 and 2021. Toys have come down 43pc, clothing 63pc. House prices, meanwhile, have increased 189pc, childcare 171pc and electricity 90pc.

Though warnings have for years been issued on the negative effects of regulation, it is repeatedly justified for economic, social and environmental purposes. But every additional “direction” to private enterprise and individuals reduces freedom to operate that imposes direct and indirect costs. A 10pc increase in regulation has been associated with around a 0.5pc to 1pc increase in prices. It is across energy, housing and childcare that these effects are most apparent. Though energy is the ultimate commodity, underpinning nearly all economic activity and powering households, it was responsible for some 2–3 percentage points of the 8pc annual rise in the May 2022 inflation data. Energy supply chiefs expect 30pc to 40pc of households to fall into fuel poverty this winter.

Both Rishi Sunak and Liz Truss remain committed to net zero in theory, but rising bills ought to give pause for thought. Dozens of retail energy companies have gone bust in recent months. We are shipping fracked gas from the US while failing to get drilling in Britain. We have undermined investment in the North Sea and, under Sunak’s chancellorship, imposed a windfall tax on energy companies that will only exacerbate the problem.

And yet, between 1990 and 1999, the UK’S energy policy was a striking success, allowing prices for domestic consumers to fall by around a quarter. Energy-related greenhouse gas emissions per unit of GDP fell by 45pc between 1990 and 2010. This was the direct result of privatisation and deregulation. The government didn’t pick winners, the consumers and businesses did – and they chose the cheapest and best technologies first.

House prices worsen almost every problem this country currently faces – from slow growth to poor health, financial instability to economic inequality. Importantly for the next prime minister, they are pushing younger Britons away from free market liberalism and towards statism. Our draconian planning laws are creating a property-owning democracy where a large segment of the population owns no property and believe they never will. The trouble is, only by taking on Nimby obstructionists and triggering a 1930s-style building boom can we slash prices. This will be politically difficult for any Conservative leader.

Though we pour £6bn of taxpayer money into the childcare sector every year, we’re seeing very little bang for our buck. Parents are spending more on full-time nursery than they would for private school. Hundreds of childcare providers are closing. We find ourselves in the preposterous situation where 45pc of childcare staff receive some kind of benefit because regulation – around teacher: child ratios and class size, for instance – are hamstringing nurseries, driving down profits and pay.

It was Thomas Jefferson who said that a government big enough to give you everything you want, is strong enough to take everything you have. A 70-year high tax burden indicates that the state has come for a lot already, and without reform it will keep coming back for more. It is therefore encouraging that whoever wins in September, deregulation will be on the agenda. But it is deeply troubling that successive governments have allowed Britain to become such an expensive place to live.