In this blog for the Social Market Foundation, Stuart Hudson – former CMA Director of Strategy – argues that an incoming Labour government will need competitive markets to drive growth – and this means it will have to navigate three trade-offs in its industrial strategy.
As British voters go to the polls, Keir Starmer and Rachel Reeves continue to emphasise Labour’s number one mission: to kickstart economic growth.
Reeves has argued persuasively that it is only through growth that the UK will be able to enjoy well-resourced public services and higher living standards. And in pursuit of this objective, she and Starmer have pledged that a Labour government will both bring the stability that has been sorely lacking ever since the Brexit referendum and also that Labour will take a more active role in the economy, on the basis that “markets must be shaped, not merely served”.
In response, the critics have questioned whether a return to stability can really make much of a difference to economic growth – and whether a more active role for the state can really amount to more than a 1970’s style approach to “picking winners”.
I think both of these criticisms are wide of the mark.
Recent research suggests that the “dullness dividend” from greater policy certainty could in fact be substantial; and also that there have been significant learnings in how to pursue intervention more effectively than in the days of the Upper Clyde Shipbuilders and British Leyland.
One area that I think has been relatively underexplored, though, is the potential tension between competition policy and industrial policy in delivering Labour’s growth mission.
Let’s start by looking at the case for a robust competition policy.
The economic evidence is clear that competitive markets are a better way to drive growth than cosy cartels or oligopolies. When firms have to battle with each other to win customers’ business, they have a powerful incentive to keep prices as low as possible, to improve quality and choice and to innovate to that they can introduce new or better products.
In markets where competition is weak, by contrast, firms can have a quiet life. They can rest on their laurels rather than improve their offerings, and it is easier for them to put up prices or degrade the quality of their products, comfortable in the knowledge that customers have nowhere else to turn.
The costs of weak competition are not only borne by consumers through higher prices and lower quality products or services. They are also borne by businesses because they suffer exactly the same problems with their own suppliers. And the economy as a whole suffers because where there are fewer incentives for efficiency and innovation, there is a slowdown in productivity – and in her Mais lecture Rachel Reeves identified the productivity slowdown in the 2010s as being a key cause of the UK’s low growth.
What’s more, competition not only has an impact on the rate of growth. It also has an impact on how broadly the benefits of growth are shared. The CMA has found that weak competition hits the poorest households hardest because they tend to spend a larger proportion of their income in markets that are highly concentrated. Meanwhile, the benefits of weak competition accrue to shareholders in the form of higher monopoly profits, and since the wealthiest in society are far more likely to own shares than the poorest, weak competition therefore exacerbates economic inequality.
Given that competition is likely both to increase economic growth and to reduce economic inequality, it is a no-brainer for the next Labour government to promote it. Indeed, Rachel Reeves has spoken positively about the last Labour government’s reform of competition law and about the beneficial role of competition. The Labour manifesto referred to a number of markets in which the CMA has been active, from open banking to housebuilding, and the party has backed the greater powers for the CMA in the Digital Markets, Competition and Consumers Act.
But however beneficial competition is in the long run, there are some important trade-offs – particularly given Labour’s focus on an active industrial strategy – and these trade-offs are best addressed through upfront and transparent policy design choices.
First, competition creates losers as well as winners. As more successful firms win business and grow, other firms will lose out, putting jobs at risk and perhaps ultimately going bust. The last Labour government took a relatively harsh line here. There could be “no escape from uncompetitiveness by resorting to loss-making subsidies, artificial barriers or protectionist shelters.”[1] But having pledged an active industrial policy to address regional economic disparities, the next Labour government may face greater pressure to step in and ‘save’ jobs in regions which it wants to ensure benefit more from economic growth. That is why it is important Labour sticks to its commitment to be clear-eyed on where Britain has a comparative advantage and where public investment is most likely to generate a return.
Second, you can have too much of a good thing. As mentioned above, firms have more of an incentive to invest and innovate in a market where they feel under competitive pressure – but they will only do so if they think the most successful firm or firms will be able to make a profit at the end of it. If a market is perfectly competitive, there are no profits to be made and so no reason to invest. Governments have an interest in ensuring that competition authorities get the balance right: tackling entrenched positions of market power while still encouraging rewards to investment and innovation. And in regulated sectors, it mean setting price controls that do not prevent a company from earning a return that covers its cost of capital.
Third, big companies that enjoy a degree of market power are likely to have more money to spend on delivering broader public policy objectives. At a time when the public finances are strained, it may be appealing to ministers for, say, two companies to be allowed to merge if they promise more investment in infrastructure or in a sector that the government regards as critical to its industrial strategy, even if the CMA says a merger would mean higher prices for consumers.
How would an incoming Labour government deal with these trade-offs?
There are some clues from comparing Labour’s manifesto this year with the one that the party issued before it last came into government. Back in 1997, the Labour manifesto included not a single mention of industrial policy or industrial strategy – but it was quite hot on competition. It said that the way to drive growth was to “promote dynamic and competitive business and industry at home and abroad.” Furthermore, it dismissed the idea of a trade-off between domestic competition and international competitiveness. “Competitiveness abroad must begin with competition at home,” it argued. It went on to pledge reform of Britain’s domestic competition to “adopt a tough ‘prohibitive’ approach to deter anti-competitive practices and abuses of market power.” Meanwhile, in Europe, it pledged to “open up markets to competition”, arguing that this would “strengthen Europe’s competitiveness and open up new opportunities for British firms.”
In 2024, Labour’s emphasis is different. That does not mean the party is silent on competition. It still promises a “competition and regulatory framework, that supports innovation, investment, and high-quality jobs.” It also says it “will ensure economic regulation supports growth and investment, promotes competition, works for consumers, and enables innovation.”
But there are far more references to “partnership” with business than to “competition”. The manifesto states that “sustainable growth requires government to be a strategic partner with business”. It goes on, “We will work in partnership with industry to seize opportunities and remove barriers to growth.” It says, “Labour will seek involvement from industry, trade unions, and civil society in our plans for growth, so they can contribute to building a stronger economy in all parts of the country.”
So if a Labour government is forced to choose between partnership with business and competition, which will come first?
Some of this will only become clear over time. Competition policy is not an area of high political salience. There are not many people who decide their vote on the basis of the parties’ approach to it, so there is a limit to the amount of time that small and hard-pressed policy teams in opposition devote to addressing hypothetical questions in the run-up to an election.
It might take a controversial merger or bailout request to bring these issues to the fore, but it is sub-optimal to make competition policy in the middle of a live crisis. In such situations, ministerial intervention might deal with an immediate political problem but at the cost of introducing greater unpredictability in the long run. Wherever possible, it is better to address these policy questions transparently and in slower time.
An incoming Labour government has an opportunity to do this, first by reviewing the links between competition policy, industrial strategy and growth so that it can come to a clear view on the policy trade-offs; and second by making any resulting changes to legislation or to guidance on how decision-making should operate under the Enterprise Act and the National Security and Investment Act.
Tensions between competition and industrial policy are inevitable, but the next government has an opportunity to resolve them openly and in a way that promotes regulatory certainty and investor confidence while protecting the interests of consumers.
[1] Balls, E., J. Grice and G. O’Donnell, 2004. Microeconomic Reform in Britain: Delivering Opportunities for All. London: HM Treasury, p. xii
Stuart Hudson was formerly Senior Director of Strategy at the Competition and Markets Authority and a Special Adviser to Prime Minister Gordon Brown. He is now a Partner at the corporate advisory firm Brunswick. He writes here in a personal capacity.
Source of the article: https://www.smf.co.uk/commentary_podcasts/labours-competition-conundrum/
