Economics & StrategyEmail
With or without Brexit we can all do our bit to take back control. In the past fortnight there has been a flurry of downbeat economic headlines. From a growth slowdown across most major economies, to announcements in the UK about inflation-busting increases in council tax and energy bills.
This is a reminder, if one were needed, that there is more going on in the economy than simply Brexit. UK commentators have developed an unhelpful tendency to seize on each economic headline and interpret it through the Brexit prism. This is not only daft, but it acts to further polarise opinion. Brexit has become the fog that obscures the daily economic challenges faced by households and businesses.
And it is one of these daily challenges that I want to focus on. Specifically, the tug of war between buyers and sellers as they both aim to get the best terms in any transaction. Whenever buyers and sellers come into contact there is a fight for what economists call the economic surplus. We can think of the surplus as the gap between the highest price a buyer is prepared to pay and the minimum price a seller is prepared to accept. In a well-functioning economy the fight is a fair one. The surplus is split.
The battlefield used to be largely found on High Streets and in wholesale markets. Today it is increasingly shifting online. With this change in location comes an enhanced set of weaponry. The harvesting of data allows for customer profiling and this, increasingly coupled with sophisticated analytics and artificial intelligence, enables sellers to understand the behaviours and motives of potential buyers. For buyers, price comparison websites are the new defensive shields to this heavy artillery.
But what happens when the battle becomes unbalanced? Specifically, when one side takes too big a lead in the arms race. This strikes at the heart of why regulators and regulations exist – to referee a fight where it risks becoming one-sided.
A good example of this is the recent announcement by Ofgem, the UK’s energy market regulator, that the government’s energy price cap is set to rise by 10 per cent come April 1. It is estimated that this will raise the average default tariff by £117 per year. Should households sit on their hands this will be an inflation-busting victory for sellers – the energy companies.
However, households and businesses buying energy have the means to fight back. Key to what happens next is whether they choose to take up arms in large numbers. Unfortunately, less than one in five customers switch supplier in any given year – and more than half of customers have been on default tariffs for more than three years. This is the equivalent of customers waving the white flag with their arsenal fully loaded. And this decision matters.
Ofgem’s latest data suggests that the average standard variable tariff (SVT) generates an average bill of £1,221 per year – but the cheapest deal would create an average bill of just £903 per year. An extraordinary 26 per cent difference.
It is the inertia of energy customers that meant the price cap was introduced in the first place. Refreshingly I have yet to meet a policymaker or regulator who relishes taking direct action such as a price cap in markets that ideally should be left to price themselves. But the conclusion from how rarely customers shop around is that policymakers are often left with little choice. There is simply a duty of care.
There are many, including contributors to this paper, who abhor such interventions which are often dubbed the “nanny state”. Invariably these same commentators remain largely silent on how to encourage customers to take a more active role and make intervention unnecessary.
The same arguments apply to the markets as diverse as insurance, phone, television and broadband contracts as well as many travel fares. There is often a highly preferable outcome for highly engaged customers and one far inferior for the disengaged. Purists argue that consumers that do not devote time to shop around deserve the outcome they get. The public are generally less hard-nosed and expect some degree of level playing field.
Inevitably a failure to equalise the battle risks a far greater overreach from the state further down the line. The same problem of inertia can also be looked at from the perspective of sellers. Indeed there is evidence that inactivity is holding back the ability of UK businesses to grab themselves larger surpluses and, in turn, generate higher profits.
Recent research from the Bank of England has found that the UK’s longstanding productivity problem is in part due to a large numbers of firms that have not kept pace with new methods of selling and innovating their products. Increasingly what productivity there is in the UK economy comes from a small number of hyper-productive firms that are using cutting edge technology and innovation.
We still do not understand fully why this “long tail” of unproductive firms exists. It is possible that a small number of highly productive firms have built business models that are very difficult to replicate. Whatever the reason, the inability of a wider range of businesses to adopt the most innovative techniques is an undoubted impediment to economic growth.
Finding the answers to why this is the case shall be far more central to the UK’s economic success over the coming years than anything that comes out of the Brexit negotiations.
And it these daily decisions that resonate for households and those who run their own business. Better daily decision-making is likely to – in the long term – determine happiness and wellbeing much more than the dominant economic headlines. Here many Britons can, regardless of the what happens in the global economy, take a more active role in determining their own economic outcome. When the country eventually stops talking about Brexit it will be the willingness to engage fully in these daily battles that will determine whether we have really taken back control.
A version of this piece was published in The Times.