Huge productivity gap between US and Europe shows how over-regulation is making us poor

The UK and EU have so grown obese with regulations that it’s time to send our politicians to Fat Camp, writes Brian Monteith

Britain’s political class is agog at the assault on the certainties it has taken for granted. The idea we might face tariffs on the export of our goods entering the United States when, for decades, we have levied tariffs on US imports as a member of the EU’s customs union – or then, after we left the protectionist bloc, did little to relax the tariffs we now controlled, has shocked many into recognising trade deals with countries are a good idea.

Likewise, the scale of the national debt and the massive cost of servicing the interest on it every year (now £105 billion) have woken up many politicians to the need for us to tackle the inexorable growth in public spending. The cost of debt interest is now the third highest category of spending after health and social welfare costs – higher than education and defence.

While these are dreadful problems, there is another huge challenge contributing to our weakening position, namely the failure to improve our productivity.

The skyline of Houston, Texas, where workers can pay less in tax than European counterparts on significantly lower wages (Picture: Ronaldo Schemidt) | AFP via Getty Images

Growing gap between EU and US

Without Britain at least matching the improving productivity of other countries, we shall see our goods and services priced out of markets, our companies will make smaller profits and the government tax revenues will be lower than estimated – meaning the debt burden will grow.

The productivity comparison between the US and the EU is especially stark. Since 2005, US labour productivity has grown at an annual average of 1.4 per cent, whereas in EU productivity grew by only 0.9 per cent between 2007 and 2022.

The persistent disparity, year after year, leads to a major difference in national prosperity. The gap between the productivity of the EU economy and the US economy has widened by 8.4 per cent since the year 2000.

And before anyone thinks this is just an EU-Bad, US-Good, hit piece, the EU itself recognised this challenge when last year Mario Draghi, former European Central Bank president, said it faced “an existential challenge” caused by the high level of regulation that suffocates and suppresses innovation and the taxes that raise costs and stifle productivity and wealth creation. Draghi noted that, on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000.

We have to ask ourselves why is there such a great difference between the US and the UK or Europe. Draghi has argued the regulatory burden our governing institutions have placed upon businesses result in the redirection of investment, sub-optimal use of scarce resources and uncompetitive markets where incentives to be creative and entrepreneurial spirits are subdued.

There is also great deal of evidence in reports and studies demonstrating US taxes are significantly lower at all levels, be they levied by federal or state jurisdictions – and that the incentive effects mean earnings and disposable income are comparatively higher than in Europe, for the simple reason that they encourage and incentivise higher productivity and greater economic growth.

Tax bills in Texas vs Italy

Last year I completed a comparative study of salaries, taxes and living costs and the outcome was incontestable. A typical example was that of IT managers: one in Houston, Texas being paid €91,940 and the other in Italy paid €53,829. Income taxes levied on the IT manager in Texas reduced take-home pay to €72,224.

Although an Italian IT manager was paid much less than their American counterpart, the tax bill was higher, leaving only €38,043 take-home pay, about half that of his Houston counterpart. I found the same outcome for train drivers, teachers, priests, lawyers – every profession in fact.

The answer is the United States economic system provides superior outcomes and for more people than does European welfarism. If you were to have the option of changing one model to achieve better outcomes, it would make most sense to reform Europe’s welfarism to be more competitive and rewarding – like that of the United States – than to make the United States more like Europe.

Recently I have been writing about the pervasive influence of the many NGOs that are often funded by the state to lobby it for regulations that the politicians are then only too happy to introduce – showing they care and are doing something. The outcome is we end up with laws emanating either from Westminster or Brussels (which we adopt even though we have left the EU) because of the cacophony of demands for more interventions to save us from ourselves.

Terminal decline

Regulations impact every facet of our lives with most people unaware how they are being directed, supposedly for their own good. Take something as seemingly modest as advertising restrictions. Heavily influenced by health-focused NGOs like Action on Salt and Sugar, the latest regulations will ban 'less healthy' food adverts before 9pm on TV and across online platforms.

While the intent is claimed to be tackling obesity, these blanket bans penalise businesses of all sizes by increasing compliance costs, reducing marketing opportunities and discouraging effect on innovation for new products. Moreover, there is scant evidence to suggest such advertising restrictions significantly impact public health outcomes.

Even an EU law about plastic bottle tops was adopted in the UK so packaging is not different between markets – yet most people despise the futile imposition.

The cumulative burden of overregulation means businesses grapple with constantly shifting regulatory frameworks, from labelling requirements and packaging restrictions to marketing bans and environmental mandates. The result? Less competition, higher prices, and fewer choices for consumers, lower tax revenues and greater public subsidy. All of that is bad.

The reality is it is our state that is morbidly obese. We need to cut back the regulations that remove incentives to increase competition and productivity. Sending our politicians to a Fat Camp where they consider how to abolish needless restrictions might be the only answer.

Seriously, we need to lose the weight of government that makes us less productive or our economy will be in terminal decline.

Brian Monteith is a former member of the Scottish and European parliaments and editor of ThinkScotland.org