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Few politicians rely more on colourful rhetoric than on detail than Boris Johnson. In his speech to the Tory party conference last autumn he congratulated everyone (not least, indirectly, himself) for coming through the pandemic and being confident about re-building the British economy.
“We are embarking now,” he said, “on a change of direction that has been long overdue in the UK economy. We are not going back to the same old broken model, with low wages, low growth, low skills and low productivity.” Instead, “the direction in which this country is going now [is] towards a high-wage, high-skill, high-productivity and, yes, thereby low-tax economy. That is what the people of this country need and deserve.”
It is lucky that such speeches are unmemorable, for Johnson would hardly want this to be recalled now. The usually pro-Conservative Adam Smith Institute called it “bombastic but vacuous and economically illiterate”. Another Conservative think-tank, Bright Blue, warned him that “ambition on wages without action on investment and productivity is ultimately just a pathway for higher prices”. And the Federation of Small Businesses, whose members are part of the Government’s core vote, observed that “it’s equally remarkable to hear the benefits of a low-tax economy vaunted when the Government has just signed off a hike in National Insurance contributions … which we estimate will cost at least 50,000 jobs”.
The speech contained no details of how Johnson’s “high-wage” economy would be created; and, above all, whence the growth on which it depends would come. It is perhaps no surprise, then, that we now find ourselves in the midst of a cost of living crisis the likes of which we have seldom, if ever in peacetime, experienced before.
In March growth was -0.1 per cent. In April it was -0.3 per cent. Meanwhile household incomes have fallen for the fourth successive quarter, the longest decline since 1955 and the tax take – forecast to reach 36.3 per cent of GDP by 2025/6 – is growing to be the highest since late Forties.
Households and businesses face “a very large national real income shock”, Andrew Bailey, the Governor of the Bank of England, told delegates at a conference in Portugal. The British economy was “weakening more than others” and the scale of the shock would be “substantive”. “It reduces domestic demand, it will pass through the labour market and it will pass through into inflation,” says Bailey, explaining that the Bank would act “forcefully” to stop price rises. That means higher interest rates, and even lower disposable incomes.
Yet ministers hardly inspire markets looking for signs of sound monetary stewardship. They are reluctant to even talk about growth – let alone how to achieve it. This is no Thatcher economic revolution. The Government seems to prefer spending public money – providing a taxpayer-funded comfort blanket for a potentially restive electorate – to cutting taxes to bring growth that would provide prosperity.
On May 17 Rishi Sunak, the Chancellor, boasted that “public spending over the course of this Parliament is growing at a record rate, both on investment and on day-to-day spending, so we can support strong investment in all the public services on which constituents rely.” Public spending is now heralded as a good in itself, yet it has meant two million more people paying higher rate tax during the Johnson administration, leaving most such people no better off than in 2010.
This might sound reassuring to some but, apart from Russia, Britain alone of the G20 countries is forecast to see its economy shrink in 2023. The much-vaunted Brexit dividend has not been paid. The more the Government spouts about “delivering”, the less it actually delivers.
How have we reached this depressing position? How has the party of business and enterprise become the party of welfarism? Why have the Conservatives thrown away their reputation for sound finance? And, most important of all, how might they win it back?
Futile socialist solutions
For most of the Conservative party’s history it was not like this. It understood aspiration and how to drive prosperity. Robert Peel was the first prime minister to identify as “Conservative”. In the 1840s he governed during a period of civil unrest caused mainly by high food prices. They were high because a Tory, Lord Liverpool, had passed the Corn Laws after the Napoleonic wars to favour landowners. They imposed tariffs on imported cereals, which stifled competition and made home-grown cereals artificially expensive. When the potato famine struck Ireland in 1844, one of Peel’s ministers, William Gladstone – then a Tory – told him that to stop Ireland starving he should repeal the Corn Laws, so the Irish could afford bread.
Despite a savage assault from his own party, led by Disraeli (a placeman of the Duke of Portland), Peel took Gladstone’s advice. In the winter of 1846, thanks to Liberal votes and in the teeth of Tory hostility, he obtained repeal. He was soon thrown out, but most Conservatives quickly learned a lesson: that free trade stimulated growth and furthered prosperity.
Lord John Russell’s Liberal administration that succeeded Peel’s dismantled more tariffs. This transformed Victorian and Edwardian Britain, not least in expanding the middle class. Growth continued for 27 consecutive years after 1846; Birmingham became “the workshop of the world” and the City of London became the world’s banker – on the eve of the Great War, German industrialists pleaded with the Kaiser not to fight Britain, because German business depended upon British capital.
The Conservative protectionist instinct was crushed by the success of free markets right up to the aftermath of the Second World War but then – as now – policy and rhetoric changed markedly.
The Conservatives followed the post-war consensus, all the way through from 1945 to 1975, using higher taxes to fund the welfarism of which today’s ministers are so proud. There was full employment, not least because the country had to be rebuilt, but growth lagged behind not just America, but that of our defeated enemies. The Germans invested in new, innovative plants while the British built grim council estates and created a client state of welfare-dependent families. The trade unions prevented managements from managing, which further deterred investment and higher productivity. Johnson-style people-pleasing became routine. “Who are the middle classes,” Harold Macmillan notoriously asked, “and what do they want?”
All three of Macmillan’s Treasury ministers resigned in January 1958 because they disliked his people-pleasing desire to increase public spending. One, Enoch Powell – later controversial for his views on immigration – took the classical liberal view that inflation was caused by growth in the money supply, and led the rebellion.
But before the Tories lost power in 1964 they had adopted the futile socialist solution of a prices and incomes policy to control inflation. They tried it again after Edward Heath won the 1970 election. Heath was spooked by unemployment reaching a million for the first time since the Thirties, and in 1972-73 let the money supply grow by 30 per cent. Powell, then in backbench exile, asked him in a crowded House of Commons whether he had “taken leave of his senses”. Two years later, after Heath had lost office and the leadership, inflation reached 26.9 per cent.
Mrs Thatcher was determined not to repeat that debacle. Powell’s economic ideas deeply influenced her; as did those of the free-market Institute of Economic Affairs, run by Ralph Harris and Arthur Seldon. She ushered in an era of spending taxpayer’s money responsibly – encouraging individuals to strive rather than rely on the state, which she cut in size and scope over her time in office.
Importantly she did so in a language we could all understand. She announced that “my policies are based not on some economics theory, but on things I and millions like me were brought up with: an honest day’s work for an honest day’s pay; live within your means; put by a nest egg for a rainy day; pay your bills on time; support the police”.
Thatcher observed that “no one would remember the Good Samaritan if he’d had only good intentions; he had money as well”. Her creed of self-reliance was most famously advanced by Norman Tebbit, in deep recession in 1981 when the economy was being restructured from near-collectivist to free-market: “I grew up in the Thirties with an unemployed father. He didn’t riot. He got on his bike and looked for work, and kept looking until he found it.”
It is a myth that under Thatcherism – a doctrine more pragmatic than many realise – the poor were cast adrift. After the great restructuring, unemployment fell and reliance on welfare decreased; but public spending in real terms grew by 1.1 per cent annually from 1979 to 1990. It could increase because the Laffer curve was correct – the theory advanced by the American economist Art Laffer that sometimes revenue increases through cutting taxes because incentives for people and businesses to be productive increase. As Powell said in 1966: “You don’t tax a loss. You only tax a profit. We’re all in this together.”
Thatcherism re-established the link between effort and reward that is (or should be) the acceptable face of capitalism. By the late Eighties Britain was booming again.
Avoiding hard choices
So why do we find ourselves heading back, not just to the economy but the socialist rhetoric of the early Seventies today? Why have growth and the Thatcherite tool kit of lower taxes, deregulation and a smaller state once again become bad words?
After City deregulation – the “Big Bang” – in 1986, the era of the barrow-boy trader arrived. New Labour maintained many of Thatcher’s policies and kept direct taxes low but the regulatory wheels came off. Gordon Brown, Blair’s Chancellor, failed to see the US sub-prime crisis coming, loosening a traditional banking system where loans were secured against collateral. Cameron’s inheritance in 2010 was poor: Labour has always left the economy in a worse state than it found it, and this was no exception. As the note left by the departing chief secretary to the Treasury, Liam Byrne, in his office revealed “there’s no money left”.
Doubtless one reason the Johnson administration is reluctant to dole out the harsh medicine of fiscal rectitude is the memory of the subsequent austerity policies of the Conservative/Lib Dem coalition of 2010-15. Cameron’s 2011 CBI speech showed him determined to maintain the Tories’ reputation as the party of sound money, of business and of growth – a task which his Chancellor, George Osborne, set about with rigour, some would say glee. But while Osborne focused on the economy (not slashing public spending but flattening it in real terms) Cameron became subsumed by constitutional questions – the 2014 Scottish referendum and the Brexit campaign in 2016 – and the economy took a back seat.
The pandemic brought it back to the fore. The state paid people to stay at home and produce nothing. It knocked a hole estimated at £300 billion in the exchequer. That should encourage a focus on growth and on a concrete plan to secure it; but we await that plan. As well as the two million new high-rate taxpayers, corporation tax is rising; National Insurance rises remain in place; the binge in the largely unproductive public sector continues.
Because of a desire to appease both “Red Wall” and “Blue Wall” Tories there has been a reversion to the “One Nation” Toryism of Heath and the post-war consensus, hoping to please everyone. This happened not after deep thought and wide consultation, but as a means of avoiding hard choices.
Johnson claims he is a Thatcherite. In a joint newspaper article with Sunak earlier this year they said “we are tax-cutting Conservatives. We believe people are the best judges of how to spend their money … We want lighter, better, simpler regulation … We are Thatcherites, in the sense that we believe in sound money. There is no magic money tree.”
Johnson perhaps wrote the article with the same care he applied to the Northern Ireland Protocol: because he has acted ever since as if there were a magic money tree, and shaking it is far simpler than imposing the transfer of money to the productive sectors of the economy that will actually affect the growth he no longer mentions.
‘Lacking an agenda’
Many of today’s Tory MPs feel the intellectual energy needed for a growth strategy has instead been devoted to Brexit, then to Covid, then to the Ukraine war and now to the cost of living crisis and a fear of recession. The Treasury doesn’t do a growth strategy unless forced to: there is no independent economic adviser of the stature of Sir Alan Walters, who served Mrs Thatcher, with the clout to take on the Treasury mandarins; and the view is that Sunak doesn’t have it either. One backbencher told me that “if Johnson survives that long, he’ll be forced into an economic plan in the autumn”. A former cabinet minister, however, said that there is no coherent economic policy “because Johnson isn’t a politician, he’s a brand. The brand likes spending money and being popular. These are the worst ingredients in a Tory prime minister. He’s unprincipled, a populist and an opportunist.”
As Jesse Norman, the Conservative MP who withdrew his support from Johnson last month, said in a devastating letter to the PM: “You are simply seeking to campaign, to keep changing the subject and to create political and cultural dividing lines mainly for your advantage, at a time when the economy is struggling, inflation is soaring and growth is anaemic at best.”
The markets, too, have noticed: Jordan Rochester, a currency analyst at Nomura, said the Government “is lacking an agenda, apart from ‘keep Boris Johnson in power’.” And the attempt to do that is a factor that has detracted from serious thought about the economy. It is also responsible for the spending fetish preventing the tax cuts essential for economic revival, and creates uncertainty. Berenberg Bank, in a recent note to clients, said: “The economy and markets would likely benefit if the UK is no longer led by an unpredictable populist.”
Wild west-style, rampant deregulation is not needed – indeed, there is a case for revising some of the Blair/Brown/Osborne deregulation to ensure business functions more responsibly – but cutting some red tape plus a thoughtful programme of tax and public spending cuts could reboot the productive economy before it falters under the post-pandemic pressures.
Another former cabinet minister, Sir John Redwood, has argued this consistently on his blog for months. On Thursday Shevaun Haviland, director general of the British Chambers of Commerce, said a “perfect storm” of spiralling costs – energy prices, labour shortages, supply-chain problems and the cost of raw materials – was crippling business, made worse by the Government’s “clear lack of strategic direction”.
Johnson’s conference speech of 2021 made no mention of the sort of supply-side reforms common in the Eighties. We still await them. Without that strategic direction and policy detail to drive it, ruin will come.
Few pretend that David Cameron was a great statesman, but he did grasp how to alleviate the post-2008 credit crunch crisis. Addressing the CBI in 2011, he said: “The previous model of growth in Britain – a debt-driven consumer boom stimulating a narrow economic boom – is broken. We need a fundamental rebalancing of the economy: more investment, more exports, a broader base to an economic future. If policy is not directed towards this goal it will fail.”
One reason we have no growth is that exports have shrunk. Investment is down, and will become more so as interest rates rise. Rate rises normally drive up a currency’s value. However, Sterling has tanked since Britain started to lag behind other economies during the Ukraine crisis. Last year the dollar reached $1.40 to the pound; now it hovers precariously just above $1.20. Because of poor productivity and stagnation, British exporters cannot exploit Sterling’s cheapness by selling more abroad; a growing economy is required for that. And the sinking of the currency makes imported goods – everything from pasta to BMWs – more expensive.
It is the sense, internationally, that we have a Government inadequately engaged with economic imperatives, and failing to grasp that growth must underpin prosperity, that is driving down the currency, the markets, and robbing people of hope. The remedies may be painful, but they are obvious.