How the Tories Wrecked the Economy
This week's budget is set to be a fitting coda to 14 years of Tory economic misrule that will leave an incoming Labour government with few good options
As a display of cynicism, it takes some beating. Jeremy Hunt has spent the past few weeks conducting a semi-public debate about how he might game his own fiscal rules to conjure up sufficient “fiscal headroom” to deliver tax cuts that no serious economist thinks are appropriate in his budget on Wednesday. Not for this chancellor the statesmanship of the John Major government, which sought to atone for the humiliation of Black Wednesday by bequeathing Labour in 1997 a golden legacy. For the Sunak government, even with inflation still well above target, public services collapsing and national infrastructure crumbling, everything must be subordinate to the electoral interests of the Conservative party. Meanwhile much of the media readily indulges this charade, allowing the Tories to set the terms of economic debate.
In this respect, Wednesday’s budget promises to be a fitting coda to 14 years of Tory economic misrule. When this government finally limps out of office, as the latest polls showing the Conservatives 20 points behind suggest is all but inevitable, it will leave behind an economy that is barely growing, in which productivity growth has stalled since 2008, resulting in no rise in average real wages for 15 years, business investment has flatlined since 2016 and public investment lags other advanced economies, as it has for decades. Government debt is close to 100 per cent of GDP and will remain close to this level for the next four years. The tax burden is a whisker off their 1948 high, with deep and unspecified spending cuts pencilled in for after the election.
True, not all of this grim prognosis can be laid at the door of the Tories. The global financial crisis, pandemic and energy crisis were all significant shocks that contributed to ballooning debt levels. It is also true that all advanced economies are facing similar challenges, to one degree or another. America has a higher budget deficit, Italy and Japan have higher levels of government debt, Germany has a weaker near-term growth outlook. But that should not detract from the scale of the challenge facing Britain, or the degree of Tory culpability for choices that have left the country far more poorly equipped than it might have been to meet it.
Cosplay Thatcherism
The original sin of the Tory years was the economically preposterous but politically effective campaign to pin the blame for the global financial crisis on Gordon Brown. The notion that a two per cent budget deficit in Britain was what brought about the collapse of the American banking system was profoundly unserious. But having accused Brown of having failed to fix the roof while the sun was shining, the entire thrust of Tory economy policy switched overnight from “sharing the proceeds of growth” to a savage assault on the state to which the party had given no thought and developed no serious plans. It was cosplay Thatcherism for dilettantes.
Of course, any government taking office in 2010 would have had to take tough decisions the address the deep hole in the public finances that had opened up as a result of the collapse in tax revenues in the wake of the global financial crisis. Alistair Darling, the Labour chancellor, had put forward his own fiscal reduction plan which, contrary to Osborne’s hysterical warnings of a risk of a “Greek-style meltdown”, had been well-received in the markets. But the sheer pace of Cameron and Osborne’s fiscal consolidation and the extent to which the bulk of the burden would fall on public spending was driven by politics rather than economics, a bet that the voters the Tories needed to win a majority cared more about lower taxes than public services.
To the extent that there was any rationale behind austerity, Osborne declared himself to be “a fiscal conservative but a monetary activist”. His argument was that by keeping taxes and public spending so low, he was creating the conditions for the Bank of England to kickstart the economy with ultra-low interest rates. But this was naive to the point of disingenuousness. Interest rates had fallen to near-zero because there was little private sector appetite to take on debt and the banking system was effectively broken. The only entity with the capacity to take advantage of ultra-low interest rates was the state, which could have seized the opportunity to invest in productivity-enhancing infrastructure as the International Monetary Fund and other institutions consistently urged. As it was, the only beneficiaries of “monetary activism” were those already rich, who saw the value of their assets soar.
Chaotic Brexit
No one can say for sure to what extent austerity was a factor in Brexit, the greatest economic policy disaster of the Tory years. But there can be little doubt that eight years of stagnant wages alongside growing strains on public services helped fuel the resentment against immigrants which was the driving force in the vote to quit the European Union. Had the vote gone the other way, a second term Cameron government could have take advantage of more benign economic conditions to reverse some of the worst effects of austerity, thereby handing the Tories a chance to retrieve their reputation for economic competence. Instead, the economic and political chaos that Brexit unleashed has ensure that it is lost, perhaps forever.
One approximation of how bad the damage caused by Brexit has been was provided in a recent note by Goldman Sachs. Based on an analysis of “doppelgänger” economies whose pre-Brexit performance had closely tracked that of the UK, it concluded that the decision to quit the EU had cost Britain around five per cent of GDP. It found that Brexit had saddled Britain with higher inflation, lower trade and slower growth as a result of increased red tape, new trade barriers and severe worker shortages in sectors that used to reply on EU workers. That in turn is reflected in weak levels of investment. One measure of that is the UK stock market, which at a time when other major economy bourses are soaring, remains becalmed, ignored by global investors, abandoned by its leading companies, a badge of international shame.
Nor should anyone harbour any illusions that the Brexit damage is done. Beyond the mechanical costs of new burdens on business, the real cost of Brexit lies in the damage it has wrought on Britain’s political economy. Trusted institutions have come under sustained attack, sowing doubts about the predictability of decision-making; the civil service has been subject to a “cold rain”, stripped of experienced leadership and left demoralised and cowed; trust in the political system has been eroded by a constant steam of scandals. The extent to which the Tory assault on British governance had undermined global investor confidence in Britain was brutally exposed in the catastrophic but mercifully brief premiership of Liz Truss, which led to a run on sterling and gilts and nearly led to a full blown financial crisis
Trussonomics Lives
Indeed, a direct line can be drawn from Brexit to Truss. It is not just that it was only in the context of Brexit that the Tories could have dared to impose first a politician as manifestly morally and politically unfit as Boris Johnson to be prime minister and then replace him with someone as patently inadequate as Truss. Johnson had won an election in 2019 promising to reverse the effects of austerity with big increases in spending but had been forced to raise taxes to do so. Truss was elected because she pledged to keep the spending but slash taxes, even in the middle of an inflationary upswing. That the Tories were prepared to gamble on Truss showed the extent to which the party has been radicalised by the scale of its economic failures.
Nor should one doubt the capacity of the Tories to inflict yet further damage between now and the election. Sunak and Hunt’s desperate attempts to game the fiscal rules to deliver tax cuts next week shows that Trussonomics is alive and well. Meanwhile Truss herself has just spent a week in America cavorting on stage with far right goons and spouting ridiculous conspiracy theories about the deep state that are widely shared by many in her party as it disappears down the rabbit hole of Trumpism. Back in Britain, a flailing prime minister babbles ludicrously about the country having succumbed to “mob rule”, seemingly neither knowing nor caring what impact his hyperbolic language has on the perception of Britain internationally.
Scorched Earth
This then is the scorched earth that Labour stands to inherit. It is fanciful to imagine that a change of government, even one with a thumping majority, will be sufficient to transform Britain’s fortunes. It is not just sentiment that is holding Britain back: all the current pathologies will still be there: the broken public services, the neglected infrastructure, the Brexit red tape and worker shortages, the diminished institutions and hollowed-out civil service, and the dire state of the public finances. Labour’s core challenge will be to revive productivity growth, which in turn will hinge on reviving investment. That in turn will hinge on forging a new national narrative that will make Britain attractive to capital again, since it will only be by harnessing private capital that it can hope to create the conditions for sustainable growth.
That will not be easy. There are no obvious levers to pull. What’s more, Labour must contend with a ferocious right-wing media that has cheered every step of the Tory disaster - austerity, Brexit, Truss - and whose hold over the national conversation seems only to grow even as support for the Conservatives plummets. In an effort to appease the press, Starmer and Reeves have regrettably though understandably already pledged not to reverse Tory tax cuts, not to raise personal and corporate taxes, to stick to the Tory’s deeply flawed fiscal rules, to drop their green investment plan, and rule out rejoining the EU single market and customs union.
Labour will need to be far bolder in office if it is to have any chance of establishing that new narrative. What’s more, it is unlikely to have long to make significant changes before international interest wanes and domestic patience snaps. Over whatever time remains before the election, I intend to return with further posts looking at some of the things that Labour could, should, or might do. In the meantime, please do send me your own suggestions or leave a comment.
Good, hard-hitting stuff. We should have invested when interest rates were low. Now all we have is a crumbling infrastructure.
Great article, Simon. In fact the situation with the UK is worst than it looks. The small cap market, which is a better barometer for the UK as these businesses are more UK facing, trades at a 25% discount to the US and 10% to Europe. Before Brexit UK small cap was at a premium to Europe and a much smaller discount to the US.
https://mailchi.mp/verdadcap/rule-britannia?e=740cd9174c