GIVEN THE SCALE of the challenges Britain faces, from the erosion of liberty and even free speech, to the threat of the possible break-up of the United Kingdom, to the attack on our cultural values the economic challenge has perhaps been relegated from its pedestal in general consciousness.
While there are only so many problems one can focus on at once it is, perhaps, worth reminding ourselves of what the challenges are. This article will deal with the problems, future articles running this week and next will be somewhat more optimistic when dealing with solutions. We will look at tax reform, rolling back regulation, ‘levelling up,’ innovation and productivity and breaking Parkinson’s Law – the growth of an unproductive bureaucracy – amongst others.
As well as trampling on our liberty the lockdown has trampled on the economy.
There are major structural challenges ahead notably repairing the lockdown-enforced collapse of much of the private sector. In my view, however – despite the hesitant, slow and extraordinarily bureaucratic easing of lockdown– there are grounds for guarded optimism that the economy will rebound quite quickly. Such a rebound is quite different, however, from suggesting that the structural base is strong. In my view it’s been greatly weakened by Government.
The recovery is likely to be asymmetric with much of the travel, retail and hospitality industries remaining challenged. The scale of stimulus both here and in the US is so great, and in my judgement misguided in the longer term, that I expect the strength of the short-term bounce may surprise many simply down to its sheer quantum. There are five primary arguments for this view:
- Monetary policy is designed to stimulate demand. I anticipate, into the foreseeable future, central bank activism and continuing negative real interest rates;
- Government spending, ex Covid-19 is likely to grow 3-5 per cent real in the medium term. This may be inefficient and in the long-term crowd-out the productive sector but in the short term is also stimulatory;
- There will be some pent-up demand from the lockdown, with the unwinding of a high savings ratio and a desire to spend. The Garden of Eden is about to re-open, partially at least;
- Covid-19 has changed the terms of business and forced a Darwinian survival in much of the private sector. While this is painful in the short term it should boost productivity and earnings longer term. This is perhaps the one real long term sustainable boon of the lockdown; and,
- Might it be like the roaring 1920’s as a chained population is unleashed to the world of sport, arts and foreign holidays (if we are allowed!)?
This is not to say all is rosy in the garden. It is not. We should not confuse a short-term bounce with long term structural prosperity. While the former is to be welcomed it risks being built on sand.
The private sector generally has responded with extraordinary creativity to this terrible situation. The contrast with the public sector could not be starker. The jobsworth attitude of the teaching unions is perhaps the most shocking manifestation but in general the public sector has been very quick to close down with very little choice, apology or effort with only a few notable exceptions (such as refuse workers).
The problem is that it is the productive private sector that has born all the cost of lockdown. Public spending is up a staggering 33 per cent this year and despite that the economy shrank by 9.9 per cent in 2020, the worst performance since the Great Frost of 1709. As a result, public spending now accounts for a staggering 56 per cent of all UK economic activity, up from 43 per cent the year before. In many regions the state has become the overwhelming element of the economy. In Scotland the public spending share will be greater than the UK average.
While clearly this is a lockdown-induced spending spike let’s not fool ourselves much of this increased public spending has become embedded. Nevertheless, expect the state to remain the dominant agent for years ahead unless there is an urgent change of direction.
The British Government is addicted to not just spending but regulatory instruction, policy ‘nudge’ and at times outright direction. Britain over the last 20 years had slowly been turning its back on the free market economy. Lockdown has turned that trickle into a flood.
Worse this so-called Conservative Government seems to believe this increased state direction to be a good thing. Regulatory pressure increases apace from the woke to the statist green, from the abolition of risk to the attempted abolition of failure. Slowly but surely Britain’s competitive edge is being blunted.
It is not just in the field of regulation that the UK is losing its edge. Britain is now a high tax country. This transformation from being relatively competitive, stable and free is now complete. Taxes today, as a proportion of GDP, are at their highest level since the early 1960’s as Governments have complicated the tax code, raised stealth taxes, reduced exemptions and generally fiddled around.
As an example, stamp duty on property used to be zero and 1 per cent, now it is zero, 5 per cent, 10 per cent and 12 per cent. Moreover, lots of other new and exciting taxes have been raised be it an air passenger duty, an insurance levy, an aggregates tax, new environmental taxes or the banking and apprenticeship levies, while the incentive to save has been reduced as pension tax breaks are curtailed. Government thinks it has got away with it as most of this has been achieved by stealth but now the headline rate is clear. The highest taxes for sixty years.
Worse on the other side of the coin public debt is out of control. Between the Napoleonic Wars and 2005 UK public debt increased to £550bn. By 2010, five years later, it had doubled to £1.1tn. Earlier this year, a mere decade later, it had doubled again to £2.1tn and on our calculations by 2025 HM Government will be some £3tn in debt.
Sure there have been external factors which have been partially responsible for this state of affairs, the global financial crisis and Covid-19 being two, but frankly after a decade of alleged austerity, significant tax hikes and a six-fold increase in public debt in a short generation what exactly have our Governments achieved outside greatly increasing national dissatisfaction from all angles?
Our public sector is not exactly world-beating despite significantly increased funds. Our GDP growth record and even more starkly growth per head, while with a European lens is reasonable, is pathetic compared with our Australian and Canadian or American cousins. Does Government ask why? Is it even aware?
Britain is at a watershed. Its constitution is challenged. Its culture challenged and its very freedom is challenged.
Economically we may well do a bit better than Brussels – big deal – but against a more demanding developed economy peer group – the Anglosphere – the UK is badly struggling.
Mired with an ever-increasing state and a regulatory proxy-state; spending commitments which are structurally unsustainable; and yet more tax rises further undermining the UK’s competitive position; the cake is being squandered.
It’s a bleak picture. Caught in the headlights of its own substantial electoral victory, this government has doubled down on “take back control” to become one of the most potent advocates of the big authoritarian state. The Government might enjoy and crow about whatever bounce materialises but don’t be fooled, the policy direction is undermining the long-term foundations. Today’s puff will be tomorrow’s burnt cake.
Let’s not despair, however. There are many examples of countries in far worse shape than ours recovering and recovering quickly. Next up tomorrow I shall examine some solutions – decline is not inevitable.