The economy is always number one on the list of issues for voters. How switched on a party is regarding economic matters is a huge turn-on or turn-off vor millions of people. The economy and the health of it vastly affects the state of public services, public optimism and the public in terms of wages and so on. The economy, which is a very complicated or very simple thing depending on your view of it, is not in a good place two recent small dips into recession and some decent growth after a big drop after COVID and a massive spike in inflation. The economy needs to do better and the Tories and Labour are both setting out their visions for the economy.
To briefly sum up the state of play for the economy. The nation is over 2 trillion pounds in debt. The deficit, one of the highest in Europe, has come down slightly (debt is how much you owe and deficit is how much you are spending compared to income). GDP growth is almost stagnant and GDP per head (how much richer the average citizen is) has been on a steady decline since 2008. People are, on average, poorer. Interest rates are still high at 2.8%, 5.25% for borrowing, though this has a knock-on effect on things like mortgage rates. Inflation, whilst dropping, is not yet very low and hovers just about the target at around 2.6%. The third highest national expenditure behind pensions and health is debt service repayments (interest of the national debt). In the home energy costs are much higher on average by a factor of around 50%. Water bills are up at least 20%, more for those in the south of England. Food costs are still high and rising and the cost of living is high. The tax burden is the highest since the late 1940s and the highest proportion of people ever are slipping into the higher rate of tax of between 40-50% due to fiscal drag (wage inflation). Health spending stands at around 12-15% depending on who you ask and adding up the costs of other Tory spending commitments like hotels for illegal migrants and the cost of trying to achieve net-zero public expenditure looks to always increase.
It is going to be a hard sell to ask for higher taxation and neither of the main parties are advocating that. Labour are going to raise money from VAT introductions to private schools but really the main argument around the economy is how to grow it; how to make it make more money and thereby help the state take more in revenue. The answer from both the main parties is to invest in the economy. This means very little in practise and so it is more about stimulating business; but really it looks like the big parties are asking big business to do more. Whether by tax incentives or cutting business rates, the two main parties are very much looking towards corporations to really drive investment, especially by incentivising investment in areas left behind by the big business drive in cities like London. Both parties are sort of looking at the state to stimulate the economy, further emphasising the political elite desire to continue Keynesian economics; the state drives the economy.
An analysis of why some nations do better economically, in a bid to find inspiration, yields interesting results. The prevailing orthodoxy tends to revolve around a very Victorian, very dated, concept of how making money works. There is a tendency to see resources as the way to make money; look at oil rich nations! They have sovereign wealth funds! They are in the green. There is some merit to this idea as a ‘quick fix’ and one might point to the shale gas requiring fracking all over the United Kingdom, but the green lobby has quite a grip on decision-making, especially the government-imposed climate change committee which has a large amount of unaccountable power and influence. Boris Johnson, in a bid to stimulate the economy in his Bohemian Liberal way, thought that Britain’s next natural get-rich-quick natural resource would be wind. “The Saudi Arabia of wind” he called his idea. But, after firms abandoned further development of offshore and increasingly onshore wind farms due to their gigantic costs and little returns, this looks like a resource that will simply rest within the minds of the ideologues and Greta Thunberg.
The analysis instead shows something far more interesting, and this can be seen in the small yet mighty economies of places like Singapore, Hong Kong and even Switzerland. None of these economies have resources to speak of, neither do they have large expanses in territory in which to exploit for industry. What seems to correlate incredibly well is the health of an economy and the freedom of the institutions within it. Hayek and Friedman economics basically conceived of the merits of a free economy and the ease by which capital flows. The more free a nationa’s institutions, especially economic, are the more prosperous a country is economically. Switzerland has some of the most liberal policies to the exchange of goods. Singapore is almost a Wild West of capital where companies can rise and fall and Hong Kong was immense for it being the home of impressive international firms. What correlates incredibly well is the method by which the state gets off the back of the free market. Adam Smith in his seminal book “The Wealth of Nations” led to the adoption of Free Trade within the British Empire in the mid-19th century and the empire saw an unprecedented growth of the economy, livelihoods and it was sustained right up until the 1890s with the rise of competitors. Leave the consumers to do their own thing and, with innovation and risk, a nation’s economy truly does grow. This is the real reflection on what works and what doesn’t work all over the world. Even China realised this and steps back more and more from big business in an attempt to stimulate an economy that has been wobbling under the surface (take a look at the bursting bubble of Chinese real estate as an example). Freedom makes money.
This isn’t really on offer as it is ideologically the opposite to the prevailing orthodoxy from the main two parties and the Office for Budget Responsibility, and the independent Bank of England, which sees state intervention and artificial market stimulation as the bedrock of economic growth. John Maynard Keynes would be proud. It is also politically expedient to say the state will take care of things rather than consumers, producers and the market. In fairness, the current prevailing view throughout the country is pretty close to that idea as well, as more people see the state as the saviour for economic problems more and more; perhaps as a result of years of living in a welfare state. (Though, one of the best quotes ever from Hayek was “What is the difference between the Welfare State and a Totalitarian State? Time”). The state and the economy have become synonymous despite the Thatcher economic revolution in the 1980s. There has been a big shift in state dependency and that has led to the state having to foot the bill for things that are way beyond its ability (furlough as a case in point, adding 400 billion pounds to the national debt in one year). The parties don’t seem to be brave enough, if they even wanted to, to argue for a different economic model.
Instead, we have a desire for a continuation, mostly because so much economic ideology is wrapped up in the civil service organisations that have a lot of sway not only over government ministers but also the market. A simple reminder of the disastrous Liz Truss premiership of 40 odd days showed this, as she tried to unveil, albeit rather chaotically, a very different economic approach and the Bank of England simply started selling Government bonds in a bid to create market volatility to stop her plans and cause her to resign in almost record time. There really seems to be a retisance to push back on the treasury orthodoxy in favour of more of the same, and we are yet to see any tangible difference between the two main parties with regards to the economy as a result. A bit of a shame, one might think. Perhaps something bold and radical will be offered from the other parties but really the only party that seeks to shake things up a bit is Reform UK. Their economic policy is the only one that can be best described as Friedman-esque, though it is yet to be seen whether this would be a vote-winner anyway. Otherwise what is offered almost unanimously is high tax, high spend and fingers crossed things will pick up again, with an eye to a possible upturn in international markets rather than a sheer hope for domestic fortunes to turn positive. After yesterday’s article one might be a bit more pessimistic about that happening.
We shall see how the economy is going to play out in the minds of the voters at this election. There is not much optimism on the horizon, one of the reasons this election was called now; it wasn’t going to get any better in order to be a vote winner. Some are predicting an IMF bailout coming round the mountain and perhaps this is a reason for a lacklustre Tory campaign; this is a hospital pass to the Labour Party. And perhaps there will be another note imitating the last one left when there was a major change of administration in 2010 which simply read “Sorry, we’ve run out of money”.
This article first appeared on the TDL Times. For more information, articles and more please visit www.thetdltimes.com.
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