After a long break from blogging due to annual leave and academic conferences, with the Tory leadership contest still in full swing, I was expecting to have to digest a large amount of new Brexit-relevant information…Turns out, nothing much has happened. That is to say, of course there has been a large amount of media coverage of the leadership contest. But when it comes to substantive policies, everything I have read sounds distinctly ‘old news.’
Despite all the heat the Leadership contest is producing, very little light has been shed on which path the remaining contenders in the Tory leadership race – former Chancellor Rishi Sunak and Foreign Secretary Liz Truss – would take post-Brexit Britain down. Indeed, the pressing issues the world and the UK are facing – such as levelling up – are being side-lined by an obsession with the new cultural wars that keep voters entertained and thoroughly focussed on non-issues, while the grand challenges go unaddressed.
I was expecting to analyse the economic programmes put forward by the two contenders. To my surprise, neither of the remaining candidates seem to have one. Rather, they seem stuck in economic thinking that resembles a zombie ideology from a bygone age. Inspired, no doubt, by some vague reference to neo-classical economic ideas, there is a lot of talk about aggregate macro-economic measures such as national debt, tax burden etc. and about very micro-level things such as how tax cuts create incentives for individual entrepreneurs and investors. As a result, the economic side of the debate focuses on the simplistic question of tax cuts v. reducing national debt.
Other crucial elements of economic policy making remain entirely unaddressed. Thus, at the sectoral level, where an industrial policy would be required – as Prof Michael Jacobs also argues in an excellent blog post – and the firm level, where important questions concern what sort of skills are available to firms and how can we increase productivity, are not being discussed. Unless I am missing something (I almost hope I am), none of these crucial economic issues have been addressed by any of the candidates. That is concerning to the highest degree given the bleak economic outlook the UK is currently facing.
A bleak future
When it comes to economic forecasts, even the usually most level-headed institutions - such as the Bank of England (BoE) – increasingly sound like straight out of a dystopian novel. No doubt, the BoE would be accused of ‘Remainerism’ were it still run by the outspoken Mike Carney, rather than by the more conciliant Andrew Bailey who seems to try and avoid talking about the impact of Brexit. Regardless, the forecasts are bleak: Not only is inflation expected to go up to 13%, but also the BoE expects a 15 month recession with GDP shrinking by 2%, while US is forecast to grow by 1.5 per cent and the eurozone by 1.7 per cent in 2023. Similarly, half of the businesses surveyed by the Institute of Directors now plan to cut investment, among other things due to Brexit.
Worse still, the UK combines the ‘worst of both worlds’ as the FT’s Delphine Strauss and George Parker note: Not only is the growth rates forecast in the UK lower than either in the US or the EU, but also are people in the UK “more exposed to the energy price shock than in the US, and less protected by government measures than in the eurozone, while the UK economy has also been damaged by the effects of leaving the EU.”
This situation is the result of an economic policy – if we can call it that – by successive Tory governments that combines a staunch belief in the superiority of free markets and free trade with an obsession with minimal government. This economic ideology ignores the fact that the preference for a minimal state may actually undermine the achievement of the two former policy goals in the sense that for free markets to be sustainable in a social sense, the ‘losers’ of free market capitalism need compensation via welfare state policies and establishing free trade requires collaboration (not confrontation) with other states as well as state-sponsored institutions (such as common standards on product quality etc.).
Some Tories acknowledge that. Tim Pitt, for instance, a former senior adviser to UK chancellors Philip Hammond and Sajid Javid points out that “Conservatives have always looked warily at over-mighty government — but this should not be confused with small state libertarianism. The Conservative approach has been to see the state as an enabler, rather than controller, of economic activity.”
It has indeed long been acknowledged that Thatcherite rhetoric against the state is oftentimes not matched in reality, as Andrew Gamble has shown years ago. Even the staunchest defenders of free markets will eventually have to understand that markets are created by states. Therefore, implementing freemarket capitalism in reality requires a strong state. Despite all the rhetoric, to some extent even Thatcher may have understood that, as public spending grew on average by 1% a year during her premiership.
None of these basic facts seem to be part of the leadership candidates’ economic thinking. Instead, the debate feels like a rehash of old ideas and old recipes, which seem to completely mismatch the problems the economy is facing in the 21st century. This may be for good reasons from the candidates perspective: As Chris Grey notes, rehashing pseudo-Thatcherite rhetoric may be determined by “the age and political reference points of the selectorate that will choose the next Prime Minister,” namely the Tory party membership.
Truss’s pseudo-Thatcherite economics: Can you tax cut your way to growth?
Liz Truss remains the frontrunner in the contest. Her economic policy seems to be summarised in the emerging slogan that “you can’t tax your way to growth.” Indeed, in most interventions she promises to start by reducing taxes, most importantly reversing the National Insurance rise brought in by her competitor Rishi Sunak, keeping corporation tax low, and putting a temporary moratorium on green energy levy.
Conversely, she strongly rejects what she calls ‘Gordon Brown economics,’ by which she means taxing people and them giving them back the money in handouts. The dig at the former labour leader is presumably meant as a broader rejection of socio-democratic economic policies, although the statement reveals either bad faith or a very limited understanding of redistribution (taxing to give back can make a lot of sense if the state taxes the rich to give to the poor, or to invest for instance). Regardless, the attack on ‘Gordonomics’ certainly is not meant to set out any substantive policy plan, but rather to also attack Rishi Sunak who has signalled support for government grants to people to help with the cost-of-living crisis.
It probably also serves as another attempt to show that Truss is Thatcherite. Yet, in that respect too the comment reveals a lack of understanding or a case of deliberate misconstruing Thatcherite policies. In fact, as Prof. Jacobs shows, Thatcher did not cut tax, but changed the tax system so that the rich would pay less (cutting the top rate for income tax from 83% to 40%), while the less well-off would pay proportionally more by increasing VAT from 8% to 15% (as well as NI). VAT disproportionality hits poorer people, because they spend comparatively more of their available income on consumption of goods and services subject to VAT. So, Thatcherite economics is not one of cutting taxes, but one of redistribution to the top.
Regardless, Truss’s proposed policy of taxing less in the hope growth with follow is still based on the same fundamentally flawed economic theory underpinning it. Indeed, the rationale for such a policy is that in conservative circles, rich people are seen as the ones who create economic growth by establishing businesses and investing, while the less well-off will benefit from economic growth thus created through a trickle-down effect. That sort of trickledown economics has long been debunked (as even the World Bank – one of its main promoters in the 1980s and 90s – now admits). But its benefits seem particularly questionable in a country like the UK, which heavily relies on consumer demand for growth. Taxing consumption rather than taxing income progressively (higher incomes paying more than lower ones) seems like a particularly questionable choice in such a context (which is also why austerity is a particularly harmful policy in the UK. More harmful, say, then in Germany, where the dominant export sector can compensate for lack in domestic demand).
Truss also objects to Sunak’s planned increase in corporation tax. Here the rationale is that reducing corporation tax will encourage investment. While radical cuts to corporation tax may in some cases attract substantive amounts of foreign direct investment (e.g. Ireland’s move from a 32% to a 12.5% corporation tax in 1999), that will only happen if other factors are reunited that guarantee that companies make additional profits as a result. In the Irish case, a key attraction of Ireland as destination for FDI was the fact that Ireland is an English-speaking country from which companies can service the EU market. An attraction that the UK has voluntarily abandoned with Brexit.
Foreign companies may still be attracted to the UK, e.g. to transfer profits made elsewhere here in order to save on the tax bill. But such ‘investments’ mostly constitute just in establishing headquarters or an office in the UK without leading to any productive investment or large-scale creation of jobs.
Similarly, existing UK businesses will hardly decide to invest any savings they would make due to a reduction in corporation tax, unless such investment were expected to increase their profits. For that to happen, evidence of increased demand for the firm’s products or services would have to be expected, something that is hardly the case in morose post-Brexit Britain as the above-cited IoD survey shows. In sum, the link between the level of business investment and of corporation tax is tenuous. Again, Prof. Jacobs points out that “Germany has a higher level of business investment than the UK despite a corporation tax rate of 30%, compared to the UK’s 19%.”
Even if we were to accept that tax cuts spur economic growth (and there are reasons to believe that they do not), there is still a question mark over whether an increase in aggregate GDP growth resulting from such cuts benefit all parts of society. Importantly, if tax cuts are to be squared with a relatively balanced budget, public spending will have to go down, which implies cuts in welfare spending and other public services that – once again – benefit the poorer strata of society most. Of course, the government could simply borrow more to finance make up for the gap left by tax cuts (something Sunak accuses Truss of), higher debt would mean more money spend on servicing the debt – especially as interest rates are increasing –, which again may affect public spending on welfare services in the long term. In other words, while a wealthy taxpayer in – say – Guilford may benefit from trading off a cut in public spending against an income tax cut, a taxpayer in – say – Ashfield may lose out given that wage income tends to constitute relatively lower and welfare payments relatively higher share of their overall income. In still other words, crude arguments about aggregate macro-economic figures will not level up the country and thus reduce the discontent that led to the divisive political culture we now have.
Be that as it may, evidence and past experience does not seem to matter for either of the Tory leadership candidates. Truss’s strategy seems to be to stay away from any concrete policy-making and instead dabble in vague but ideologically-loaded calls to arms. Thus, rather than agreeing to meet with her competitor Sunak and the CBI to discuss concrete solutions to the cost of living crisis, she promises to crack down on protests, unions, and measure to favour renewable energies. One can see how such a tough stance would please the European Research Group (ERG), but given the pressing issues the country and the world are facing the priorities are shockingly wrong. (Equally shocking is her lazy explanation for refusing the meeting, stating that Boris Johnson – currently on his second holiday of the summer – is the one still responsible for fixing the cost of living crisis).
Beyond taxation, Truss’s least Thatcherite economic policy is perhaps her alleged attack on central bank independence (CBI) considered by many a key feature of conservative economic policy making. CBI is meant to guarantee that monetary policy is shielded from political interference and from instrumentalisation of the economy for political gain. Truss announcement that she wants to change the BoE’s mandate. Some have seen that as a direct attack on central bank independence. However, Truss’s team seems to suggest that independence would be untouched by a changed mandate. According to the Spectator’s Ashworth-Hayes, what she may have in mind instead is either of two things: Either reducing the nominal target of keeping inflation at 2% to push the BoE to do more to fight it (which would inevitably mean further interest rate increases); or a shift from inflation targeting to nominal GDP targeting following the Japanese model. The latter shift would build into the BoE’s mandate an explicit mandate to consider the trade-off between inflation and unemployment. While economists debate the pros and cons of CBI as well as the benefits of inflation v. nominal GDP targeting, what is astonishing is the fact that which one of the two options the candidate to be the next PM has in mind remains subject to speculation by journalists.
Sunak’s pseudo-Thatcherite economics: Compassionate conservatism 2.0
Sunak’s claim to Thatcherite economics is somewhat different from Truss’s, focusing more on the social problems. Reheating the ‘compassionate conservatism’ idea, in one debate he warned against the impact Truss’s proposed policies would have on the poor. His economic approach focusses on two key pillars of conservative economics, namely ‘sound money’ and ‘balancing the books.’ Conversely, he is sceptical of tax cuts – at least at this stage of the economic cycle. He supports direct support to households rather than tax cuts as a way of dealing with the cost-of-living crisis, rightly pointing out that tax cuts are not much good if you are pensioner for instance.
Conversely Sunak pins his Thatcherite credentials on the monetarist idea that ‘sound money’ is key for economic growth, arguing – wrongly – that the ‘root cause [of the looming recession] is inflation.’ To be sure, inflation is a problem that needs to be taken seriously, but it is not the root cause of the recession, but a result of a supply shock caused by the War in Ukraine, the Covid pandemic, and in the UK case, Brexit. Therefore, the spike in inflation we are witnessing is clearly not primarily a monetary or a demand-driven phenomenon – as conservative economists usually see it – and addressing it will require other policy tools than interest rate increases.
To be fair, Sunak does not suggest addressing soaring inflation through interest rate increases. Indeed, he rejects the latter due to their negative impact on home owners with mortgages. In this respect, Sunak’s economic plan is even vaguer than Truss’s. His ‘plan to tackle inflation’ is a purely ‘negative’ one in the sense of saying what he would not do, rather than saying what he would do. Indeed, what exactly the policy tools are he would use to address inflation is unclear. It seems hardly thinkable that what he has in mind instead of increasing interest rates would be state-imposed price controls, which is the alternative treatment to interest hikes, but usually associated with interventionist left-wing economic policies.
Doubling down on the culture war
As always, when economic reality bites and solutions are few due to the commitment to Brexit and to (what even conservatives must admit are) pseudo-Thatcherite economics, conservatives turn to culture war to distract the public from the real issues. In recent weeks the ‘woke blob’ is once again frequently mentioned in a discourse that is nothing short of a conspiracy theory (see Chris Grey’s blog for a fuller account). Even the downfall of Johnson himself – obviously and evidently the result of the votes of conservative MPs and in no small measure only possible due to the actions of far-right European Research Group – is being blamed on a mysterious ‘woke blob.’
The woke blob conspiracy has also infected the leadership race. Truss seems to position her self as the anti-woke PM pushing Sunak down a similar path. Sunak reportedly promised to extend the meaning of extremism to include ‘vilifying the country’ a formulation that sets of alarm bells amongst some observers, and seems like a move worthy of autocracies like Thailand.
The fact that despite the pressing issues we are facing, the candidates for the leadership of the UK’s governing party rely on a conspiracy theory as their main programmatic point tells you something about the state of British politics.
However, in the context of the next General Election, the focus on the culture war may be a risky strategy. Some observers believe seeing signs that the British public – outside of a smallish group of vocal activists on both sides – has started tiring of the ‘culture wars.’ Hurling insults at alleged enemies may provide some relief from the frustrations of everyday life; long-term however, they will not fix the very real problems people are facing. Contrary to politicians, most people will not see any material benefit resulting from fighting the culture war and will turn to more concrete issues. The Tory leadership hopefuls would do well doing the same.
The long shadow of the Age of Empire
The lack of any serious debate about the economic issues the country is facing is extremely concerning in itself. What makes it even more concerning is that our media have been full for weeks and weeks with reporting about the Tory leadership race, which in fact is determined by a tiny minority of the population. The Tory membership is estimated at around 150,000 mostly male (63% - compared to under 50% in the entire voting population), mostly white (95% - compared to 83%), and older than average (57 years – compared to 40 years) British citizens. It is this group of people, amounting to roughly 0.3% of the population, that will decide who will call all the shots for at least the next two years. The rest of us are condemned to the status of bystanders.
It is tempting to blame this state of affairs on the archaic political system the UK has inherited from the ‘Age of Empire.’ After the ‘age of extremes’ (20th century), the world has entered the ‘age of crises’ – dominated by recurring economic, health, and above all ecological (climate change, biodiversity loss) crises. Yet, Britain’s archaic voting and party system disenfranchises the vast majority of the people and allows a narrow conservative political elite to continue entrenching old ideologies of national sovereignty and imposing the wrong kind of economics for a new era.
Those supporting Tory policies and values may rejoice in the almost complete control over who runs the country. Yet, the rise of UKIP and then the Brexit vote have shown what a destabilising impact this system has on the UK’s society. In the instance of Brexit, the blow to the cohesion of the UK has benefitted a new type of conservatives who grabbed control of the party. Another two years of economic recklessness may generate a blow to the cohesion of UK society so hard that even they may be among the losers. They will only have themselves to blame. The rest of us - who continue to be bystanders in the unfolding drama - will only have the consolation that the next blow may also finally wipe out the wrong kind of conservative economics.