Comment

Britain is mortgaging its future to prop up the present

The country is in a fix – if only the coming election offered us a choice of how to solve it

Demonstrators dressed as chickens protest opposite Downing Street in London as Labour is calling on Rishi Sunak to name the General Election date
Credit: Jordan Pettitt/PA

On one thing virtually everyone can agree, whether on the political Left or Right – Britain has a growth problem.

If left unaddressed, this will continue to erode living standards relative to others, cause a precipitous slide down the international league tables of economic performance, destabilise the political system and steadily weaken the UK’s influence in world affairs.

The problem is already so evident and acute that you’d imagine it would galvanise our politicians into action. Sadly, there is very little evidence of it.

Instead, the ruling Tory party has allowed itself to be sidetracked by the energy-annihilating divisions and processes of Brexit, and now busies itself with comparative irrelevancies such as small boats and political extremism.

To be clear, Brexit is not the cause of our economic ills, which long pre-date the EU referendum. Nor would our position be much improved by reversing the decision.

Rather, Brexit has been a disastrous distraction from the real causes of UK decline, an all-consuming national obsession during which nothing else of any significance got done at all. Deep structural problems within the UK economy that might otherwise have commanded attention have been substantially ignored, as if politically too difficult to face up to.

The challenges first of the pandemic and then the energy price crisis do admittedly provide some sort of an excuse, but we are through these shocks now, and still there is a glaring absence of the required reform.

On the other side of the fence, Labour’s government-in-waiting defines itself by a growing list of what it would not do, rather than what it would, choosing to rely instead for its electoral appeal merely on the fact that it is not the party directly responsible for today’s economic malaise. In any case, it offers no credible path back to a higher-growth economy.

This is the backdrop to an illuminating Policy Exchange paper this week co-authored by Roger Bootle, founder of Capital Economics, and James Vitali, the think tank’s head of political economy.

The paper details eight recent examples from history of rapid per capita economic growth, and attempts to draw lessons for the UK from their success. These include post-war Germany and France, Thatcher’s Britain, Poland after the fall of communism, Ireland, Singapore, Hong Kong and South Korea.

Garbage from nearby offices and restaurants are piled up in Gerrard Street, near London's Leicester Square, as a result of a strike by public service employees in 1979
Economic lows of the 1970s helped to spur on Thatcher's market liberalisation Credit: Lawrence Harris/AP

As you might guess, there is no silver bullet, no one-size-fits-all approach to economic transformation. But there are perhaps two factors they have in common.

First is that each starts from a position of economic crisis and/or underdevelopment. This creates a clean slate in which the only way can be up, together with the political will and public support needed to make it happen.

With post-war France and Germany, it was the need to rebuild after the destruction of the Second World War. “Jaw jaw” replaced “war war”, and the protectionism of the past gave way to free trade principles that were to lead to a European common market.

Strong political leadership enabled post-colonial Singapore to apply its own unique brand of state-directed capitalism and make the leap from third-world poverty to advanced economy status.

Institutional reform, privatisation and economic liberalisation instructed Poland’s dash for freedom after the tragedy of communist rule, while low tax, small state, free market, rule-of-law principles were a touchstone of Hong Kong’s economic success.

Driving all these success stories was strongly rooted political support for economic transformation, catch-up and advancement. This was born of crisis, drift, national humiliation and destitution.

The same was true of Thatcher’s Britain; the economic liberalisation of the 1980s could not have been driven through without the degradation of the 1970s, when Britain seemed irredeemably to be slipping beneath the waves.

What perhaps explains today’s lack of political urgency is that it is not yet clear that Britain is in anything like as perilous a position as it was back then.

We are merely stagnating, rather than plunging into the abyss. In any case, it may require British decline to get a lot worse before it generates the political will needed to do anything about it.

The same is true of Germany, where the air of lost prowess is if anything even worse than in Britain, and where there is an equally potent sense of hopelessness when it comes to addressing the underlying weaknesses.

The second unifying factor between Policy Exchange’s eight economic success stories is – with the possible exception of Thatcher’s Britain – relatively high levels of domestic savings and investment.

It has been a longstanding hobby horse not just of mine but of much of the economics profession, that Britain is a profoundly unbalanced economy which routinely puts current consumption ahead of investment in the future.

Repeatedly, we fall victim to the Juncker curse, named after the former European Commission president Jean-Claude Juncker; we know what has to be done, we just don’t know how to get re-elected after doing it.

Mortgaging the future to prop up the present is a cultural addiction that instructs both policy and behaviour.

Debt-funded welfare has become an accepted substitute for the virtues of work and saving. Britain has some of the lowest savings rates in the G7, with gross savings of just 17pc of GDP, against 23pc in France, 29pc in Germany and 43pc in Singapore, according to data cited by Policy Exchange.

Domestic saving and investment are just two sides of the same coin, so it should come as no surprise that business and government investment in the UK are also exceptionally low.

As a proportion of GDP, consumption is higher in Britain than any other advanced economy with the possible exception of the US. Again, there is little sign of the political class doing anything that might change this balance.

The Prime Minister, Rishi Sunak, pledged last weekend to entirely eliminate employee National Insurance contributions, while barely pausing to explain how he might pay for it beyond a vague commitment to unspecified cuts to benefits.

Tax cuts are all well and good, but I can think of few as inappropriate as this one, since National Insurance does at least pay lip service to the contributory, social insurance principle.

That’s why pensioners get so upset by the idea that the state pension might in future become means tested. We’ve paid our stamp, they say in unison, and we expect our return.

To eliminate employee NI would finally break the link, artificial though it might be, with tax as a form of saving that provides for the future.

Everyone agrees that Britain is in a fix. It would be nice if the coming general election gave voters a clear choice on what to do about it. Instead, the mainstream parties compete only for the prize of how best to sustain the status quo.

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