Two great crises have converged on the British economy. Squeezed in the middle is the hapless figure of Rishi Sunak, the third prime minister since September, facing multiple questions about how long he will last.
The first problem stems from the rise in energy prices reminiscent of the 1973 quadrupling of oil prices which laid the basis for future stagflation – now the dominant challenge globally.
The longer-standing crisis is the collapse in productivity growth since the 2008 financial turbulence. This translates into high indebtedness, high public sector wage demands and deteriorating services in health, education, social care and transport. The strike wave hitting Britain raises memories of the 1978-79 ‘winter of discontent’ which ultimately brought down Jim Callaghan’s 1976-79 Labour government, ushering in 18 years of Conservative rule under Margaret Thatcher and John Major.
Sunak could suffer a similar fate, acting out the prelude to a substantial Labour victory in the next election (probably next year) that could put the Tories out of office for a long time. The Conservatives, once the most formidable vote-winning machine in history, irritatingly proud of being the ‘natural party’ of power, seem to have lost the will to live, or at least to govern.
Liz Truss, Sunak’s predecessor, was the shortest-tenured prime minister in UK history The autumn experience of Truss blowing herself up was the most unsettling event in my 50-plus years of watching and participating in British politics. Uncomfortably for Sunak, both she and Boris Johnson, the incumbent in 2019-22 and like Truss a victim of his own hubris, show no signs of contrition. However improbably, they even display signs of wishing to engineer a comeback.
On one thing, everyone agrees. The only way Sunak can help his party escape the wilderness is to produce much higher growth, rather than the recession most are forecasting (including the International Monetary Fund and the Bank of England) over the next 12 months. The Conservatives’ favourite method is cutting income tax. This was the missile fired by Truss and Kwasi Kwarteng, her chancellor of the exchequer. The financial markets rejected this as unaffordable and economically illiterate. The missile boomeranged to eject first Kwarteng and then Truss.
True to Tory tradition, Jeremy Hunt, Sunak’s chancellor, seems stuck on the argument that tax cuts are the only viable long-term means to get growth going. But, guided by Truss’s mishaps, this will not happen yet – perhaps after the next election. That’s far too cautious for truculent Truss. She resurfaced on 5 February with a tragicomic defence of her failed policies, blaming her downfall in a 4,000-word essay (as many failed politicians tend to do) on a ‘powerful economic establishment’ and ‘the system’.
Sunak has no magic wand. He cannot borrow any more. He tried that trick as Johnson’s chancellor during the pandemic. After Truss, no more of that. Yet the myth persists that income tax cuts for top-rate earners are effective. There is no evidence for that. Thatcher cut taxes at the end of her 11-year prime ministership, after her third election victory. It generated a short boom in 1987-90 but then recession hit, which had to be averted by deficit spending. The UK entered Europe’s exchange rate mechanism and left in disgrace. Conservative voters and MPs fantasise about tax cuts without any knowledge of the past.
That’s not the only thing they dream about. Britain will have to stop posing as a great power. Italy manages to get by, as do Belgium, the Netherlands and Austria. Britain can be moderately rich. A minority may be insanely rich. But it has to abandon the illusion of a low (income) tax paradise. Scandinavian countries combine enterprise and growth with high taxation. However, this is a route Sunak and his backbenchers – to say nothing of the rank and file of Tory members – are highly unlikely to take.
So Labour looks likely to be the next party of government. What will they do? Growth will require investment in existing sectors and innovation in the next generation of growth-inducing businesses. Changes are needed in a fiscal system which favours consumption over investment.
One ruinous consequence of the UK’s structure is the massive subsidy for UK home ownership compared with European competitors. Renting is taxed by being scarce and low quality. Thatcher privatised the public housing stock by giving tenants the right to buy. To enhance growth, families should rent accommodation and invest the spare cash in productive opportunities. Similar arguments can be made about the wastefulness of subsidies for private education for schoolchildren.
Public sector services are worn out and need to be revived. There are no resources left to repair the damage, let alone make fresh investment. Since the Tories have nothing left to offer but empty solutions, it will be Labour’s job to organise recovery. It’s an enormous task. The Conservatives may unite in adversity. They are likely to enjoy their spell in opposition more than Labour will its period in power.
Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Political Science, Chair of the OMFIF Advisory Council and Crossbench Peer in the House of Lords. He resigned from the Labour party in 2020 after 49 years of membership.
Image source: 10 Downing Street