• Andrew O'Brien

The five biggest economic mistakes that have led the Conservatives back to austerity

The sacking of Kwasi Kwarteng and the appointment of Jeremy Hunt as Chancellor marks the end of ‘Trussonomics’ and the return of ‘Osbornonomics’ (aka ‘austerity’). On the media circuit this morning, Hunt tried to reassure markets by hinting at tax rises and ‘efficiency savings’ (aka spending cuts) to come in his Medium Term Fiscal Plan (aka a Budget). If you closed your eyes, you could almost think that Britain was back in 2010 in the wake of the financial crisis, with a Conservative Chancellor once again preparing the country for tough decisions.

To be fair to the Conservative Party and the new Chancellor, a lot has happened. Brexit, COVID and now the war in Ukraine have all taken their toll. However, it is also fair to say that the underlying health of the economy is such that Britain is less able to weather political or economic turbulence.

The economic poor performance is also driving political turbulence creating another negative feedback loop.

The mission of the Conservatives when elected in 2010 was to balance the books and get the economy growing again. Yet over a decade later the deficit is bigger than ever, wages are once again falling in real terms, growth has been anaemic and the country finds itself at the mercy of the bond markets. How has it come to this?

Politically this is important because it was a public fed up with austerity that nearly saw the Conservatives thrown out of office in 2017. Only by reversing course on austerity was Johnson able to rebuild the party’s fortunes.

Here are the five biggest mistakes that wrecked the Conservative’s mission to balance the books and spread economic prosperity. Hold on, it’s a long one…

1. Giving up on public service reform

The Conservative’s 2010 manifesto included as one of its “benchmarks” for Britain “reform public services to deliver better value for money: We will raise productivity growth in the public sector in order to deliver better schools and a better NHS.”

Some would say that this has been achieved. Between 2009 and 2019, productivity growth in the public sector was positive – averaging around 0.4% per annum compared to a decline of productivity between 1998 and 2008 under New Labour.

However, look behind the numbers and much of that increase has been driven through pay and hiring restraint as well as cutting back on capital expenditure relative to the New Labour period. This has now left us with creaking infrastructure, a demoralised workforce summed up by the fact that we now face the first strike by the Royal College of Nurses in its 106-year history. Rather than finding better ways of working and reducing demand for services over the long term through early intervention, the Conservatives went for the short-term option of holding down labour costs and cutting back on capital.

The initial period of the Coalition Government saw a commitment to “Open Public Services”, innovative models such as payment by results and expansive ideas such as free schools. The ‘Big Society’ was a recognition that to make the public finances sustainable, we needed to look at prevention and empowering communities rather than just throwing money at problems. We can argue about the merits of these policies, but at least the will was there to look at the fundamental structure of the public sector.

Unfortunately, the Lansley reforms led to such a political kickback that the Conservatives started to row back on reforming public services. Brexit then sucked political attention from anything else and COVID left the government in crisis mode.

Politically, it was then deemed necessary focus on spending rather than reform to counter arguments by the Labour Party about austerity. The May, Johnson (and until Friday, Truss) ministries then tried to reverse the impact of earlier spending cuts.

The creation of Integrated Care Systems in the NHS in the past couple of years is notable because it is the exception to the rule of not reforming services. It was also driven by unelected officials, notable the previous Chief Executive of NHS England Lord Stevens, then by elected ministers. Yet this reorganisation seems to be merely pushing money around in a different way rather than leading to genuinely new models of delivery.

For at least a decade, the Conservatives have been managing public services and tinkering with budgets, not reforming them.

All this means that demand has continued to increase, old models of service delivery abound and innovations (such as the use of staff-led mutual social enterprises) have halted.

A lack of reform has weakened the country’s economic foundations. The rebuilding of the public sector promised by Boris Johnson appears to have been junked by Truss and Hunt. Ultimately, it is only through making the country healthier, smarter and safter that we can achieve higher levels of growth. Yet this foundation seems likely to be further eroded over the next few years unless the government commits to reform and investing in new models of delivery.

2. Failing to rebalance the economy

The second “benchmark for Britain” was to “create a more balanced economy” with “higher exports, business investment and saving as a share of GDP”.

This has been an unmitigated failure. In 2010, exports were 30.7% of GDP. In 2019, before COVID, they were 31%. The “march of the makers” does not appear to have taken place. Exports in goods were lower in real terms in 2019 than they were in 2010.

The UK’s Balance of Payments is in a shocking position. In Q2 2010, the UK had a current account deficit of nearly £13bn in real terms. In Q2 2022, it had risen to £34bn.

In eight of the past 10 years, business investment (excluding land and dwellings) has not grown. The UK remains one of the lowest investing countries in the world. Expenditure on R&D may have been revised up, but at 2.4% of GDP, this is still lower than the OECD average.

The household savings ratio has fallen from just over 10% in Q2 2010 to 7.6% in Q2 2022, in only one quarter in 2015 did the saving ratio exceed the level of Q2 2010 between 2010 and 2022.

Some of these were due to factors beyond the government’s control. Low interest rates reduced the incentive to save, for example. However, Conservative governments did nothing to address the fundamental structure of the economy to encourage investment, higher wages or increased productivity.

Industrial Strategy was embedded in some areas (automotives) during the Coalition but was piecemeal. It was belatedly picked up the May Ministry in 2017 and then dropped again by Johnson and Truss. Ironically, the one major area of Coalition success, automotive exports, now appear to have gone into reverse, no pun intended.

Serious efforts to tackle the balance of payments, to boost exports and rebalance the economy were either never tried because they were deemed to be too expensive or because Conservatives did not want to “intervene” in the market. We’ve never confronted the fact that we do not make enough of what we need or what the world wants, with the Conservatives dependent once again on growth in financial services bailing out the UK (hence lifting the bonus cap).

3. Hoping in business as usual

As we have discussed at length on this platform, one of the major errors of the Conservative Party has been to trust that business as usual will lead to a change in economic performance. For that reason, I won’t go over all the problems again, safe to say, read the rest of the articles on this platform!

If only the state got out of the way (as Osborne experimented with during this period of ‘expansionary fiscal contraction’), cut taxes and put their faith in enterprise, things would get better. Alternatively under May and Johnson, if only the state spent more, invested more and partnered with business things would get better. Either way, things have stayed pretty much the same. The “British model” of capitalism has never been challenged – particularly its short-termism and addiction to debt based finance rather than equity.

Worse, under Truss, the Conservatives appear to have doubled down on the idea that simply trusting this model will work. There is a certain irony that in trying to give what they thought business wanted, Truss and Kwarteng found themselves out in the cold. Whatever the Conservatives do, it will never be enough because firms want to free ride on the system, not partner with it.

4. Failing to get a grip on immigration

Cameron promised to get immigration down to the tens of thousands a year. Brexit then promised to “take back control”. Now the Home Secretary has promised again to get immigration back down to the tens of thousands.

Yet despite all the rhetoric, on average net migration has been higher between 2011 and 2021 than it was between 2001 and 2011.

Will Tanner has outlined the key arguments far better than I could in Conservative Home, however essentially the UK economy has been addicted to easy access to labour from overseas which has supressed wages for UK nationals and taken the pressure off for firms to invest in skills of the domestic workforce or invest in ways to boost productivity.

Retaining access to migrants we need is essential, but the Conservatives have not done enough to ensure that access whilst at the same time reducing dependence upon it.

Worse, investment in skills in the UK has gone backwards during the past decade. The Chartered Institute of Personnel and Development says that a “high proportion of our workforce has poor literacy, numeracy and computer skills, and evidence suggests that employers are training less and investing less in their workforces than two decades ago.”

In failing to get a grip on this issue, the Conservatives have overseen a failing model.

5. Ignoring the UK’s social infrastructure

Investing in good physical infrastructure is important, but so too is the UK’s social infrastructure.

Youth centres, village halls, local charities and voluntary organisations, music and cultural institutions, local sports clubs. These are the institutions that bind people together, create social trust and the values which encourage long term investment in our society.

Unfortunately, the Conservatives have got the balance wrong. Far too much focus has been given on physical infrastructure and not enough on the social infrastructure. We should be investing in both, as one depends upon the other. People can only fully utilise social infrastructure if they have the necessary physical infrastructure but without social infrastructure people will not have the need and urge to use the physical infrastructure (except to leave where they are). The UK is due to spend over £600bn on physical infrastructure over the current Parliament, yet nowhere near enough on social infrastructure.

An enlightened group of Conservative MPs have put the case for social infrastructure in an excellent paper, Social Capitalism, which I was pleased to be able to help them and New Social Covenant Unit with.

However, the argument is straight forward. Higher levels of social capital are the foundations of economic growth. If you fail to invest in social capital, you will not see the economy significantly improve.

Sadly, since 2010 the Conservatives have not done enough to keep social infrastructure alive. Public buildings and spaces have been closing in large numbers. Pubs and libraries have been in sharp decline. 70% of youth services closed between 2010 and 2016. Initiatives such as the Big Society were never given enough time and investment to develop because everything was focused on balancing the books rather than considering the cost to the UK’s economic fundamentals.

Social infrastructure is not free. Social capital requires financial investment. A strong national identity is the key to higher levels of economic performance. These conservative ideas have been ignored whilst the two liberal wings of the Conservative Party have battled to see whether spending cuts or tax cuts will do the job.

Oscillating between two failed strategies

The Conservative Party is oscillating between two failed philosophies. On the one hand, there is Osbornomics which believes that balancing the books is a good in itself and “stability” will deliver better economic performance. On the other hand, Trussonomics, which believes that slashing taxes and encouraging enterprise is enough to get things moving forward. They are not mutually exclusive; in a sense the Conservatives have been doing both for over a decade. Again, ironically it was Osborne who was able to significantly reduce corporation tax, not Truss. However, the emphasis and investment in each strategy does vary over time. At some times it is more interested in balancing the books, other times in getting the state out of the way and reducing taxes.

The point is that until the Conservatives are prepared to confront the structural problems in the UK economy – the way we deliver public services, the balance between sectors, blind faith in British capitalism, a lack of grip on immigration and a lack of investment in our social infrastructure – there is no escape from austerity.

One path leads to perpetual austerity through underinvestment and eroding our economic fundamentals, the other path through splurging money on tax cuts with no results.

All this begs the question, when will the Conservative Party realise that it needs to develop a new economic vision?

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