Why are the Conservatives and Labour obsessed with the state?
Over the past few months we’ve started to see the Conservatives and Labour begin to outline their economic visions for how to rebuild after COVID-19. Politicians are always keen to highlight their differences. The Government is not “levelling up, but giving up” says Keir Starmer. Labour has a “paltry agenda” says Boris Johnson and Starmer is talking the country down.
"The truth is that at their core both Labour and the Conservatives fundamentally agree on how to grow the UK economy, the only differences are those of degree."
As with so many things in politics, we need to look past the rhetoric. The truth is that at their core both Labour and the Conservatives fundamentally agree on how to grow the UK economy, the only differences are those of degree. Both believe that the key thing holding back the UK economy is the performance of the state. The Prime Minister and Leader of the Opposition talk a good talk about backing enterprise but both are obsessed with the state.
Labour has traditionally been the party of an “active state” going all the way back to its founding and the Fabian movement. So, it is not surprising Labour sees the performance of the state as critical to its economic agenda. But the conversion of Conservatives to state power has caught many politicians and commentators off guard, with many writing it off as mere political opportunism. Yet, the change in approach from the Conservatives under the leadership of Theresa May and Boris Johnson has been profound and it isn’t mere posturing for Red Wall voters. It is the logical conclusion of over a decade of Conservative economic management.
At last year’s Conservative Party Conference, the Prime Minister gave a speech unlike anything his predecessors would have given. For most Conservative leaders in recent times, it has been the role of the private sector to generate the growth that is required to pay for world class public services. The state is dependent on business. Johnson turned this belief on its head when he said that the “bedrock of national productivity” was “great public services on which everyone – families, business, investors – can rely”. To back up this belief, Johnson has been happy to get the cheque book out, with hundreds of billions being committed to infrastructure projects, extra spending for the NHS and other public services. In repudiation of previous Conservative orthodoxy, the Chancellor was prepared to raise increase corporation tax in order to pay for that investment provoking the ire of his predecessors.
The argument is simple to understand. The state not done enough to create the conditions for business to thrive. It’s not the fault of entrepreneurs and business leaders that we have experienced sluggish growth, low levels of investment and stagnating wages. Infrastructure, particularly digital infrastructure, has not been invested in by the state. Public services have been squeezed by austerity which have hampered the labour market. If we can build up this infrastructure and public services, businesses will have the tools that they need to create jobs, innovate and build the world-beating companies of the future.
"...it would be a mistake to think that this commitment to a more active state is just a rhetorical device."
Labour’s response has been that all this talk of a more active state is simply a “mask” and the Conservatives haven’t truly changed. To some extent, this is true. Conservatives are still sceptical of the state and its power to do good. The Prime Minister himself often slips into talking down the state and bigging up the power of industry, as we have seen in many of his comments around the production of a vaccine. But it would be a mistake to think that this commitment to a more active state is just a rhetorical device. Conservatives have made this shift as a form of psychological defence, displacement, to avoid confronting the fact that despite all tax cuts, deregulation and optimism of the Cameron years, UK businesses have failed to deliver.
The story of corporation tax cuts is the best way to show this change. In 2012, when George Osborne announced further cuts to corporation tax, he made clear this was part of a ‘deal’ with business. Labour had overtaxed and overregulated business, inhibiting the power of businesses to create jobs and growth. Lower taxes and cutting regulation would free up UK plc. In return for this certainty on tax, Osborne was clear that he expected UK businesses to “invest, expand, hire, innovate and be the best”. Close to a decade later, and this bargain was never kept at a cost of over £70bn to the Treasury and with a huge opportunity cost of years spent waiting for the private sector to come to the rescue.
Any consideration of the UK’s recent economic performance tells us that there is something fundamentally wrong with British business. We have the world’s leading financial service sector with capital flowing in from all over the world, but low levels of investment. We have some of the best universities in the world, but we have lower levels of corporate R&D investment than our competitors. We’ve never had more people going to university or receiving some kind of qualification, but yet we consistently find skills gaps. English is the ‘global language of business’, yet we export less than our peers in Europe. All of this can’t be the problem of the state, surely?
Occasionally, Conservative politicians have experienced moments of lucidity. In 2017, Brexiteer and former Trade Secretary, Dr Liam Fox criticised business leaders for preferring “golf on a Friday afternoon” to trying to export overseas. “What is the point”, he asked “of us reshaping global trade, what is the point of us going out and looking for new markets for the United Kingdom, if we don’t have the exporters to fill those markets?”. The then Prime Minister, Theresa May, quickly distanced herself from Dr Fox’s remarks, but the question “what is the point?” is still haunting Conservatives. The party’s conversion to state activism is the latest, and perhaps last, attempt to avoid answering that question.
"Prime Ministers since Harold Wilson have been trying to work around business, offer it carrots or beat it sticks, yet we remain where we are. Don’t be surprised if business shrug, pay their taxes but carry on as usual."
This brings us back to the Budget. Some have accused the Conservatives have going back on their pro-business tradition. In fact, the Prime Minister and Chancellor are raising taxes and borrowing huge amounts of money because they are absolutely committed to business. If companies won’t take the risk and invest for themselves, the state will come in and do it for them. In The Social Contract, Rousseau said that those unwilling to follow the General Will would be “forced to be free”. Johnson & Sunak have interpreted the general will of British capitalism and companies will be forced to invest to deliver it. Their only choice is whether they invest themselves or whether the state taxes them to do it on their behalf. The one problem with this Rousseauian approach to economic management is that we’ve been trying it for years, in various forms. Prime Ministers since Harold Wilson have been trying to work around business, offer it carrots or beat it sticks, yet we remain where we are. Don’t be surprised if business shrug, pay their taxes but carry on as usual.
Labour has come to similar conclusions about the need for an active state. Keir Starmer has spoken about the need to create a “new partnership between an active government, enterprising business and the British people.” Labour has always been intoxicated by the power of the state to intervene in the economy. From Morrisonian nationalisations to Wilson’s belief in “democratic planning” or Brown’s vision of the distributional state, the belief has always been that if the state can create the right “framework” we’ll see change.
"When you spend every day attacking the government from the dispatch box or the media, it is tempting to see all problems as being the fault of the state."
The fact that Labour has often spent so many years in opposition is important. When you spend every day attacking the government from the dispatch box or the media, it is tempting to see all problems as being the fault of the state. Business leaders are not stupid, either. They are happy to tell Labour that everything is the fault of the government and if only they had the right support everything would get better. Opposition politicians naturally want to believe anyone who says that the government of the day is doing a bad job.
There does seem to be some understanding in Labour that they need to reset expectations with business. Keir Starmer and Anneliese Dodds have both spoken about labour would have “high expectations” of business and in return they should have high expectations of a Labour Government. This could be the start of an interesting policy agenda but needs further articulation.
The need to articulate this agenda quickly, as the danger for Starmer’s Labour Party is that they go into the next election on a ticket for more active, bigger spending state to boost the British economy against Johnson’s Conservatives promising exactly the same thing. Both are likely to promise a stronger “partnership” with business to get the job done. In this economic fight, the Conservatives will have the advantage in that they are traditionally seen as the party of business and will have the power of office to spend more money and claim credit for previous initiatives.
In the midst of this fight over who can make the state run better, there is a huge gap in the British economic debate about British business, its performance and effectiveness. Although the structure and functions of the state were transformed in the 20th Century, business is still based on Victorian principles of shareholder primacy and short-term financial performance. The British Academy, hardly a radical organisation, has found that the UK has a “particularly extreme form of capitalism”. Business leaders occasionally talk about the need to think “long term” and engage “stakeholders” such as workers, society and the planet, but rarely does this lead to fundamental changes in business practice. New forms of business, such as social enterprise, which put people and planet before profits, are relatively ignored.
Ultimately, it is the decisions taken by millions of British businesses which will determine what kind of recovery we have in the wake of COVID or whether we tackle the climate emergency. Their motivations and priorities will do more to shape our economy than any government tax cut, fund or policy initiative. Politicians ignore this at their peril.
Whichever political party is prepared to grasp this truth and focus on reforming business, rather than hoping that the state can solve all our problems, will be able to set the tone for the UK’s economic debate for the next decade. Currently, both Labour and the Conservatives are avoiding this issue, and it is why nothing will change, whoever is in government. The only hope is that policy makers are running out of alternatives to avoid confronting these issues.