The financial crisis killed off Tory support for free markets
The passing of a decade since the start of the credit crunch, and subsequent Great Recession, has given opportunity for much reflection this week. Is the financial system safer today than it was then? What are the lessons for monetary or fiscal policy? How much did a delayed reaction to the crisis contribute to Brexit or the rise of Jeremy Corbyn?
One conclusion is clear: the Thatcher to early Blair period, with its focus on limited government and liberal market-based reform, has proven merely an interlude in British politics. Proponents of free-market economics vastly overestimated the commitment to these principles within the Conservative party. The financial crisis appears to have buried it.
Whilst Jeremy Corbyn and his Labour team talk of overthrowing a “neoliberal order,” in truth, the shift away from a commitment to free markets and a small state has been occurring gradually and can be seen through the evolution of the Conservative Party.
After some initial years of government restraint, Labour’s Blair and his chancellor Brown opened the spending taps in the 2000s, with government spending rising from 35pc of GDP to 39pc at the height of the boom, leaving the state at a similar size as in the Nineties recession. The Conservative response was to acquiesce and talk about “sharing the proceeds of growth”. By then the party was in thrall to the so-called modernisers, who pushed the idea that economic policy was a secondary concern to hugging huskies.
The financial crisis itself slapped this group in the face, of course, and brought the focus back to the economy. With spending rising and revenue falling, a humongous budget deficit emerged, which had to be dealt with, alongside reform of the financial and banking regulation.
But what has been the result of Conservative government in dealing with these challenges? Overall government spending is still above pre-crisis levels as a share of GDP, and the tax burden is now at its highest level for 30 years.
The Conservatives completely swallowed the critique that the financial crisis was due to deregulation. In fact, in the Eighties there was a huge shift from selfregulation in the sector to state-led regulation, which has mushroomed since 1986. The number of regulators has increased from 1 for every 11,000 people employed in the financial sector to 1 for every 300. Rather than think deeply about the routes of the crisis: monetary policy, regulatory failure, warped incentives, deposit insurance and encouragement worldwide of state support for housing, the Tories merely adopted conventional wisdom.
All this would be palatable if the Conservatives had engaged in meaningful supply-side reform to raise the potential growth of the economy and hence delivered rising productivity and living standards. Yet the party has ignored all the main levers to achieve this: junking the meaningful tax reform set out in opposition, giving up on attempts to open up education and healthcare to market pressures, removing no barriers to private sector infrastructure delivery (see Heathrow) and using demand-side short-term fixes rather than land use liberalisation in the housing market.
No doubt the party initially expected growth to bounce back robustly as the effects of the financial crisis wore off. Now, with seven years of weak productivity growth since 2010, the lack of meaningful economic change is inexcusable and has damaged the whole tone of politics. In a world where wages are not rising sustainably, people come to care more about its distribution, hence the greater appeal of the egalitarian politics of the radical Labour leadership.
Indeed, even the choices the Conservatives made on spending show a lack of seriousness in going for growth. In 2010, the Comprehensive Spending Review junked high impact road schemes but recommitted the Government to the building of HS2, which had a substantially lower benefit-cost ratio. Government control of energy markets has continued to expand. Overall, modest spending restraint, in fact, saw most major areas of the welfare state left intact, meaning little advanced repair of the long-term fiscal challenge associated with an ageing population.
Instead the party’s energies have focused on re-regulating large parts of the labour market through the National Living Wage and pension auto-enrolment; expanding the scope of the welfare state with more government childcare support and free school meals; and engaging in a so-called industrial strategy, which has never worked before.
Out of ideas, pressured by Corbyn and with too much time passed to blame its 2010 inheritance, the final dismal manifestation of the party’s shift came with the 2017 manifesto, with its frequent denouncement of unfair markets and widespread calls for intervention. Even on Brexit, where for years Eurosceptic Conservatives talked about escaping EU regulation, protectionism and using the repatriated net contribution to cut taxes, there has been no positive vision outlined for change. The only area where the Conservatives seemingly want a policy shift is an economically illiterate desire to severely restrict migration.
It is difficult then to make the case that the Conservative Party in Parliament are any longer a free market party, if they ever truly were. Any individual thoughtful politicians who believe in market-based reform are, sadly, vastly outnumbered. Bar a small clique recapturing the party through the election of a new leader committed to these principles, the prospects for economic liberalism look dismal.
The direct impact of the financial crisis as a perceived failure of capitalism certainly have played a part in this. Politicians respond to the public mood, as well as lead it, and the bank bailouts and slow subsequent growth has shifted attitudes. Yet the Conservative Party’s lack of conviction for market-based growth and the popular results it delivers has worsened that mood, and has now contributed to the spiral for more and more intervention we see today.
‘Modernisers pushed the idea that economic policy was a secondary concern to hugging huskies’