Our ailing economy needs another dose of Thatcher’s shock treatment
It’s not just the public sector that is failing. The next PM must fix chronic problems in business, too
‘Believe it or not, this crisis will pass. The important questions concern what happens then’
It is now not long before a new prime minister takes office. Amid the flurry of promises, it is high time to sketch out the nature and scale of the challenge that lies ahead. Of course, we are currently passing through a period of acute difficulty, associated with high energy and other costs.
Moreover, the pressure from this factor will only get worse over coming months. Yet, believe it or not, this crisis will pass. The really important questions concern what happens then. Make no mistake, before this crisis hit us we were already in a bad way with productivity growth down to nugatory levels and overall performance weak. What is the essence of this problem and what needs to be done?
I have been re-reading Lord Lawson’s memoirs of his time in government in the 1980s, The View from No 11. They make fascinating reading. Most people will know that, beginning in 1979, Margaret Thatcher’s government faced a tough task trying to improve the performance of the public sector. It tackled this by privatising swathes of state-owned industry, reducing the size of government spending as a share of GDP, cutting civil service numbers and hitting the power of trade unions.
It is easy to imagine that this assault on the public sector was the essence of Thatcherism and the main cause of our improved economic performance in the later part of the 1980s. But in fact this was only part of the story because at the time the performance of much of the private sector was also lamentable.
Lawson is funny on this topic. He says that after decades of high taxation, over-mighty trade unions and interfering government, most senior managers in the private sector had essentially given up on managing their companies. He says that the more energetic of them spent their time tramping the corridors of Whitehall seeking subsidies. The less energetic spent their time on the golf course.
Of course things are different now, not least because so many of the awful practices of the 1970s, by both labour and management, have been either reformed or squeezed out. Even so, there are some marked similarities. In particular, gross though the current failings of the public sector are – in the NHS, the education system, the police and the civil service – things are also clearly deficient in much of the private sector. What accounts for this?
To be fair, the most egregious examples of poor performance are in those parts of the private sector which were once publicly owned. The water companies are the most glaring example. Generous bonuses have been paid to senior management and hefty dividends paid out to shareholders despite woefully inadequate attention to improving the supply performance and thereby serving its customers. This is a regulated industry. Clearly, the regulators have done an appalling job at holding the water companies to account. The obvious question is who regulates the regulators? This is another area of government failure.
Another key area of failure is housebuilding. The industry is effectively an oligopoly but it is the interaction between this oligopoly and an outdated planning system that is responsible for our inadequate supply of new homes. Government failure again. Yet the problem of poor private sector performance goes wider.
What is at the root of it? All the usual suspects will rush to blame Brexit. But this won’t wash, not least because the fundamental problem substantially predates our exit from the EU.
A better candidate is the progressive drag from regulation which has got worse year after year, combined with the recent corporate embrace of jiggery-wokery that has deflected attention from the real underlying business and the generation of profit.
The prolonged period of very low interest rates and easy money may well have played a subsidiary role as it has helped to keep alive some businesses that should probably have gone under, thereby allowing the transfer of resources to more efficient parts of the economy. But there is something more important than this, namely extremely low investment. This has been a problem for many years. Government can try to tackle this by the sort of tax incentives introduced by Rishi Sunak when chancellor but these are unlikely, on their own, to bear fruit.
There is a deeper problem which has been highlighted by the economist Andrew Smithers. He attributes the weakness of fixed investment in the UK and the US largely to the corporate bonus culture which incentivises managements to concentrate on boosting the short-term performance of their companies’ share prices, rather than to its long-term efficiency.
Reshaping this incentive structure would be a tall order for any government but I suspect that if we are to substantially increase investment levels, something will have to be done.
Lawson says that in order to deal with the problems besetting the country in 1979, it was vital that the new government got on with the task immediately and this required shock treatment. We can dispute whether the Thatcher government of 1979 got it precisely right and whether the shock treatment was too intense. But in essence I think his argument is sound.
Today, households and companies are going to experience a profound shock of equivalent magnitude, or even greater. But what about the treatment? What makes the current situation more difficult is that whereas Mrs Thatcher had up to five years before she needed to face the electorate, whoever takes over in No10 now has about two years. It will require both vision and determination, as well as an ability to get stuck into the job immediately, to demonstrate some early results and to give reason to hope for serious progress in the years ahead.