Britain can’t boom as long as the Tories are fighting fruitless civil war
A lack of stability has hurt business investment and caused markets to lose confidence in Britain
‘UK business investment trends from 2007 onwards tell a clear story about the merits of stable leadership and the costs of a lack of it’
Liz Truss and Rishi Sunak – the final two candidates for prime minister – are right about one thing: the next leader must figure out how to turn Britain back into a country where businesses can thrive and invest.
While social and welfare policy can share out the pie in different ways, growing it over time requires private investment to support innovation and increase the stock of capital in the economy. In the long run, this is crucial to achieve stronger economic growth and a sustainable improvement in living standards.
Despite specific policy details remaining “constructively” ambiguous, both candidates propose tax cuts as the cure to the UK’S economic ills. Their main differences lie in the timing. Whereas Truss wants to slash taxes immediately, Sunak would prefer to wait until inflation is under control.
Sure, keeping taxes competitive will support higher investment over time. However, the whole tax debate distracts from a more pertinent issue.
No longer the reliable steward of the economy, the Conservative Party has become so troubled by infighting, scandal and a lurch towards populism that it is now a key source of economic uncertainty – which acts like a brake on private sector investment.
In theory, new leadership provides an opportunity for a reset. Will a reset happen? Judging by the tone of the leadership debates, the early signs do not look promising.
Both candidates claim the UK faces a crisis that requires wholesale policy change. This is a political fiction, not an economic reality.
Like other major economies, the UK suffers serious short-term troubles. Covid-19 disruptions, including the lagged impact of the huge stimulus that propped up the economy during lockdowns, and recent major shocks to commodity markets coming from Russia’s war against Ukraine.
By now, a mild recession across the Western world is probably unavoidable. But the underlying fundamentals in the UK remain solid.
The balance sheet of the private sector, from households to businesses, is in much better shape than a decade ago. Debt is at a safe level while cash balances are high.
Commercial banks have four times as much capital today as in 2007. Credit markets are healthy. According to the IMF, UK public debt as a percentage of GDP is the second lowest among the G7, after Germany. The UK enjoys near-record employment and some of the best regulated labour and product markets in the advanced world. London remains a global centre of finance. The list of strengths goes on.
Beyond providing direct fiscal support to a minority of households who cannot carry the burden of surging energy prices over the coming winter, there is little the Government could or should do to dampen the current shock.
For the purpose of winning the Conservative leadership race, all these facts are apparently inconvenient.
Both Truss and Sunak prefer to paint the UK’S woes as on a par with the 1970s. But this is a political straw man. It is a rhetorical device so that each can strengthen their claim to be the heir to Thatcher.
The politicking even extends to the slamming of institutions – especially by Truss. The Bank of England, the Treasury and the Office for Budget Responsibility on the whole perform at least as well as their international counterparts – and better in some instances. We depend on these institutions for our economic stability and their record is mostly solid.
What neither candidate seems ready to admit, is just how much the Tory Party’s messy infighting – which has produced two elections and three leadership contests in six years – combined with a needless pre-occupation with Brexit, has distracted from sound governance and hurt the private sector.
UK business investment trends from 2007 onwards tell a clear story about the merits of stable leadership and the costs of a lack of it.
After tanking by 25pc during the global financial crisis, business investment bottomed out in late 2009. The May 2010 election produced a pro-markets coalition government led by the Conservatives, with the Liberal Democrats as a junior partner. A return to sound fiscal management combined with predictable leadership under then-pm David Cameron set the stage for a multi-year expansion in business investment.
Although the headwinds of public and private balance sheet repair from 2010 onwards and the peak euro crisis in 2011 triggered bouts of volatility, the solid uptrend persisted until early 2016 – at which point investment was 40pc above its 2010 level.
However, the gains ended abruptly after the UK voted to leave the EU in June 2016. Brexit and the extreme uncertainty of long and noisy Brexit negotiations coupled with domestic political infighting prevented any rise in business investment between the second half of 2016 and the first quarter of 2020.
When the first wave of the pandemic hit in early spring of 2020, business investment slumped by about 20pc. After a partial recovery since late 2020, investment in the first quarter of this year was still no higher than its pre-financial crisis peak in 2007.
Sterling follows a similar pattern. On a trade weighted basis, the increasing confidence of global markets lifted sterling by about 20pc between May 2010 and November 2015. Today, it remains around 15pc below its pre-brexit vote peak. Markets have lost their erstwhile confidence in the UK.
In practice, stable government means no unfunded tax cuts, the sincere pursuit of calmer relations with the EU, and a serious caution when fiddling with the remit and powers of institutions.
Before rushing in with sweeping policy changes, the next prime minister would do well to remember the old Latin maxim primum non
first, do no harm.