Will the Conservatives be blamed for Britain’s coming immiseration?
We can’t carry on spending as we have been – the truth is the Government urgently needs to become solvent
The question now is who gets the blame. Britain is about to become much poorer. Almost all of us will find that we can no longer afford things. A country can’t pay people to stay away from work for the better part of two years without a hit to its prosperity. That much is certain. What remains uncertain is whether voters will see falling living standards as a consequence of the lockdowns and the Ukrainian war, or as a result of Tory policy.
Ministers hope that the nation will keep a sense of perspective. Prices, after all, are rising worldwide. British inflation last month, as measured by CPI, was 6.2 per cent, the same figure as for the EU, and lower than the 7.9 per cent being suffered in the United States – though all those numbers will rise.
Price hikes are a consequence of natural disasters or conflicts, which see people diverted from useful production. Recall the order in which the Four Horsemen of the Apocalypse came: first plague, then war, then hunger, then death.
Most of us knew that Ukraine was the breadbasket of the world, growing around a tenth of all the planet’s wheat. But how many of us were aware, before last month, that it also produced 48 per cent of Europe’s rapeseed oil and 88 per cent of its sunflower oil? Note the past tense: produced. This year’s drilling should be happening now; but, even in parts of Ukraine that are not directly impacted by the fighting, roads are clogged, seed is in short supply and fuel is rationed.
Ukrainians are seared by the collective memory of the 1933 famine, which Stalin used to break their resistance to socialism. They remember that, even as millions of Ukrainians starved, grain was shipped out to meet Soviet quotas. Perhaps inevitably, given that history, the Zelensky government has imposed a ban on the export of oats and wheat.
Other governments are following suit, chasing the phantasm of “selfsufficiency”. Last week, Xi Jinping told his rubber-stamp parliament that the Ukrainian war (meaning, in reality, the possibility of Western sanctions) showed why the Chinese economy needed to be more closed.
“There is no room for any relaxation on the issue of food security,” the supreme leader explained to delegates, setting out a plan to reserve 296 million acres of land for food production. “You should not rely on international markets to solve it. China must depend on itself and feed itself.”
In fact, protectionism fails in its own terms: a country that seeks to “feed itself ” is far more vulnerable to localised shocks than one which buys from a diverse range of global suppliers. This wrongheaded policy pushes up prices for everyone, as supply chains shorten and the gains of specialisation are reversed.
Even more serious than food scarcity is the surging cost of fuel. For energy is not simply one among many commodities. It is the vector of economic growth, determining the price of everything else.
One way to understand the improvement in the human condition over the past two and a half centuries – the huge increases in longevity, literacy and leisure – is as a series of innovations in energy leading to falls in prices.
British ministers can do very little about higher food and fuel prices. Nor can they do anything about the Bank of England’s frenetic money printing. Monetary policy was taken out of the hands of politicians in 1997; and, in any case, the damage has already been done.
The Bank of England has doubled the scope of quantitative easing since March 2020, buying £875billion of government bonds while blandly assuring us that there would be no inflationary consequences. It is too late to complain about any of that now – though this column complained vocally at the time.
Still, if politicians can do little about rising commodity prices or the quantity of money in circulation, they can at least mitigate the damage. We can’t stop a squall blowing up at sea, but we can, I don’t know, heave-to or reef our sails or whatever it is one is meant to do in a storm.
How can a government soften the impact of inflation? By tugging at every lever that might reduce the cost of living. Some of those levers are no longer in our politicians’ grasp. They cannot order an end to money printing or a rise in interest rates. But, even so, there are still a few switches they can pull.
First, they can eliminate tariffs, quotas and import barriers. This policy is fiercely resisted by mercantilists – not least in our trade department – on the grounds that it takes away our negotiating strength. Even now, despite centuries of evidence to the contrary, we persist in thinking of imports as a concession to offer rather than a prize to pursue. In fact, letting businesses buy cheaper materials raises living standards for everyone.
Second, they can lift restrictions on domestic energy production, suspending the various green levies, ending the moratorium on fracking, facilitating North Sea drilling and speeding up the planning process for nuclear installations.
Third, talking of planning, they can make the act of building a house easier. Our reluctance to allow development pushes up property prices to a level that Europeans find incomprehensible. This has knock-on effects: shop prices are higher because retailers must pay more in rent, wages go up to cover housing costs.
Fourth, they can deregulate the various cartels that result (in Adam Smith’s words) “in a conspiracy against the public, or in some contrivance to raise prices”. This runs from small things (contact lenses are far more expensive here because, unlike in most countries, you can’t buy them over the counter) to large ones (childcare is particularly ruinous for British families because we have the highest staff-to-child ratio in Europe
– a ratio set to benefit producers, not consumers).
Fifth, and most important, they can cut taxes. When you tot up all the various levies and imposts – VAT, council tax, income tax, national insurance – tax is the single biggest item in most household budgets.
Of course, cutting taxes on its own would push the deficit even higher. We learned this week that paying the interest on the Government’s debt will cost us £83billion in 2022-23. The TaxPayers’ Alliance worked out that this is more than the Government will raise over the same period from fuel duties (£26.2billion), capital gains tax (£15billion), alcohol duties (£12.7billion), tobacco duties (£10.9billion) and stamp duty (£17.1billion) combined.
In order to cut taxes, we need to cut spending. Aye, there’s the rub, for it will require a U-turn. The PM describes himself as a “Brexity Hezza” and, in normal times, his formula of high-spending, patriotic conservatism plays well with voters.
But these are not normal times. We can’t carry on with discretionary spending – on everything from HS2 to the nationalisation of social care – as if we still had the half trillion pounds we burned through during the pandemic. We can’t continue with the net zero targets as though the Ukraine war were not happening. The Government urgently needs to become solvent.
Can we afford to keep paying civil servants to stay home when the rest of the country is struggling to make ends meet? Can we keep pretending that shovelling cash into the NHS is improving its performance?
If polled in isolation, voters say that they want higher spending in general – and on healthcare in particular. They also say they want tax cuts. Similarly, they support both the protection of the green belt and cheaper houses. They oppose most deregulation, but want lower prices. This, of course, is why we don’t ask these questions in isolation, but instead have general elections at which governments are judged in the round.
So, to return to the opening question, will voters blame the contraction on the Conservatives or on the international situation? In April 1992, John Major was re-elected during a recession, partly because he succeeded in blaming the global downturn. But the mood changed violently when it became apparent that, far from mitigating its effects, his policies (notably membership of the Exchange Rate Mechanism) were exacerbating them. He went on to lead the Tories to their worst ever defeat.
Remember the defining poster of the 1992 election campaign, “Labour’s Double Whammy”, which showed two boxing gloves slamming towards us: higher prices and higher taxes. No party can get away with that combination, especially not a party of the centre-Right, whose essential appeal is economic competence. The next election is being determined now.
Even now, we persist in thinking of imports as a concession to offer rather than a prize to pursue