Monday, July 15, 2024
HomeDemocracy in DecayRachel Reeves and the Thatcher dilemma

Rachel Reeves and the Thatcher dilemma


RACHEL Reeves, Labour’s shadow chancellor, has described today’s Britain as reminiscent of 1979.  For younger readers, in 1979 the UK was broke, inflation was rampant, nationalised industries were on strike, militant unions weren’t collecting rubbish or burying the dead, there was no investment and there were three million unemployed. The Labour Prime Minister was James Callaghan, who had taken over after Harold Wilson retired when he reached pension age. So yes, I agree with Ms Reeves (it’s not often I write that). There are parallels which are largely the symptoms of a failed state machine.

What to do about it? The Thatcher solution, which worked albeit with several years of economic pain, was to balance the budget, crush inflation with high interest rates, reduce the size of the state and deregulate. Whether she would have gained her second term in 1983 without winning the Falklands conflict is still debated by some lefties (Labour had lurched massively to the left under Michael Foot) and, as ever, there are three opinions for every two economists you ask. There’s also the 1980s boom. I lived through it and it was great.

Of course, if or when Ms Reeves becomes Chancellor, adopting the Thatcher approach could be politically tricky. So far she and Sir Keir Starmer have kept the lid on the lefties in their party with the promise of power. Rather cleverly, they have avoided publishing their plans, instead saying they will conduct a spending review once elected and go from there. Bewilderingly, the media are letting them get away with it, so far. Ms Reeves has not ruled out spending cuts, although such a course will not be popular with the public-sector unions which fund the Labour Party.

That’s the least of her problems. She used to work for the Bank of England and is a believer in money printing (which caused the inflation) and a big state providing infrastructure. She was a supporter of HS2. And of course she believes in Net Zero, the lunatic policy of economic self-harm invented by Ed Miliband, her first political leader. As anyone paying an energy bill knows, prices have risen consistently and dramatically as more wind farms and solar parks are built. The current government have at last worked this out and are seeking to build more gas-powered generation. That’s just a sticking-plaster though. The whole switch to renewables is causing problems – even the Guardian agrees. Unless the government wakes up, the UK will be decommissioning power plants faster than it is building them for the next decade. 

Ms Reeves is promising that growth will be ‘hard-wired’ into the budget, apparently through a reformed enterprise and growth unit. Right. She’s on a course that is putting up energy costs. She is unlikely to be able to balance the books, which would require cuts of £120billion or so, in other words 10 per cent of government spending. As the Tories have demonstrated, that’s not a recipe for growth: it’s a recipe for stagnation, rising taxation, high interest rates and eventually a default as the UK’s debt mountain (run up by QE during her time in the Bank of England) becomes unserviceable.

The only solution to out-of-control spending is to spend less. That means smaller government. The only way to stimulate growth is to make the risk/reward equation more attractive. The risk side includes the cost of capital, upon which the government has only indirect effect through the yield of its bonds, which is determined solely by the market. The reward side is adversely affected by taxation. Companies currently pay 25 per cent tax on profits (corporation tax). Equity investors pay 37.5 per cent tax on the dividends (which are paid from the post corporation tax profit). It’s perhaps not surprising that many investors can find better places for their money than the UK.

In normal times this would be the Conservative line. For reasons unknown to those outside 10 and 11 Downing Street, that is no longer the case. The Tory party – or the bit of it in Whitehall – believes in big government, big spending and high taxes. Margaret Thatcher famously required her cabinet to read Hayek’s Road to Serfdom. I fear Team Rishi are still listening to the fairy tales of the magic money tree.

Reform is the only party that has grasped the scale of the problem and has some viable solutions. The Whitehall machine is terrified of the policies, although smugly complacent inasmuch as under first-past-the-post it’s unlikely that it will be facing a Reform minister post-election. The Tories are terrified as they’re haemorrhaging support, which is why they have started the predicable and incorrect ‘Vote Reform, get Labour’ refrain being repeated by the useful idiots of Fleet Street. The reality is more nuanced.

That there is no point in voting for the Tory party that got us into this mess is blindingly obvious. The message which has not sunk in with the media, but is slowly getting to the public, is that Labour’s economic plans are even worse. (If you doubt that, visit Wales, run by Labour since 1999). Labour is a target for Reform too; given the tribal nature of UK politics there are an awful lot of Labour voters who would never vote Tory. They might vote Reform.

If they don’t, the UK will take another step on the road to the IMF, which leads only to despair.

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Patrick Benham-Crosswell
Patrick Benham-Crosswell
Patrick Benham-Crosswell is a former Army officer who has spent the last 30 years in commerce. He is the author of Net Zero: The Challenges, Costs and Consequences of the UK's Zero Emission Ambition. He has a substack here. He is the Reform Parliamentary Candidate for Swansea West.

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