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Monday, July 15, 2024
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HomeDemocracy in DecayThe grim economic landscape the next government will inherit

The grim economic landscape the next government will inherit

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THE past may be a foreign country, but I recall it sort of worked. Britain was a genuine envy of the world.

If we go back to the year 2000, most would say things were broadly OK. Public services functioned, taxes were moderate, the policy debate was largely contained around economic policy and the state of public services, although through a new legal settlement, a growing unelected quangocracy and changed cultural debate, the building blocks were quietly being put in place to undermine the edifice. But in 2000 Britain was fairly content. It was not an agitated, depressed place. 

Today our country has declined in almost every respect. Opinion poll after opinion poll suggests a total lack of confidence in services provided, be it the NHS, policing or local authorities; tax is proportionately at the highest level since 1948, and politics has spilled from merely economics and services to almost every aspect of life in ways that would have seemed impossible just a few years ago. There were no 20mph speed limits, no cancel culture and a general degree of respect which allowed one to get on with life as one saw fit.

Today, outside a few rarefied communities, signs of decay are everywhere. Recently I had occasion to drive through the East End of London on a journey from Stansted. I was shocked and saddened. Mile after mile of mindless graffiti defaced the route. And it was mindless. ‘Banksy’ may be a vandal but at least there is an attempt at wrongheaded satire and artistic merit. This was an urban scrawl of nothingness.

It’s tragic. It destroys pride, it undermines self-worth and is a symptom of a bad place. It’s not clever, uplifting or satisfactory. Do the authorities do anything about it? No, if anything it is tacitly encouraged as some odd form of self-expression, a rogue individualism and a mirror of their warped view of civil society.

Graffiti is a symptom; let’s look at the big picture. What have this government and the previous Blair/Brown administration bequeathed the nation?

Twenty-five years ago Britain was the genuine global success story. Our public finances were in good shape, taxes were one of the lowest in Europe, growth was decent, the rule of law was broadly accepted and while of course there were problems – there always will be, it’s the human condition – things worked and people were broadly content.

So let’s contrast this with today, looking purely at the economic picture using Office of Budget Responsibility (OBR) data adjusted for inflation. 

In 2000 public spending was £636billion in real terms, or £22,000 per family. Today it has virtually doubled after adjusting for inflation to £1,216billion, or almost £44,000 per family. But the narrative is that there has been austerity. It’s not enough and that’s the problem. But what does your family get for the extraordinary figure of £44,000? Worth it?

With a spending explosion which many call austerity, the national debt too has exploded. In 2000 it was £564billion. Today it is £2,770billion, a five-fold increase in one generation. This is glossed over as if it is normal and nothing to worry about. It’s under control. But it is not. Never, outside war, has this occurred on a scale remotely of this magnitude.

The scale of the spending increase, for no obvious benefit, is extraordinary. Public spending accounted for 32 per cent of economic output in 2000. Today it is 46 per cent. This too is seen as inevitable and not a problem. But simple maths shows almost all the growth over the last 20 odd years has been through state spending at the expense of the private wealth-creating sectors. We have swapped a relatively dynamic enterprise society for a largely statist, regulated and failing public one. It’s not either/or: the wealth-creating sector has been crowded out.

Since Boris Johnson came to power in 2019, 580,000 additional public sector workers have been ‘employed’. The private sector has shed 370,000 jobs. Another manifestation of the decline of private enterprise.

Taxes in 2000 averaged 32.5 per cent of GDP. Today they are 36.5 per cent, a proportional rise of 13 per cent and a greater increase than any other European nation save Greece – and still the Government manifestly fails to balance its budget.

In 2000 the population was broadly stable. Since Johnson became Prime Minister gross migration has exceeded six million. This is seen by some as a blessing, but it has undermined wages as growth per head has declined over the last five years at the most precipitous level in more than a century.

And as if the increase in public debt, taxation and the growth of the state was not enough for government over the last 20 years, currency has been devalued by printing over £900billion (or £32,000 per family) via ‘quantitative easing’ with in effect near zero interest rates for a decade, distorting the real economy. Has the magic money tree resulted in Arcadian utopia and prosperity for all? I leave you to judge. 

The narrative is that we’re recovering. Growth has returned and the policy is working. We have become used to their narrative, but all is not well. Far from it.

The political debate is dire. Labour say almost nothing and wrap themselves in banners of the Union Flag in an attempt to portray themselves as patriots while the Tories say ‘Trust us, we’ll cut tax’ and offer motherhood and apple pie despite doing the exact opposite while in power. It’s delusion.

On every matrix this country is being strangled by tax, preposterous and unaccountable spending, increasing worklessness (more than nine million of working age do not work). It is a sick society with an exponential increase in mental health claims and a vindictive regulatory morass where government says ‘We do not trust you’.

Labour are almost certain to win the general election but they have no answers. While it is hard to imagine they can be more incompetent than the current crowd, don’t bet on it. In what seems their flagship policy, they seek to tax one of the few remaining centres of excellent in this land, private education, which is not only vindictive and against natural justice but will be surely counter-productive for all pupils.

What else might they tax? They say there will be no wealth tax but we’ll see. Ominous silence on capital gains tax, property taxes and the doubtless green taxes. It will be counter-productive. In each case all they will do is crush growth and enterprise and encourage further decline.

I wish it were not so, but the groupthinkers in the corridors of power from the OBR to the Bank of England, from the Treasury to much of the academic and think tank establishment, cannot look past their noses. They have missed the big picture, focusing instead on the short term and micro-management (which they are not very good at).  They are like ‘the man with the muck rake’ from Pilgrim’s Progress, looking down and so missing the celestial crown offered above.

We are in for tough times. This fate is entirely inflicted by a foolish political class. But they cannot defy the laws of economics indefinitely. Indeed we are already in the early squalls of the storm. Already, despite the narrative parroted in the media, Britain is getting manifestly poorer. In terms of the economic effect alone the scale of the failure is massive. If we compound that with the social and moral failure it is catastrophic.

To put the scale of this failure in context, from 1955 to 2010 per head GDP growth averaged a consistent 2.3 per cent. Today, according to the ONS, per capita GDP stands at £33,271. If the long-term trend growth had continued since 2010 current per capita GDP would be some 35 per cent higher at £45,062. That is a staggering underperformance. In an age of extraordinary technological advance it is breathtaking in its failure.

UK GDP per capita 1955 to date with trend growth of 2.3 per cent from 1955-2010

Source: ONS & Walbrook Economics

I should love to report all is well. It is not. Twenty-five years of the delusion that the centre knows best and of socialising risk, spending and culture, has resulted in a monumental failure.

Politicians talk of the existential threat this land and the West in general faces from external foes. Maybe, but the greatest foe and risk to our freedom and prosperity is our delusional policy choices, economic, cultural and moral. The die may be cast for this election but the challenge is only just beginning. Gang warily.

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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