The sick man of Europe suffers a relapse

Politics gets in the way …

“When a regime has been in power too long, when it has fatally exhausted the patience of the people, and when oblivion finally beckons – I am afraid that across the world you can rely on the leaders of that regime to act solely in the interests of self-preservation, and not in the interests of the electorate.” It sounds like the sort of quote that Churchill, Thatcher or Blair might have offered up. In fact it was penned by none other than Boris Johnson in 2011 in an article in the Daily Telegraph. It is worth recalling this quote in a week when Johnson survived a motion of no-confidence amongst his own MPs by a margin of 211-148. With 41% of his own MPs voting against him, the general consensus is that Johnson’s days in office are numbered. I would not be so sure.

For one thing, Johnson’s polling share amongst MPs (58.8%) is higher than the average across the previous ten contests (54.2% - see chart above). It was a big parliamentary rebellion, to be sure, and it will make life difficult but as shows of support go this was not a bad one. Public opinion polling evidence does not suggest that his popular appeal has been damaged significantly more than most Prime Ministers at this point in their term. The long-running Ipsos poll, with data back to 1977, indicates that Johnson’s latest approval rating of 26% is slightly below the long-term average of 31% whilst the disapproval rating is at 66% versus the historical average of 60% (chart below). Past experience suggests that a disapproval rating above 70% would be a cause for concern, foreshadowing a change of government in 1979, 1997 and 2010. The latest poll reported in The Observer indicates that only 26% of respondents believe Labour leader Keir Starmer would make the best Prime Minister versus 28% for Johnson. Thus the current polling readings suggest the Tories should not be in too much of a hurry to ditch Johnson. After all, who would replace him? And would the electorate forgive the Conservatives if they ditched a third leader in six years?

It is clear that Johnson believes that he has a mandate to continue. For a politician who believes a 52-48 majority in favour of Brexit represents the will of the people, a 59-41 margin represents a thumping majority. As far as Johnson is concerned, he is not going anywhere and under current Conservative Party rules he cannot be challenged as party leader for another 12 months which would confirm him in Downing Street beyond year-end. The rules can, of course, be changed and with the Prime Minister due to face the Parliamentary Privileges Committee in the autumn over whether he lied to parliament, the position could change considerably.

… but the economy is increasingly what matters for voters

The bigger problem is that the government is likely to become increasingly distracted by internal politics rather than the mounting headwinds facing the economy. Just this week, the media focused on the news that the latest OECD forecast suggests that the UK will be the slowest growing economy in the G20 after Russia in 2023 with a GDP growth rate of zero. This is driven by a number of factors including higher interest rates, higher taxes, reduced trade in the wake of Brexit and higher food and energy prices. The government has control over some of these factors; others it has not. The concern, however, is that competing factions in the Tory government will push to implement a range of potentially contradictory policies. It is an article of faith amongst many of them that taxes should be cut. Others have picked up on mounting public concern about the poor state of public service provision, most notably the NHS where workers have been rewarded for their sacrifices during the pandemic with pay rises well below the inflation rate. It is not possible to satisfy both of these competing demands. Then there is Brexit, where there are signs of unease on the backbenches that the policy is not delivering what was promised.

But the malaise goes deeper. As a recent article in The Economist noted, the “half-hearted vote to endorse Boris Johnson as prime minister, on June 6th, betrayed how deeply Britain’s ruling party fails to confront hard choices … Britain is stuck in a 15-year rut. It likes to think of itself as a dynamic, free-market place, but its economy lags behind much of the rich world. There is plenty of speechifying about growth, and no shortage of ideas about how to turn the country round. But the mettle and strategic thinking that reform requires are absent—another instance of Tories ducking hard choices.”

There is little new economic thinking coming from the government. One of the key policies announced in the March Budget was a cut in the basic rate of income tax in 2024 – a direct nod to the Thatcherite policies of the 1980s. Last week, the government announced plans to allow benefits to be put towards mortgages and permit social tenants to buy their homes, echoing the “right to buy” policy of the 1980s. Unfortunately, those with savings of more than £16,000 will not be eligible and those with savings below the threshold will struggle to fund a mortgage.

Housing policy is certainly one area where new thinking is required. The government’s approach over the years has amounted to raising demand in the face of a slowly expanding housing supply which has served to inflate prices relative to household incomes. Unlike the 1930s the government is not in the business of building houses but it is in a position to influence policy to increase housing supply which ought to alleviate some of the cost pressures on the poorest in society in the long run. The government’s stated target is for 300,000 new homes to be built per year by the mid-2020s (some estimates put the requirement at up to 340,000). Over the last five years housing completions have averaged 163,000. The Centre for Cities argues that the lack of available land in the right places is one of the key constraints on increasing supply, which could be remedied by (inter alia) making better use of Green Belt land and reforming property taxes, notably levying a tax of 20% on the selling price of new properties to develop local infrastructure and allow funding for more social housing. Whether or not these are the right policies, they are an improvement on efforts to stoke demand.

There are a host of other areas where reform is required and space considerations preclude a detailed look. However, in order to improve the economic circumstances of voters requires reform of areas such as NHS funding and the social care system. Efforts to reduce regional imbalances which could help to boost productivity, long the Achilles Heel of the UK economy, are also necessary which may require changes to regional governance. Reforms to the tax and benefits system are very clearly needed – Universal Credit is a good idea in principle but its implementation has been badly handled, as the National Audit Office pointed out in 2018 – whilst the Mirrlees Review noted more than a decade ago that “the tax and benefit system should have a coherent structure based on clearly defined economic principles.”

There are many other areas besides. But the main takeaway, as the article in The Economist made clear, is that the government has failed to take bold steps in recent years to tackle many of the underlying economic problems. It continues to rely too heavily on policies which were deemed successful in the past but which may not be appropriate today. Unfortunately since Johnson’s government will spend the next couple of years merely trying to survive and is unlikely to engage in much long-term strategic thinking, most of the UK’s economic ills will continue to fester. In the 1970s, Britain was known as “the sick man of Europe.” It appears to have relapsed.