I was asked last week by the Sunday Telegraph to rank the
economic policies of Labour and the Conservative parties as part of a larger survey group. The story duly appeared under the heading “Economists back the Tories - but remain underwhelmed” in which it was suggested that while Dixon’s “criticism of the Tories centres
around their fixation on austerity, he is more scathing about Labour’s plans.”
Whilst I am grateful for the press coverage, and my comments were reported
accurately, I do believe they were given a spin which was not warranted by the
totality of my remarks. In the interests of balance, therefore, I reproduce
below the full transcript of my answers to the Telegraph’s survey.
Tax & spending
CON 3; LAB 3 (Marks out of 10 where 10 is good and 1 is
poor)
There are many good things about the Labour plans: (i) they are semi-costed so we
have some indication of how much they want to spend; (ii) There is also something to be said for establishing
a National Investment Bank even though it will not be able to generate the
£250bn in infrastructure spending that Labour plans. Far better to use it as a
conduit to fund SME lending as in Germany and the US, where the KfW and SBA
operate. The bad news (and the reason I
give the overall plan such low marks) is that too much emphasis is placed on
taxing higher earners and corporates. In other words, the tax base is too narrow.
For a party which seeks to promote equality, this is merely a “soak the rich
strategy” which will change the behaviour of those caught in the tax net. It is
thus unlikely to generate as much revenue as planned. In any case a penny on
the basic income tax rate yields 4x as much revenue as a penny on higher
earners. And whilst the idea of renationalising parts of the infrastructure
sounds attractive, this will result in as many problems as it solves. The
education pledge is too expensive given the
current numbers going into education. Abolishing university tuition fees
is a good thing, but it would have been more affordable 20-30 years ago.
However, Labour deserves credit for sparking a debate on the role of the state
in the economy.
This is more than can be said of the Conservatives, whose
economic manifesto offered nothing new. The commitment to balance the budget
only by the mid-2020s does raise a question of whether the austerity of the
last 7 years has been worthwhile. The public sector is creaking at the seams
and it is not in any position to withstand a further round of austerity. As the
Institute for Government has pointed out “the
Government is struggling to successfully implement the 2015 Spending review …
[with] clear signs of mounting pressures in public services.” A policy of
more austerity will be self-defeating and I would like to think that Philip
Hammond will take a less draconian
stance than George Osborne (the jury is out but his hands are tied by Brexit).
I maintain that the commitment to reducing corporate tax to 17% is a mistake
because it robs the Treasury of revenue and it is not as if HMRC is getting the
corporate tax receipts it already believes it is owed.
Immigration
CON: 3; LAB 5
The idea that we can get net immigration back to the tens of
thousands is economically illiterate and ultimately self-defeating although I
understand why the Conservatives made the pledge for political reasons.
However, targeting net immigration by focusing only on inflows, and continuing
to classify students in the numbers makes little sense. It remains to be seen
how a policy of “allowing us to attract the skilled workers our economy needs”
is compatible with the targets. Labour is vague on immigration although they
have sensibly resisted giving a pledge on numbers. The commitment to protecting
the rights of EU workers already in the UK will play well in Brussels.
Jobs & pay
CON: 2 ; LAB: 2
In this day and age, governments don’t really deliver jobs –
other than by setting overall conditions – and have little influence over pay,
except by controlling the minimum wage. Labour’s planned figure of £10/hour is
probably not unreasonable although it is a big stretch from where we are today
which will squeeze smaller businesses. The Conservative strategy which does not
give an outright figure, but plans 60% of the median wage, is probably less of
a hostage to fortune. The Conservatives are probably more realistic in the sense
that they did not talk about creating jobs but it is difficult to give marks to
either side because I am not convinced that they said very much, However, both
get credit for recognising worker rights though the Labour plans have a whiff
of the 1970s about them (“empower workers and their trade unions”).
Industrial strategy
CON: 6; LAB: 4
Both parties sound good on paper but there is little new
here. Both sides offer a tinkering at the margin approach – nobody would
dispute Labour’s view that we need to improve the economy’s skill levels but
this will take years to show any improvement and it was vague on how to achieve
it. The Labour manifesto had nothing substantive to say on productivity, which
is the UK’s Achilles Heel at present and the Conservatives score a little
higher, having already announced their National Productivity Investment Fund.
My concern, however, is that neither party will be able to do much in an
environment where global forces will play a major role (e.g. automation).
Social care & pensions
CON: 3; LAB: 5
The Conservatives scored an absolute own goal with their
initial plan on old age care provision, which was far less generous than that
scheduled to come into operation in 2020. It ignored the Dilnot Commission
proposal which advocated a cap on costs, thus mitigating against efforts to
create a market for insurance in this area. Although they have backtracked, the
damage is done. Sensible to remove the pension triple lock. Labour sound more
convincing on this issue but the problem is how to pay for it. They are relying
on squeezing higher earners and it is not clear whether they can afford all
their commitments given the demands from other areas.
Totting up the marks, that amounts to 17/50 for the
Conservatives and 19/50 for Labour (versus average marks of 23/50 for the Conservatives and 18/50 for Labour). Not exactly a ringing endorsement for
either party, as the headline suggested, but not enough in my case to suggest a bias towards the
Conservatives.
Although much of the current media attention is focused on
Donald Trump’s rather unfortunate comments in the wake of the latest London
terror attack, his decision last week to withdraw the US from the Paris
Agreement on climate change was a much bigger deal. To recap, the agreement was
drawn up in the first place in a bid to limit global greenhouse gas emissions
in order to curb the rise in global temperatures and thus prevent some of the
worst effects of climate change from causing even more environmental damage.
There are 195 signatories to the treaty, with only Syria, Nicaragua and the
Vatican not having signed up. However, the US decision to withdraw not only
drives a coach and horses through global cooperation efforts on climate change,
but it raises question marks against the commitment of the US to a whole range
of international agreements.
Turning first to the climate issues, I am not a climate
scientist so I am bound by the consensus of expert opinion which has done the
work and drawn the conclusions. What everyone agrees on is that the earth is
warming rapidly – global temperatures are around 2 degrees higher than when
measurement commenced in the late nineteenth century. We also know that the
amount of carbon dioxide in the atmosphere is at unprecedented levels (see
chart, courtesy of NASA).
The Intergovernmental Panel on Climate Change (IPCC) reckons that “anthropogenic greenhouse gas emissions … are
extremely likely to have been the dominant cause of the observed warming
since the mid-20th century.” Note that it does not say with 100%
probability that climate change is man-made, but “extremely likely” is the sort
of language scientists use when they are fairly sure. It may be that they are
wrong, but until such times as the world’s most reputable scientists change
their minds I’ll go with what they know, rather than what various interest
groups believe to be true. And even if the scientists are wrong, it is a better
insurance policy to take offsetting action rather than ignore them and find out
they were right.
The science of climate change also suggests that global
warming will have significant impacts on weather patterns, crop growing cycles,
access to water and has the potential to disrupt the way we live our lives (for
an overview of all these issues, see the Stern Review, which reported in 2006).
As Stern pointed out, climate change “entails costs that are not paid for by those who create the emissions …
Questions of intra- and inter-generational equity are central. Climate change
will have serious impacts within the lifetime of most of those alive today.
Future generations will be even more strongly affected, yet they lack
representation in present-day decisions.”
Trump’s decision is the ultimate in short-term thinking
designed to satisfy a tiny proportion of his country’s electorate whilst
ignoring the wider consequences for their children (viz the wonderful response by Emmanuel Macron to Trump’s decision).
Quite what better deal Trump has in mind for American workers by pulling out of
the agreement is hard to fathom. After all, there are fewer people employed in
coal mining in the US than in the green tech sector so it is not exactly a
rational response to domestic issues. It is also a wider abrogation of duty to
the rest of the planet, for as Stern also pointed out, solutions to the climate
change problem require a global response.
There is thus general agreement that Trump’s strategy is
self-defeating with regard to climate issues. But an equally serious concern is
that an America first strategy runs counter to the rules-based system which underpins
the world economic architecture and which has served the US so well for the
past 70 years. An America which does not adhere to the treaty commitments to
which it has signed up cannot expect others to play by the rules which the US
flagrantly ignores. It may “only” be climate change, the implications of which
will not become fully evident until after Trump is long gone, and in any case
the US can always sign up again under a different president. But can the US
expect all countries to adhere to the rules on global trade if for some reason
it does not suit them? To what extent can the US’s military allies in Asia or
Europe rely on its support?
International diplomacy is a game of give and take. Unfortunately,
Trump appears to see it as a game of winner takes all. Moreover, he has not yet
demonstrated that he understands the notion of cooperation on global issues
(not that the British government is in any position to cast aspersions). But if
Trump has any pretensions to providing leadership on a global scale, the
climate change policy needs to be rethought. Future generations of voters may
thank him for it.
As the UK election race unfolds, latest evidence continues
to point to the Conservatives winning next week’s ballot. However, the analysts at Electoral Calculus
currently reckon that their majority will come in at 74 seats compared to an
estimate of 168 three weeks ago (the current margin is 17). One poll released
earlier this week even indicated that the Tories might lose their overall
majority by winning fewer seats than they have now, although this was generally
dismissed as an outlier. But the shift in the polls has rattled the markets,
and foreign investors now see a risk that the election will not be the foregone
conclusion it seemed a few weeks ago (see chart).
As I noted back in April (was it really that long ago?) this
election is being fought purely for tactical reasons – and indeed the prime
minister admitted yesterday that the decision to call yet another plebiscite
was driven by Brexit-related reasons. In my view, this is nonsense. The rest of
the EU does not care how large the PM’s majority is: The UK will still be in a
minority of one in the Brexit negotiations. But the size of the majority
matters for May herself. A parliamentary majority around 50 (still decent,
let’s not forget) would be seen as the equivalent of a draw. Anything less would
put the PM in a difficult position as she has to deal with the right-wing of
her party, which has a habit of making life difficult for Conservative prime
ministers. In effect, she needs a big win to give her a personal mandate.
So why are the polls narrowing? It can simply be boiled down
to two factors: personality and policies. As George Parker wrote in the
Financial Times today, “Theresa May thought a snap election
would empower her, but what started in April as a quest for a “strong mandate”
to deliver Brexit is threatening to leave her diminished. Polls suggest the
more people see of her, the less popular she becomes.” Her main opponent,
Jeremy Corbyn, started out as a no-hoper who couldn’t be trusted to run a bath,
let alone the country, yet he is the one who has looked at ease in dealing with
the hostile questioning (the odd brain fade during interviews notwithstanding).
Corbyn has had to deal with questions about his past support for terrorist
organisations and his willingness to press the nuclear trigger in the event it
becomes necessary, and all-in-all has come out of it rather better than most
people expected. This does not make him prime minister-in-waiting, however.
Corbyn has spent the whole of his parliamentary career (34 years) opposing the
mainstream of his party on most key issues. He will struggle to find sufficient
MPs loyal to him in the unlikely event he becomes PM.
So if the personalities are not very appealing, we must
judge them on their policies. Here again, both sides are found wanting. In
summary, the Conservatives propose too much austerity and Labour promises too much tax-and-spend. Neither has talked enough about the single
biggest issue facing the UK during the next parliamentary term – Brexit.
Indeed, the prime minister seems to be asking the electorate merely to trust that
she will “deliver the best deal for Britain.” That is not good enough. I would
be more inclined to listen to a politician who acknowledges what economists
have been saying for the last four years, that Brexit comes with a cost – a big
one – and that they have a plan to deal with it. A party which proposes that
“no deal is better than a bad deal” does not cut it.
Meanwhile, Labour’s tax-and-spend policy is open to the
criticism levied by Conservative politicians that “there isn’t a magic money
tree” to fund their plans. This is, of course, spot on although if I were
Jeremy Corbyn, I would be pointing out that senior Conservative politicians
such as the Foreign Secretary only twelve months ago supported the idea that
leaving the EU would immediately mean that the UK could devote an additional
£350m per week to the NHS. The manifesto
analysis conducted by the IFS last week provided a pretty damning assessment of the fiscal plans of both sides arguing
that “neither sets out an honest set of
choices.” Though as an aside, I found this blog piece
by John Weeks an interesting insight into the shortcomings of the IFS’s
analysis.
As we head towards polling day, I get the sense that many
people are unenthused by the choices on offer. I almost have feelings of
nostalgia for Screaming Lord Sutch and his Monster Raving Loony Party.
Unlike Lord Sutch, the MRLP is still with us, however, and amongst their
manifesto (or as they call it, manicfesto) commitments for 2017 are a pledge to
“nationalise crime to make sure it
doesn’t pay,” “reducing the alphabet
to 23 characters. This will start by cutting the letters N. H. and S” and
giving atheism charitable status on the grounds that it is a “non-prophet organization.” I’ve heard
worse.
Although last year’s Brexit referendum was initially
proposed by the Conservatives, it was conducted across party political lines as
MPs were allowed to vote with their conscience. And as we all know, the
question on the ballot paper simply asked whether the UK should remain part of
the EU or leave the EU. No thought was given to the form which Brexit should
take. For a long time, Theresa May simply relied on the slogan “Brexit means
Brexit” without giving any further indication of what that meant. By the time
of her Lancaster House speech on 17 January, we finally got more insight when
we were told that the government’s negotiating position would be based on the
principle that “No deal is better than a bad deal for Britain.”
Most economists are horrified by that stance. It is simply
not credible to assume that the rest of the EU is going to back down in the
face of UK intransigence. What is more, this statement has made its way into
the Conservative election manifesto. So either the Conservatives are committed
to driving the UK economy over the edge of the cliff in the event they do not
get the deal they want, or they will be forced to break the pledge upon which
basis they were elected (assuming they win next week’s election).
But rather than treat the Brexit negotiations as a single party
issue, there is a strong case for cross-party representation in the UK
negotiating team. Indeed, if we accept the claims of those who believe Brexit
is the biggest single issue facing the UK since World War II (maybe a slight
exaggeration but you get the point), surely it deserves a similarly united
national response. It would certainly help to assuage the 48.1% who voted
against Brexit that their concerns will be listened to.
Whilst Labour believes the UK should continue down the
path which their political opponents have already carved out, it does at least
believe that “leaving the EU with ‘no
deal’ is the worst possible deal”. It also makes the sensible suggestion
that the UK should seek to remain part of organisations such as Horizon 2020,
Euratom, the European Medicines Agency and Erasmus, and advocates protecting the
rights of foreign nationals already in the UK. The Liberal Democrats are even more direct and parts of their manifesto sound like they wish to overturn the
result. But at least the “aim for
membership of the single market and customs union” sounds like a rational
economic plan. The Scottish Nationalists have not yet released their manifesto,
but you can be pretty sure that their aim will be to ensure that Scotland
remains part of the EU.
On the basis of these varying degrees of support for the EU,
my suggestion would be for the UK government to assemble a cross-party
negotiating team, perhaps weighted by parliamentary representation. Based on the latest
analysis by www.electoralcalculus.co.uk,
this would imply giving the Conservatives a 60% weighting; Labour 32%; the SNP
8% and the Lib Dems 0%. I do not expect
this to happen, of course. As Philip Stephens noted in the FT four weeks ago, “Theresa May is dangerously disdainful
of dissent” pointing out that “Mrs May
assumes a monopoly of wisdom on setting Britain’s terms for EU exit. The record
suggests she can claim anything but.” Ben Chu in today’s Independent suggests that the whole Conservative manifesto strategy is designed to bolster
the prime minister’s position rather than looking after the UK’s best economic
interest. In effect, we face a principal-agent problem whereby the agent (in
this case the prime minister) has an incentive to work in her own interests
rather than the principals who commissioned her (the electorate).
One solution to the principal-agent problem is to provide a
high level of transparency – the prime minister’s insistence that she does not
intend to reveal details of the discussions on a rolling basis surely adds fuel
to Chu’s suspicion. Fortunately, we can rely on the rest of the EU to deliver
that transparency. Giving the principal a stake in the outcome is also another
useful solution. The issue (as noted above) is whether May’s objective is to
secure her own or the national interest. A final check is thus to impose
greater accountability. Packing off Conservative party representatives to
Brussels for two years who then come back with a deal which is set to be rubber
stamped by parliament is simply not enough. I thus maintain that at the very
least other political parties should be represented during the negotiations,
who are not bound by some form of parliamentary omerta. Some issues are too
important to be left to politicians. This is one of them.
Wayne Rooney is one of the most famous footballers in the
world. He is the record goal scorer for his club, Manchester United, and for
the English national team, and has won everything worth winning at club level
(including 5 league titles, an FA Cup and the Champions League). However, over
the last 12 months, questions have increasingly been raised about his continued ability
to cut it at the highest level which has raised speculation that he will leave
Man United at the end of the season. Not that football journalists know
anything – The Guardian reported earlier this month that he would leave the club at the end of the season
having suggested just three months ago that he has no intention of leaving.
Meanwhile the fans, not exactly models of consistency themselves, are generally
in agreement that it is time to go.
But whilst the fans treat usually football decisions in the
context of the on-field activities, there are in reality a lot of other
economic factors to consider. Look at it from Rooney’s point of view. He is 31
years old and reported to be paid around £300k per week on a contract believed
to run until June 2019. Even if we assume this figure is around £260k, as
reported in a number of media outlets, this means he can expect a gross income
in the region of £27 million even if he never kicks a ball again. From the
club’s perspective, it would appear to make sense to offload their highest
earner if he is no longer able to perform at the level demanded of him. Indeed,
as of mid-2016, the club was paying out £203 million per annum on wages –
implying that Rooney accounted for just less than 7% of the total.
But Man United also earned £268 million in commercial revenue
– primarily sponsorship and retail activities (here for more detail on the club’s
accounts. It is slow to load, but worth it for an in-depth look at the accounts of a major football club).
We should be in no doubt that Rooney has helped sell a lot of replica shirts. But
now that he is no longer in the England squad, his commercial value will
undoubtedly have slumped. Footballing considerations aside, the club appears to
have little to gain financially by keeping him on. Of course, no other club in
Europe is going to pay Rooney £13.5 million per year so unless he decides to
join the exodus to China, where silly money is apparently on offer, what to do?
The rational response would be to hang around for the next couple of years and
bank the cash. Fans forums would, of course, be inundated with comments
suggesting that he is only in it for the money and that such actions will
tarnish his legacy. But frankly, you can trash my legacy for £27 million any
day.
Rooney’s logical response to this criticism should be to ask
the fans what they would do in the same situation? If your employer told you
not to come in to work for the next two years whilst still paying your salary,
most people would say it is illogical to refuse. After all, you could travel;
learn a foreign language; do further study or take up a new hobby. Failure to
understand the rationality of this position is a form of cognitive bias,
defined as “a systematic pattern of
deviation from norm or rationality in judgment, whereby inferences about other
people and situations may be drawn in an illogical fashion.” It is not just
football fans who suffer such biases, of course. Financial markets are riddled
with them, which goes towards explaining why many investors make decisions
which they can justify at the time but with hindsight appear ridiculous.
As it happens, the rumour mill is in full swing suggesting
that various clubs are currently bidding for Rooney’s services. He may indeed
be tempted to go elsewhere: It is not as if he is short of money so he can
presumably afford to take a pay cut. The motivations for him wanting to do so
are fully in line with evidence from psychology which suggests that factors other than money can motivate sportspeople.
Like actors, sportsmen (and women) are motivated by adulation. So long as he
continues to be reasonably well paid, Rooney might be tempted to trade off some
of his extraordinarily high current salary for a lower one and a continued
presence in the public eye.
Still, it’s a nice problem to have. As for me, if I were
faced with Rooney’s decision I’d take the money on offer from Man United. In
fact, I would take a small fraction of his salary in order not to play
football. Now you might say that I am not as good a footballer as Wayne Rooney
so am in no way as deserving. But that is only true on the field of play. When both
of us are doing nothing, I’m just as good as he is.
Without wishing to trivialise in any way the horrific
bombing in Manchester, the suspension of the UK election campaign came at a
fortuitous time for the prime minister who was undoubtedly on the ropes on
Monday regarding her U-turn on plans to fund care for the elderly. Dealing with
old age care is an issue of major economic importance, and I did note last
weekend that “tackling the problems of an ageing society will require us to
think differently on tax and social insurance issues.” But it is worthwhile
digging into some of the economic implications of an issue which not only
affects the UK but is a problem for all ageing societies.
To remind you of the story so far, the Conservative
manifesto last week suggested that those requiring long-term old age care would
be required to run down their assets to “a
single capital floor, set at £100,000, more than four times the current means
test threshold.” The implication is that households will have to pay a lot
less than they do today. Whilst that is true of the current system, it omits the fact that under legislation
already on the books “from April 2020, there will be a cap limiting the amount people will have to pay for their care and support”.
Moreover, the threshold beyond which people receive no financial support is due
to rise from £23,250 to £118,500 (these reforms were originally scheduled for
2016 but local authorities balked at the additional costs this would impose,
hence the delay until 2020).
In other words, a significantly more favourable plan is already scheduled to come into play in 2020 than that proposed by the Conservatives. As it currently stands, someone who has lifetime care costs of £150,000 could
lose up to 90% of their accumulated wealth. Raising the support threshold and
imposing a cap significantly reduces this proportion. By contrast, the
Conservatives’ plan placed no such upper limit so that all but the final
£100,000 of an individual’s assets could be used to fund their care needs. I am
indebted to the FT’s economics correspondent, Chris Giles, for working out the
tax rates on assets in different care systems (see chart). What is evident is
the magnitude of the costs under the current system (the green area) versus the
proposals set out by the Dilnot Commission in 2010 (black line). Last week’s Conservative plans (red line) help those at
the lower end of the asset scale but they are far less favourable compared to what was proposed in 2010.
The idea of scrapping the cap caused an outcry for both good
and bad reasons. The bad reason is the notion that today’s generation of
pensioners be protected so that they can hand over their stock of assets to future
generations. Whilst this may reflect an instinctive desire to help one’s
offspring, there is no reason why today’s tax revenues should be used to ring-fence
bequests to future generations. A better objection is that the absence of a cap
promotes unfairness due to the fact that for any given wealth cohort some will
be afflicted by illnesses which require extensive old age care whilst others
will not. For example, an unfortunate
pensioner who suffers from dementia may require many years of care whereas
someone with the same assets who dies suddenly at the same age will not face
the same care burden. There is no sense of social insurance: people are very
much on their own.
Whether the reaction of the public and politicians was
motivated more by the latter than the former matters less than the fact that
the Conservatives responded to the groundswell of opposition by announcing they
would indeed place an “absolute limit” on care costs (without saying what the
limit would be). What is absolutely not true is the prime minister’s assertion
that “nothing has changed from the
principles on social care policy that we set out on our manifesto.” In fact, everything has changed. The principle of a cap means that we have some
notion of risk pooling rather than one which forces individuals to bear full
personal liability.
A more pertinent question is how this should be funded, which
is the bit no-one talks about. The Dilnot Commission pointed out that there are
three ways to fund old age care provision. The obvious way is to do what we do
now – raise the additional revenue from general taxation, which will mean
higher taxes. A second option would be to change the balance of spending away
from other items and towards care provision. However, a third option would be
to introduce a specific tax increase which should be paid “at least in part by those who are benefitting directly from the
reforms. In particular, it would seem sensible for at least a part of the
burden to fall on those over state pension age.” Dilnot further suggested
that “it would be sensible to do so
through an existing tax, rather than creating a new tax” which would most
obviously suggest targeting inheritance tax.
I am not even averse to the idea of levying a specific tax
in order to build up a social insurance fund, although governments are
generally very bad at ring-fencing revenues for specific tasks. Whatever the
ultimate outcome, the UK government clearly has to think more carefully about
generational outcomes than it has up to now. The current pay-as-you-go
option is not fit for purpose. But nor is a system which mitigates against a market for
social insurance. There is plenty to ponder but it certainly will not be
resolved before the election, and it is increasingly a problem which all industrialised countries have to face up to. Ageing societies don't come cheap.
Having previously looked at the Labour Party manifesto (here),
in the interests of balance it is only fair that I take a look at the economic
consequences of the Conservatives’ election promises – particularly since they
are nailed on favourites to win the election, so what they have to say is
probably more relevant. However, since they did not offer any attempt to cost their proposals – unlike Labour or the Lib Dems – it is harder to offer a
precise assessment.
What is striking is that last week’s document highlighted “Five
giant challenges” in a similar vein to the famous 1979 manifesto which highlighted
“Our five tasks.” But there the similarities end. Indeed, the overall tone was
widely interpreted as a step back from the Thatcherite policies which have
dominated the Conservatives’ agenda for almost 40 years. This view is based on
an apparently innocuous couple of sentences tucked away on page 9 which suggested
“We do not believe in untrammelled free
markets. We reject the cult of selfish individualism.” That is most certainly
not the Conservative philosophy which has been presented to me throughout most
of my adult life.
So why the change of direction? Perhaps it is because, as John
Kay pointed out in an FT column recently (here)
, “a great intellectual failure of the
past two decades is the inability to offer a more nuanced account of the market
economy than that contained in the mantra of ‘greed is good.’” I could not
agree more. One of the motivating factors behind this blog in the first place was
to point out that systematic indifference to the fate of swathes of the British
economy, which had been left to contend with the forces of free market economics,
would ultimately weaken, rather than strengthen, it (see my first post from June 2016).
Market self-regulation clearly produces outcomes which are damaging both to the
company and the consumer (think of the scandals in banking in recent years) and
as Kay points out, “the legitimacy of
modern business organisation has been further undermined by continuing
revelations of corporate wrongdoing … and by the disclosure of the aggressive
tax avoidance.”
Does this mean that a Conservative government under Theresa
May will take a step to the left (or more accurately, the centre) of the
political spectrum on economic matters? Admittedly, one of its consumer
protection policies was a rehash of an old Labour policy promising to introduce
tariff caps on domestic energy bills. This ironically, was a policy described by
David Cameron as “Marxist”. But it is not the whole story.
From a macro perspective, the Conservatives now only “aim for a balanced budget by the middle of the
next decade.” At the time of the 2015 election, the budget forecast showed
that the UK was on track for a budget surplus by 2018-19. One of the problems
which the government has faced since 2010 is that income tax receipts have
continued to fall below expectations (chart), which has blown a £30-40bn hole in the budget
with the result that filling the fiscal gap has taken far longer than anticipated.
At least the Conservatives have dropped the pledge not to raise income taxes or
National Insurance Contributions, which caused such a controversy in March.
All
this matters because the government will increasingly have to face up to the
problem of rising healthcare costs resulting from an ageing society as baby
boomers retire in droves. One of the ways which the Conservatives have tackled
this is to propose a reduction in the cap on welfare spending for the elderly,
which means that those receiving social care must fund the entire cost until
they reach their last £100,000 of assets. This is hugely unpopular amongst traditional
Conservative supporters and it also flies in the face of the Dilnot Commission
recommendation that a limit be placed on lifetime social care contributions (a
review body set up by the coalition government in 2010). Nobody likes the idea
of running down their childrens’ inheritance to pay for care costs, hence its
unpopularity, but it is a recognition that tackling the problems of an ageing
society will require us to think differently on tax and social insurance issues
in future.
I have managed to get this far without talking about Brexit,
primarily because there is nothing new to say. The Conservatives continue to believe
“Britain needs a strong and stable
government to get the best Brexit deal … delivered by a smooth, orderly Brexit.”
But it also remains committed to reducing annual net migration to ”the tens of thousands, rather than the
hundreds of thousands we have seen over the last two decades.” Having
failed for the last seven years to deliver this pledge I remain unconvinced that
it is achievable any time soon (never mind the fact that the figures are almost
certainly wrong, as the UK’s sample based system has huge margins of error).
Moreover, it continues to target a net figure whilst only focusing on migration
inflows. Even more strange is that whilst the manifesto states a desire to
ensure that the flow of skilled migrants continues, in the next paragraph it
announces a plan to ”double the Immigration
Skills Charge levied on companies employing migrant workers.”
This highlights the lack of joined-up thinking on immigration and highlights why businesses are increasingly expressing disquiet about the costs of immigration curbs. Moreover, in its Fiscal Sustainability Report,
released in January, the OBR assumed long-term net immigration of 185,000 per
year. Its low immigration scenario, which assumed a net figure of 105,000 per
year, reckons that in 30 years’ time the UK’s net debt to GDP ratio will be 11%
higher than in the already unfavourable baseline, rising to 20% and 30% higher on
a 40 and 50 year view respectively. Obviously, we should take long-term forecasts
with a huge pinch of salt but they should remind us that immigration curbs come
at a substantial economic cost.
Quite clearly, Theresa May is banking on the idea that she
can win a large enough majority to silence the hardliners within her party who
believe in the primacy of free markets and Brexit-at-any-price. She will have
to, because there is enough material there to enrage the old-school Thatcherites
who have a habit of making life hard for vulnerable prime ministers. As an
economic plan, aside from the immigration pledge (and maybe the energy caps),
it has its good points. But by pushing out yet again the point at which the UK
balances its fiscal budget, I do question whether the last seven years of
austerity have been worth the cost.
