Real inflection points are rare in British politics, but we are living through one right now, and the consequences for the UK economy of the choice set to be made by the members of the Conservative Party will be profound.
What is at stake in the leadership of the party and the country are vastly different takes on both the problems we face - inflation, low-growth, public finances, energy-costs, the impact of the Ukraine war – and the means of dealing with them. This is not just a debate about who, but how. There may be something inherently absurd about a few thousand people who organise fetes and raffles, club committee-members, along with election-time leafleteers in Tory associations across the land choosing the next prime minister, but, more than usually this time, they also hold the country’s future in their hands.
The UK is certainly not the low-tax high-wage economy Boris Johnson once aspired to create – currently the tax burden is 33.1% of GDP, predicted to rise to 36.3% by 2026. That’s the biggest proportion since the 1940s. The real value of average wages is falling at the fastest rate in two decades. Amid dire warnings from the OECD that UK growth is set to be the worst in the G20 apart from Russia, the prospect of an expansion in poverty and destitution is very real.
So, the answers being put forward by candidates who aspire to lead the country are crucial – assuming they’re in a position to deliver on them.
Broadly, it’s an argument between eye-catching (and vote-catching) tax cuts, and fiscal prudence, but the argument is being led by politics rather than economics. With an election likely in 2024, the candidates must promise what will make the country at least feel things are improving pretty quickly, while acknowledging much of what will make that happen is outside their control - the effects of an apparent Chinese economic slowdown and the Ukraine war.
There have been widespread accusations that the Covid crisis ushered in a growth in the size of the state that took the Conservative government far away from Conservative principles. At the same time, the furlough feel-good factor has faded for those who kept their jobs, but now cannot afford to both heat and eat.
Can the country afford to drastically increase borrowing further to protect public services in what looks set to be a challenging winter? Is it best to give-in to public sector pay recommendations to avoid damaging strikes? Would tax rises of the kind already signalled – especially corporation tax – hamper recovery? Would tax cuts spur growth thereby enabling further cuts – Nigel Lawson’s famous “spurious kind of virtuous circle”?
The arguments will be made, but not to a panel of eminent economists – not even to the UK electorate as a whole, but to a small, self-selected group of Tory activists. Many of them are likely to be at least as motivated by issues of crime, immigration and NHS waiting lists as the apparently faltering economy.
But what might also influence them too is that rare summer visitor – good news, or, at least, mixed news. The latest ONS retail sales figures (in the three months up to May) fell but they are still above pre-Covid levels. Clothing sales actually rose by 2.2%. The low consumer confidence figures don’t necessarily pre-figure a recession. UK household savings built up during the pandemic are healthier than in almost all other OECD countries. There is the capacity to spend if confidence improves.
And the macro picture could be worse – debt to GDP ratio is below 100%, which puts the UK in a better position than most of its competitors post-Covid. The Bank of England, while publicly gloomy, is still sticking to its plans to raise interest rates, which suggests a measure of assurance.
What all this amounts to, then, is room for manoeuvre for whoever gets the key to Number 10.
The enemy of confidence is uncertainty, but whatever comes out of this peculiar electoral process, there will be a new person running the show by the autumn. It won’t be someone who can wave around the mandate of 14 million voters as Johnson was wont to do. It will be someone under huge pressure to deliver in short order. And they will still have a parliamentary majority of now just slightly fewer than 80, so there’s no excuse not to get their programme through.
