If we wish to get a handle on how the Conservatives have curated the UK economy in the last 14 years, we really need to go back 44 years, to the first administration of Margaret Thatcher.
Austerity and Brexit
In 1980 we had the false tilt at monetarism and the eager embrace of neo-liberal economics. The name of the game became reducing the size of the state, lower taxes and an enlarged role for the private sector. Much of Conservative policy since – especially Osborne’s austerity – has been inspired by this.
Austerity in the coalition years 2010–15 gave rise to disgruntlement on the part of a large section of the electorate which arguably led to the 2016 Brexit vote. Leaving the EU has had seriously adverse economic consequences. By 2024 the UK has ended up with an economy 5% smaller than would have been the case had we not ‘brexited’. The annual amount of GDP that has been foregone is £100bn – that represents lost economic activity that would have given rise to £40bn in tax receipts.
UK trade deficit
For decades the UK has had a balance of payments problem on its international trading accounts involving exports and imports. It used to be the case that a chunky surplus on invisible trade (services such as insurance) was able to offset the deficit in goods. But in the last 20 years this has rarely been the case. In the four years 2016–2019 the average annual deficit for visible or ‘goods’ trade positions was £141bn.
In the four most recent years this has risen to £173.7bn. In seven years out of the last eight the UK had an overall deficit on its current account. This has been financed by the UK selling off assets abroad, or foreign investors being willing to hold UK debt. As former governor of the Bank of England, Mark Carney, remarked, the UK is “dependent on the kindness of strangers”.
This, combined with reduced tax receipts thanks to austerity, has left the public finances in poor shape – the national debt is equivalent to 100% of GDP. That the government increased its borrowing to see the nation through the global financial crisis (2007–09) and then the Covid pandemic is both understandable and appropriate.
In obsessing over the short term, Conservative chancellors have failed to differentiate between ‘current spending’ and ‘investment spending’. Their fiscal rules have restricted public investment which could have increased growth via raised productivity, giving headroom to pay down the debt.
A rise in inequality
As chancellors both Sunak and Hunt have overseen tax and benefit changes that have driven up inequality. An Observer editorial in March pointed out that Tory policy caused households in the bottom 10th to lose “more than 10% of their income as a result of tax and benefit changes; in stark contrast, most affluent households in the top half of the distribution gained financially”.
Since 2010 the country has seen the fastest rise in child poverty for almost 30 years. At the end of last year, Unicef figures showed that the child poverty rate rose fastest in the UK between 2012 and 2021 out of 39 OECD and EU countries. The UK was at the bottom of the table. Consequently, children in the UK are 7cm shorter than the European average. This is thought to be due to the lack of quality food driven by poverty.
In his 2024 spring budget, chancellor Hunt announced further tax cuts that benefit middle and high earners most, taking the amount forecast to be spent on tax cuts over the next five years to £65bn. Given the parlous state of public services and the public realm (the NHS and RAAC repairs in schools most notably), engaging in give-away tax reductions is absurd.
In conclusion, Conservative economic policy in the last 14 years has been abysmal. The UK economy is in a dreadful state and it is the Tories’ fault.
Might any incoming Labour government do any better?
There is an ambivalence in the economic policy statements coming from Labour. In her ‘Mais’ lecture earlier this year Rachel Reeves flagged up some good, ambitious ideas including a more thoughtful industrial policy and a scheme for an enlarged pension system that could promote investments in UK industry. Will Hutton, in writing up his assessment of her lecture was full of praise.
At other times Labour put themselves on the backfoot by allowing the right wing media to circumscribe them. Starmer has set Labour’s face against rejoining the Single Market or customs union. Equally, Labour has rejected outright plans for a ‘wealth tax’, whilst stating that the party has no plans to lift the two-child cap on child benefit.
Two years back Labour’s flagship economic policy had been its Green Investment Plan. This plan would have invested in renewables and other activities to reduce carbon emissions and bring the UK economy into the 21st century. The cost would have been £28bn per year. Looking across the Atlantic, Biden’s Inflation Reduction Act is working to the same purpose and has been hugely successful. Raised US government spending has attracted in a flow of private investment (just as Keynes predicted!) and the US is enjoying economic growth.
Starmer and Reeves have allowed themselves to be corralled by restrictive Conservative fiscal rules – and the Daily Mail. They have all but abandoned their flagship policy, stating that it might reappear in any Labour second term.
Kate Aronoff, the respected American commentator, in her recent Guardian article, did not pull her punches. The fate of Labour’s Green Investment Plan is in doubt, “thanks to the political cowardice of people such as the shadow chancellor, Rachel Reeves”. Aronoff argues that Labour must re-engage with the Green Investment Plan and seek an early implementation “…otherwise the difference between Tory and Labour rule will keep getting harder and harder to spot”.
With any Labour government, what will prevail? Will Hutton’s optimism or Kate Aronoff’s pessimism? There are ways forward for healing the UK economy. If Labour can prove bold enough to engage progressive options we can (slowly) rescue ourselves from the wreck the Tories will be leaving behind.
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