The Big Squeeze
Pain now or pain later; our disappearing workforce; second-rate public services; there's life in levelling-up; NHS productivity crisis; R&D tax credits; muddling through; and leaving the ECHR.
We think conservatives need to talk more and get better at sharing ideas. So we are starting this newsletter so we can share with you the best newspaper columns, policy reports and books that will stimulate thinking and promote new ways of doing things.
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Best wishes, Nick and Gavin
Towering columns
Danny Finkelstein says the Chancellor is right to not to postpone the pain:
There is … a strong political impulse to support borrowing. The right want tax cuts, the left spending. Those who resist borrowing are sometimes attacked as ideological, as people who relish cutting spending or wish to raise taxes. The alternative attack is that we (for I am one of them) are dense, because we don’t appreciate that the state isn’t a household, so it can borrow what it likes (it can’t).
Jeremy Hunt’s autumn statement will come under every kind of attack. The spending reductions will be attacked as too severe, the tax rises as too great and the borrowing as too little. As if we haven’t just embarked on a massive experiment of doing the opposite and it wasn’t a great failure.
James Forsyth says Britain’s disappearing workforce is killing growth:
The recession may last a year, perhaps two — but it will be different. Unemployment, as formally defined, won’t exceed 5 per cent even during the worst of the downturn — in the 1980s it went into double digits. Seldom have there been more vacancies in the economy. It’s an odd form of recession where almost anyone who wants a job can find one, but that’s the situation we’re in. Almost every month, the number of those not looking for work grows: it jumped by 169,000 in the three months to August. That is more than the population of Oxford.
This has consequences. The OBR thinks the cost of health and disability benefits will rise by £7.5 billion — quite a sum. A shrinking labour market is also one of the reasons why the Bank of England thinks potential growth is now a mere 0.75 per cent even in 2024-25. The Tories desperately need to get back to moving people from welfare into work — not just to reduce the welfare bill but also to boost the economy. Jeremy Hunt is not ignoring this problem. He announced a review to investigate the mass exodus from the economy, which will report in the new year.
The Economist’s Bagehot says Britain has European tax rates with American-quality services:
The promise of a cradle-to-grave system has been replaced by a cradle-and-grave one, with the middle largely forgotten. Working-age benefits are terrible. Unemployment benefit is set slightly above destitution levels, at barely £80 ($91) per week, says the Resolution Foundation, a think-tank. That equates to 14% of average earnings or roughly half the level it was in the 1970s. In the Netherlands, this payment starts at 75% of someone’s last payslip.
In theory, the night-watchman state does little but is, at least, cheap. A welfare state may cost a lot but it provides a lot. The current British state falls between these two stools. Britain still has a comparatively low tax take compared with other rich European countries. But some people within the system are hammered, suffering Scandinavian-level marginal tax rates for South Carolinian services. A recent graduate earning £30,000 faces an almost Scandi marginal tax rate of just over 41% once national insurance and student-loan deductions (which behave like a tax) are included.
Iain Martin asks why nobody seems interested in public service reform anymore:
Not so long ago, it was different. Difficult public service reform was a big theme in politics for more than three decades. Beyond election-time sloganeering, this became a cross-party endeavour to make scarce resources work better and go further. Margaret Thatcher increased spending on the NHS and initiated reforms in health and education. John Major’s citizen’s charter was under-appreciated at the time. Tony Blair and the New Labour modernisers were obsessed with making public services more responsive to consumer needs, with self-governing foundation hospitals and academy schools.
Right into the Cameron era, with huge expansion of academies, this stuff was the core aim of ambitious ministers. Now we are in a funk and there is too little interest in fixing anything. In area after area — planning reform so we can build more, giving town halls more power, lifting the block on onshore wind power — almost everything is just too difficult. The country has apparently become unreformable. On healthcare, it is not so much that we cannot agree which reforms might be acceptable. We don’t get that far and we’re not particularly interested in finding out.
Jon Yeomans insists there is growth potential in levelling-up:
Since Theresa May’s industrial strategy was ripped up and replaced by Boris Johnson’s “levelling up” crusade, some sectors do not seem to know whether they are coming or going.
The government unveiled its levelling-up white paper only in February, setting the lofty goal of “giving everyone the opportunity to flourish”. But times have changed, not least with the impact of war in Ukraine, and so has the prime minister. Rishi Sunak has been more ambivalent about the future of “levelling up”, although the project’s architect, Michael Gove, is now re-installed at the Department for Levelling Up, Housing & Communities.
There is still great potential to be unlocked from the idea of levelling up. The most recent economic outlook from professional services giant PwC reckoned the UK could lift its GDP by £72 billion by boosting low-productivity sectors in the regions to the national average.
Douglas Murray says we need to leave the ECHR to stop illegal immigration:
Watching the same mistakes play out here at home is tragic, and wholly avoidable. The previous Home Secretary, Priti Patel, nobly attempted to solve the dilemma by copying what our allies in Australia did a decade ago when they faced similar illegal flotillas. The Australians put the illegal migrants onto neutral territory where their claims could be very slowly processed. Among much else this proved a terrific deterrent. Today Australia does not have an illegal migration problem.
But when Patel announced her plan to offshore law-breakers to Rwanda, all hell broke loose among the liberal commentariat and grandstanding MPs of all parties. “I don’t want to live in a country which treats people like this”, they wailed. The Rwanda plan consisted of flying people who had broken our laws to a hotel in Rwanda with a swimming pool. If that is regarded as the height of barbarism these days then I would love to know what the lap of luxury might be.
The Patel plan was foiled because the rest of the government had failed to do what needed to be done on a legal level to stop so-called “human rights campaigners” effectively dictating UK immigration policy. All that is needed is withdrawal from the ECHR, the replacement of it with an almost precise replica of the rights afforded in it (so as not to overly spook the centrists) with minute alterations to the wording on illegal migration.
Wonky thinking
This morning, the Institute for Fiscal Studies has presented its reaction to the Chancellor’s Autumn Statement:
That is a grim place to be – high borrowing, high debt, high tax, and yet a lot of public services feeling under strain. How can all that be the case? Surely with lots of tax and lots of borrowing it should be boom time for public spending. Part of the answer of course lies in the fact that we just got a whole lot poorer. That is the central fact that underlies most of what we heard.
Part of the answer lies in the extraordinary scale of expected spending on debt interest. It looks like doubling relative to forecasts and hitting £100 billion a year by the end of the forecast period. That’s more than spending on any public service bar the NHS. As interest rates rise, the consequences of some of the borrowing that has happened over the last decade, and in particular of QE, as well as of more borrowing over the next few years, are coming home to roost. Borrowing is not for free.
That increase in debt interest, plus higher spending on health and on benefits, entirely explains the growth in the size of the state over the period from 2019 to the later years of this decade. With defence spending cuts off the table, an ageing population, and pressures everywhere else you look, my guess is that we are in a new era of higher taxation, higher spending (as a fraction of national income) and a bigger state. I would be most surprised if the tax burden gets back down to its long term pre Covid average at any time in the coming decades. Higher taxes look to be here to stay.
Earlier in the week, the IFS reported that, while NHS spending in England this year is 12 per cent higher in real terms than in 2019-20, and there are 13 per cent more doctors (including 10 per cent more consultants) than in 2019, 11 per cent more nurses and 10 per cent more clinical staff, the NHS is treating fewer people from the waiting list:
If the NHS continues to struggle to increase treatment volumes, it is unlikely that waiting lists will start to fall any time soon. At the moment, the NHS has only been saved from even higher waiting lists because fewer ‘missing’ patients are joining the waiting list, either because they have continued not to seek care or because they have not been referred for hospital treatment even after seeking it. This risks its own set of problems if people do not receive the care they need. It is possible that the number of patients joining the waiting list will surge in the coming months, but we think it is unlikely, given that no such surge has occurred over the past year.
Instead, what will happen to waiting lists likely rests on how many patients the NHS can treat. If the NHS is able to increase its treatment volumes substantially above 2019 levels, then waiting lists may well start falling in 2023. We will produce an updated set of projections in the Spring. In the meantime, we think that this remains a reasonable central projection. But treatment volumes have remained stubbornly below pre-pandemic levels for all of 2022 so far, and the target of increasing volumes by 30% by 2024–25 looks increasingly ambitious and potentially beyond reach. If the NHS continues to struggle to increase its overall level of activity, waiting lists could feasibly continue on a rising path well beyond next year.
And Onward proposed ways to reform R&D tax credits to encourage innovation:
The UK’s growth problem is, to a significant degree, a business investment problem. High productivity countries like the US and South Korea generate business R&D investment of around 2.6% and 3.8% of GDP respectively. The UK’s business investment in R&D is under 2%, and even when Government and non-profit spending is included only rises to around 2.4%. So incentivising investment in innovation is an urgent challenge for a Government that wants to increase the longterm growth trend in a tight fiscal context. Left to their own devices, businesses will underinvest in R&D. That’s because innovation generates large spillover benefits for workers, firms, and local areas that aren’t captured by the companies actually undertaking R&D activity. The social returns outweigh the private returns – justifying government intervention to boost levels of R&D spending by businesses.
Book of the week
This week’s book is Two Hundred Years of Muddling Through: The surprising story of Britain’s economy from boom to bust and back again, by Duncan Weldon:
The 2008-09 recession and the recovery from it were the first real stress test of the liberalised labour market created in the Thatcher and Major years. Both the 1980s and 1990s recessions came while reform was in progress rather than complete. Firing was made easier but so too was hiring. Taking on a worker was less of a commitment for a firm now it had the power to quickly reverse its decision. In the early 1980s a 5 per cent fall in GDP pushed up unemployment by 7 seven percentage points, while in the 1990s a 2.5 per cent drop in output saw the unemployment rate rise by 4 per cent. By contrast a 6 per cent fall in 2008/09 was accompanied by a rise in worklessness of three percentage points. The relationship between lost output and lost jobs appeared more favourable and more firms were quick to begin hiring again once the downturn ended. That said, there were legitimate concerns about the nature of some of the new roles - more were part-time or had limited hours, and pay and conditions were often worse than the pre-recession norm.
The macroeconomic trade-off meant that the silver lining of rapid jobs growth came with quite the cloud. The counterpoint to the jobs miracle was a productivity disaster. Rapid growth in the number of hours worked coupled with a slow expansion in overall economic output added up to a historically weak productivity performance. Whereas output per hour worked had grown at a steady rate of around 2.2 per cent per year for the three decades up until 2008, in the decade afterwards it collapsed to a growth rate of more like 0.5 per cent. That might not sound like much, 2.2 per cent 0.5 per cent are after all both small numbers. But over the course of a decade it is the difference between output per hour worked expanding by 24 per cent and output per hour worked growing by 5 per cent. In fifty or sixty years’ time, when the conclusive economic histories of the early twenty-first century are written, the productivity collapse after the financial crisis will be a major theme.
Quick links
Michael Gove made the case for levelling-up and reducing regional inequality.
Ministers reversed a takeover of a UK semiconductor plant by a Chinese-owned firm.
Most of our economic growth in the last decade has not come from increases in GDP per capita - but from population growth caused by immigration.
Around a third of child sexual abuse is perpetrated by other children, Miriam Cates told the Commons in a speech.
14% of teenage children have been a victim of violence in the last 12 months.
Ex-No10 adviser Sam Richards launched Britain Remade, a campaign to get Britain building.