The Conservatives' new economic argument

Good morning from New Economy Brief.

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There wasn’t a lot of economic policy announced at Conservative Party Conference this week (which is a story in itself), but the outline of the Conservative’s economic argument at the next election is becoming clearer. This week we look back at the conference and map the contours of the ‘new approach’ which will underpin the party’s electoral strategy in 2024.

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Sunak, Agent of Change? Rishi Sunak’s speech to the Conservative Party Conference floor focused on the idea that politics and the way decisions are made need to change, and that Keir Starmer and Labour embody the last 30 years of status quo politics. How credible that is after 13 years of Conservative government will be questioned, but Sunak’s argument was that Britain needs a new politics of bold, pragmatic and radical decisions that prioritise the country’s long-term future, and that he is the man to deliver it. That’s the pitch, but how do the new policies announced at Conference map onto this rhetoric?

Network North replaces the Northern leg of HS2. The showpiece announcement of Sunak speech was that £36bn of rail infrastructure investment that was due to go into connecting Birmingham and Manchester as phases 2a and 2b of HS2 has now been freed up and spread across the whole country, where it will improve roads, motorways, buses, trams and rail networks. However, IPPR North argues that “scrapping the Manchester leg is a betrayal of the North”, as their analysis shows the North would need £86bn more transport investment just to match what has been invested in London over the last decade. So even if all the £36bn goes into improving transport infrastructure in the North, it's still £50bn short.
Watch the money. And while £36bn of capital investment can now be used to improve other areas of the country, it may take years of planning before funds are released for ‘new transport projects’. This underspend is behind the idea that there are ‘scorecard savings’ from cancelling HS2 - i.e. that it will free up some room in the OBR forecast period. This means the Conservatives are likely to argue they have more ‘fiscal space’ to make manifesto commitments in the Autumn Budget and ahead of the next election, with speculation that this may be used for tax cuts. (It should be noted that many would question the economic logic of using one-off savings on capital spending projects to fund permanent tax cuts.)

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The Conservatives’ wider macroeconomic and electoral strategy. Chancellor Jeremy Hunt explained a key part of the party’s economic strategy in his conference speech, where he asserted that any new borrowing would be inflationary, and that cutting inflation is the best way the government can help families with the cost of living. This positioned Labour’s spending plans (particularly their £28bn Green Prosperity Plan) as potentially inflationary and therefore against the interests of cash-strapped working people, sharpening the Conservative dividing line on spending ahead of the Autumn Statement.

“Sound money under the Conservatives or run out of money with Labour.” Other than this argument about borrowing, and an allusion to the Prime Minister’s U-turn on net zero targets saving families money (we covered this here), the cost of living was strikingly absent from the main conference speeches. The Chancellor did announce that the national living wage would rise to at least £11 per hour, but this was largely expected given the level of inflation. Otherwise, Hunt and Sunak doggedly maintained that any additional support or spending would only push inflation further.
The leadership held the line on tax cuts. This anti-inflationary argument also allowed both to resist calls for tax cuts - instead they branded reducing inflation as itself a ‘tax cut’ for working people. While there was plenty of tax-cutting fervour around the fringes of the conference, not least from Liz Truss herself, there was no sign of the rumoured pre-election abolition of inheritance tax, or anything else from the menu of tax cuts being championed by various Conservative MPs.

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What does it all mean? The Conservatives are betting that positioning their party as a new ‘agent of change’ will bring them electoral success (though it looks like the public aren’t buying it). As the FT’s Steven Bush explains: “That many of his priorities offend other Conservatives, and cause high-profile rows, only helps to establish the perception that he is a changed Conservative leader and this is a reformed Tory party.” However, he concludes, “for a political message to work it has to align with the policy reality”, and here there is a growing disconnect between the rhetoric of long-termism, and an approach which has mainly involved pushing back climate action and cancelling a large infrastructure project.

Is it landing with voters?. Sam Hall suggests that Sunak’s previous speech on his government’s ‘new approach’ to net zero was a “deliberate attempt to confect climate dividing lines that don’t really exist”. In a separate article, he concludes: “YouGov polling suggested [his speech on climate delay] had damaged Rishi Sunak’s ratings among Liberal Democrat voters, which will not help the party in its blue wall seats. Another poll showed a dramatic fall in the party’s already low vote share among younger voters, a major concern for conservatism’s longer-term prospects.” A new report from Onward concurs that weakening climate commitments will damage the Conservatives at the ballot box, especially among younger voters
The public supports stronger social security. Although the Conservatives’ are positioning themselves as a reformed party, they are returning to the Cameron/Osborne era’s ‘strivers and shirkers’ narrative on social security, exemplified by the Prime Minister questioning whether people deemed too sick to work were genuinely ill. Yet the public’s views on welfare have changed since the 2010s. The latest British Social Attitudes survey - the ‘gold standard survey of public opinion’ in Sam Freedman’s words - shows “the perception that benefits recipients are undeserving has reduced substantially since 2010.” 19% agree that most people who get social security don’t really deserve any help, down from a high of 40% in 2005. Responses in 2019-22 are the lowest since the question was first asked in 1987, which the authors attribute in part to the increased prevalence and visibility of poverty in recent years. Where Universal Credit pays £35 a week less than the cost of essentials, more punitive sanctions are unlikely to go down as the Conservatives might like. Conversely, an essentials guarantee (as JRF’s Katie Schmuecker called for) might.
The economic case against sanctions. Hunt suggested he is looking into reforming the work capability assessment. But economic evidence for benefit sanctions is weak and most studies suggest they don't help people into work - they force people into hunger and drive them to food banks. IPPR’s Harry Quilter-Pinner explains why ramping up sanctions isn’t the answer to our employment challenges. (For an outline of the economic case against benefit sanctions, read our earlier New Economy Brief.)

Weekly Updates

Fiscal policy

A new spending category? Creating a new category of preventative spending could avoid short-term thinking in the Treasury, argues Demos. Currently, government spending is split into long-term capital spending and day-to-day ‘resource’ spending. The think tank argues that adding a third category would make it easier for the government to allocate resources to things like children’s social care, where evidence shows that early intervention is a cheaper and better policy, nipping problems in the bud that will otherwise get far more painful and expensive.

Tax

The gender wealth gap. Like income, wealth is unequally distributed between men and women, according to the Women’s Budget Group. The new report argues that higher taxation of wealth is a “feminist issue because it can help reduce the gender wealth gap and, at the same time, raise public revenue to strengthen our social infrastructure”.

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Raise taxes to raise incomes? New calculations by the Institute for Public Policy Research (IPPR) show that countries with higher taxes than the UK achieved better living standards over the past decade. Contrary to the argument that cutting tax helps lower the cost of living, higher taxes are associated with a higher average post-tax disposable income in countries like France, Germany and Denmark.

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Inheritance tax polling. Most people oppose any reduction in the £1 million inheritance tax threshold, new polling commissioned by the Trades Union Congress (TUC) suggests. Only 20% support a reduced threshold, while the remaining 60% want it to either remain where it is or increase, according to the survey conducted by Opinium.

Welfare

A long-term approach to Universal Credit. Universal Credit is “simply inadequate to meet day to day living costs” and requires a “mission-led approach”, argues a new report by the IPPR. It recommends setting up a new independent body for social security which would “review progress and hold government to account on agreed commitments”.

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The reality of social security. New qualitative research by the New Economics Foundation explores the “dynamics between everyday life and social security” for women living in poverty in Liverpool and Manchester. It finds that the income safety net is “threadbare”, that “punitive policies limit women’s autonomy” and that “conditionality and an inability to find childcare that fits with good work lock families in poverty.”