Good morning from New Economy Brief.
There is an economic debate brewing on the right of British politics. After 14 years of government, taking in Brexit, Covid, Truss, the cost of living crisis, and a variety of economic policies and messages, senior figures in the Conservative Party and elsewhere on the right of British politics are wrestling with fundamental questions around what kind of economy they want to create, and how they plan to get there. Whatever the Conservatives’ fate in this year’s general election, this conversation is only going to get louder.
This week, we explore the latest contribution, a new paper (“A Conservative Economy”) published by centre-right think tank Onward which attempts to put forward a conservative economics for “a fairer and more productive nation”, and makes recommendations that may come to form the next consensus in conservative economics.
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The diagnosis
Onward’s paper, which includes a foreword from Levelling Up Secretary Michael Gove and is co-authored by ex-Theresa May adviser Nick Timothy, diagnoses three major challenges facing the British economy: growth, globalisation and fairness. These “fundamental characteristics” are holding the economy back, the report argues.
Exports and production. The paper argues that “weak productive capacity and net exports” are at the heart of Britain’s economic problems. A lack of skills, infrastructure, and investment mean we simply “do not make or do enough goods and services the world wants and needs to buy”.
Globalisation and financialisation. Because we don’t make and export enough, the report argues, we rely too much on overseas investment in our housing stock, equities and debt. It says that while “capitalism is the greatest force the world has ever seen for driving up living standards… Financialisation and rent-seeking have enriched overseas investors and provided returns to financial capital, but often at the expense of the real economy.” The result is a “separation of risk and reward” and a vicious circle of underinvestment and economic stagnation.
Sovereignty and security. Economic security has become a popular phrase right across the political spectrum over recent years. Just look at Rachel Reeves’ ‘Securonomics’. This centre-right paper is no exception, though its framing leans more towards “sovereignty” than “security”. It argues that the UK spends too much on consuming imported goods and not enough on investing in our own economy's productive capacity. This failure to save and invest makes us especially vulnerable to 'stretched supply chains'. It also identifies several problems that mean the investment that does take place does less good than it should. These include regulations that discourage pension funds from investing in the shares of UK companies, and a "fashion for share buybacks" that syphons companies' profits away from being productively invested and into the pockets of their owners.
Workers. The report claims that British workers get an “increasingly unfair” deal, where work is no longer a guarantee of a decent standard of living. It highlights the lack of home ownership among younger people and the fact that people are having fewer children than they would like as negative outcomes of this. Rather than stagnant wages and the erosion of workers’ rights, the report focuses here on migration, arguing that the inflow of people from abroad is a key reason for our low-investment and low-wage economy.
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Recommendations
Improving productivity, growth and reindustrialisation. The paper focuses on regulation and targeted investment to boost growth. It calls for corporate governance reform to increase the domestic savings rate and boost private sector investment, as well as tighter controls on overseas ownership of critical infrastructure and utilities. It says the new investment should focus on higher education, with more emphasis on technical training, and on renewable energy technology and infrastructure to boost energy security.
Improving economic security and trade. Industrial policy is key, and should actively support industries with high export potential, the report argues. It also calls for new agencies to direct R&D investment in “high growth-potential industries” as well as to develop regional economies. On supply chains, it calls for “stronger powers to intervene to prevent loss of industrial capacity or speculative acquisition of UK land when the national interest requires it”.
Creating a better deal for workers and families. Like the report’s diagnoses, its recommendations highlight the need to curb immigration. It also emphasises the role of the family, including a suggestion to reflect the cost of having children in the tax system (such as transferable personal allowances). The report also calls for tax policy to deter overseas ownership and rentierism as well as worker representation in corporate governance.
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Consensus and conflict?
One striking thing about the paper is how much it overlaps with the current centre-left economic policy offering. We should keep capitalism, but regulate it. We should watch out for rentierism and prioritise investment. We should do something about living standards. Of course, many on the left would question a lot of the analysis and solutions – particularly the emphasis on immigration and the family unit, where the Onward paper is more strikingly conservative. But on the role of the state and public investment, this paper may point to a shift in the consensus. Certainly the diagnosis and prospectus have more in common with current Starmerism than with the more strident buccaneering, free-trading, deregulatory vision that Truss and her Pop-Con movement are propagating.
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Contested legacy
How the Right’s economic argument will be settled very much depends on how the general election and its aftermath play out. Having been in power for 14 years with a string of Prime Ministers, all of very different economic persuasions, it’s difficult for Conservatives to come up with something entirely new. Every argument will inevitably be seen as a critique of much of the economic legacy the Conservatives will leave behind if they do lose the election. The options fall broadly into three camps: carry on as before and hope for the best, pivot back to radical Trussonomics or, perhaps, consider a more active role for the state in tackling the challenges of growth, globalisation and fairness, as this paper suggests.
Doom and gloom? Despite slightly stronger growth figures last week, the overall economic picture is still gloomy according to the National Institute of Economic and Social Research. Their Economic Outlook report argues that the UK will now fail to meet its (arbitrary) fiscal rules – perhaps indicating that we are unlikely to see another fiscal event this side of an election – and that the wider context is of a low trend growth rate and rising inactivity, driven by low public investment.
The next crisis? The UK’s next financial crisis is likely to come from the nonbank financial intermediation industry, according to a new longread in Politico. The piece argues that this sector is very lightly regulated and that its levels of leverage and exposure to shocks are potentially worrying, creating the risk of knock-on effects that could spiral into a wider financial crisis. The Bank of England is working with other global regulators to look for international solutions, but the piece argues that these may come too late to avert the risks facing the UK economy.
Energy democracy. “The energy transition is an enormous opportunity to not only decarbonise but democratise the power sector,” according to Common Wealth. The think tank’s latest briefing sets out how Labour’s proposed £3.3bn Local Power Plan could underpin an expansion of community energy ownership, based on the idea of public-common partnerships between communities, local authorities, and the new GB Energy.
To tax or borrow? Additional spending to green the economy should largely be paid for with higher borrowing rather than raising taxes, argues economist Simon Wren-Lewis in a new blog. He unpacks the idea of ‘tax smoothing’ – keeping taxes stable over time rather than letting them fluctuate with spending priorities) and argues that the time-limited nature of green investment means that temporarily allowing the deficit to increase makes more sense than hiking taxes to fund it.
Society’s Venture Capitalist “The best way of government demonstrating optimism about the future is by investing in it, putting their money where their mouth is,” according to a wide-ranging lecture by Andy Haldane, chief executive of the RSA and former Bank of England chief economist. He argues that the UK is being held back by fiscal rules which are “self-defeating on [their] own terms” by limiting much-needed investment.
Look North. As IPPR North celebrates its 20th anniversary, a special edition of Progressive Review looks at the current state of the debate on devolution. It includes essays on the merits of metro mayors, whether the deals-based approach to devolution is working, and the role of devolved administrations in tackling regional health inequalities.
Trade for the climate? The UK and US could pioneer a “new generation” of climate-focused trade deals based around “tethering market access to emissions intensity”, according to former White House chief economic advisor Jennifer Harris.
