Inflation is at a 40-year-high. Food bills are soaring. Pensioners are so fearful of rising energy costs that they are delaying turning on their central heating. There are “eye-watering” cuts in public spending and tax increases to come. But never mind. All will be fine now that the grownups are back in charge.
Jeremy Hunt was at his emollient best in his Commons debut this week. The government has learned the hard way that you dispense with orthodoxy at your peril. Abacus economics – derided by Liz Truss during her leadership bid – is vital if the UK is to take advantage of its fundamental strengths.
For now, the new chancellor admitted, it was impossible to avoid decisions of eye-watering difficulty, but in the long term the future looked bright. Hunt then launched into a familiar riff, listing all the things Britain had going for it, provided it swallowed its latest dose of austerity medicine: three of the world’s top 10 universities; a global financial sector; “incredible strength” in the creative industries, science, engineering, manufacturing and innovation.
To which there are several things to say. The first is that the record for doing things the orthodox way has been pretty dreadful in the 15 years since the global financial crisis. Real wages have barely grown, investment has been weak, the public finances have never been licked back into shape and Britain’s trade deficit has hit new records. Truss was wrong about many things, but her basic critique was spot on: the UK’s economic model isn’t working.
And while Hunt is right to point out the things Britain does well, he is really only looking at the asset side of the balance sheet. The debit side makes much grimmer reading. Britain is dependent on foreign investors to finance its massive twin budget and trade deficits; the NHS is in a state of permanent crisis; a lack of critical energy infrastructure means the lights may well go out this winter; faith in the police to investigate crimes such as burglary is at rock bottom; the transport system is ramshackle.
The economy relies on hot money flowing through the City of London to finance the trade deficit and to keep the housing market booming. It works for a wealthy elite, living in London and the south-east of England, but not for the population as a whole. Inequality is rife and there has been a rapid expansion of the informal labour market, where work is sporadic and badly paid. All of which are features of a struggling developing or emerging market economy, rather than one in the first rank of nations.
What’s more, it’s hard to see how the new age of austerity is going to make matters better. There will be less money for upgrading infrastructure and more cuts for already cash-starved police forces, courts and prisons. Treasury-enforced pay restraint in the public sector will accelerate the loss of staff to the private sector, while the highest tax take in more than 70 years will discourage private investment. It will be harder for people to get around the country but easier for them to slide into poverty. There is a good case for the state protecting its citizens from an external inflationary shock, but that support will now last for only six months. Raising taxes and cutting spending during a downturn will deepen and prolong the recession.
Truss’s botched experiment represents a setback to new thinking of any kind, and that’s a depressing prospect. The perpetuation of abacus economics may keep the financial markets quiet for a while, but what rule by technocrats like Hunt really offers is a managed decline. The only sustainable way to get healthy public finances is to improve the performance of the economy.
This is not, as some fondly imagine, merely a question of reversing Brexit. Since the 2016 referendum the UK’s growth has been nothing to write home about, but it has been faster than that of Italy and Germany, and only slightly lower than that of France.
One way forward would be to rethink the UK as an emerging market economy, with the aim of emulating the success of – say – a country like Taiwan, which makes 65% of the world’s semiconductors and 90% of its advanced chips.
There are a number of stages to this process. Stage one involves owning up to the fact that the UK is not a world-beating economy, and hasn’t been for some time. Stage two involves braining up: a sustained commitment to improving education and skills. Stage three involves building up developing sectors that will provide the goods and services to boost exports, reduce the trade deficit and make the economy less reliant on the financial sector.
Assuming they survive Hunt’s axe, Truss’s investment zones – areas that will benefit from tax incentives and planning deregulation – are one possible way of building up. This was the model that led to the development of Canary Wharf, home to a large chunk of the financial sector, on reclaimed land in London’s Docklands.
An alternative would involve a national development plan designed to nurture the industries and the services of the future. The tiger economies of east Asia used the full range of measures available to them, including tax, procurement, public ownership, state aid, infant industry support and capital controls.
Governments here have been wary of activist economic strategies, in large part due to the belief that the UK’s problems are minor and transitory. It is becoming increasingly clear that they aren’t.
Larry Elliott is the Guardian’s economics editor
