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It’s been an extraordinary couple of weeks.  Not just because of the Lions’ thumping victory over the Wallabies and Andy Murray's triumph at Wimbledon, though these are cause for celebration enough.  No: this is the fortnight that revealed a sea change in the whole nature of British politics.

The post-war years fall, broadly, into three phases.  The first was one of managed decline, in which postwar Britain retreated from empire, built the welfare state and sought full employment, at the cost of periodic balance of payments crises, falling competitiveness, and escalating union power and inflationary pressures. That phase was decisively ended by a great reckoning, in which Mrs Thatcher’s government forced the country to acknowledge and address the sources of its decline.

The settlement that resulted was and remains politically controversial, but its main domestic features – controls on union power, a focus on defeating inflation, privatization, opening up the financial sector to competition, centralization of power – were not reversed, or indeed seriously challenged, under Labour.  Quite the opposite: the whole point of New Labour was that it accepted the terms of trade laid down by Mrs Thatcher.

But the economic inheritance Labour received from the Major government was so strong, and global monetary conditions so favourable, that it massively overreached itself.  Financial supervision was weak; banking debt was allowed to rocket upwards, increasing by 250 per cent in defiance of a 40-year consensus; private debts ramped up; public spending soared. Before the financial crash of 2008, at the height of the boom, when the economy under Gordon Brown should have been running a large surplus, it in fact had a budget deficit of 3% per cent  When crisis hit, it struck a weakened and badly over-extended economy, whose golden inheritance had been squandered under Labour.

Initially. the Coalition had anticipated that the resultant economic mess could be largely conquered within five years.  This reflected more hope than experience; as a Policy Exchange report written before the 2010 election pointed out, similar recessions induced by financial shocks have historically taken six to ten years to work through. When I reminded the audience at a Spectator debate of this a few months ago, many were plainly aghast.  But as the past fortnight has shown, for the UK today – very open, very unbalanced, very indebted – a full recovery will in fact take longer still. The spending review was an acknowledgement of this, pushing fiscal stringency into the next parliament, and forcing Labour to accept the current spending envelope and recognise economic reality for the first time.

Then last week the Cabinet Secretary gave a speech to civil servants in which he explained that it might take two decades to renew the economy: “This is not a two-year project or a five-year project. This
is a 10-year project, a 20-year generational battle to beef up the economy in ways that we have not seen for many, many decades.” In other words, we now face a second great reckoning, a second fundamental shift in the nature of post-war politics.  What can we say about it?  Should we welcome or fear it?

The first thing to note is that this change is public, well understood
and imposed by the facts of economic life.  Mrs Thatcher’s task was
hampered by the fact that her diagnosis – that British decline was not
inevitable and could be reversed – was, initially at least, not widely shared even within her own party.  By contrast, anyone outside politics who doubts the need for austerity today can simply be referred to the Red Book.
So lower state spending is not merely here to stay; people understand
why it is.  This means they can and will change their habits and
expectations accordingly.

The result, as recent changes in British
social attitudes make clear, is that the country is becoming more
small-c conservative.
This means that for the first time since 1945, and arguably some time
before then, the possibility of big increases in state spending no
longer hangs over British politics.  Gone, for a while at least, is
the pushmi-pullyu by which governments were able to cop out of
economic policy by pumping up demand, only to have to retrench
ingloriously thereafter.
Instead we have, for the first time in six decades, a long-term hard
budget constraint:  a limit on the extent to which governments can woo
voters by what to 19th Century eyes would be treating on the grandest
scale, offering money to favoured constituencies and special interests
in return for their political support.  In the immortal words of Liam
Byrne, there is no money left.

Meanwhile the cost of public services will continue to rise, forcing
ever more difficult—and increasingly cross-party—decisions about who
is to benefit from public spending, and by how much.  These changes
have been brilliantly discussed in a recent article by Janan Ganesh.
As I set out in Compassionate Economics, the key underlying driver is
what has become known as Baumol’s Cost Disease.
Think of it this way:  even if a midwife could see 50 young mothers a
day in pursuit of ever-greater efficiency, would you (or they, or she)
want her to do so?

But if all this is true, if for a decade no party will be able to
promise a lot more state spending, then what is the point of the
Labour party?  Fabianism is dead; while the idea of the party as the
mouthpiece of the working man has been grievously damaged by its
dependence on the unions, and especially on Unite, a union which, as
the Falkirk scandal has reminded us, is dedicated not to the interests
of its members, but to its own political power. This second great reckoning means that Labour needs to return to its
pre-Fabian past, as the tiny band of Blue Labour conservatives around
Ed Miliband, such as Jon Cruddas. Maurice Glasman and Stewart Wood,
are pushing for it to do.  But that will be a tortuous and long-term
process.

If Fabianism is dead, however, the financial debacle after 2007-8 has
also left extreme liberalism in crisis.  So what remains?
The opportunity exists for Conservatives to fill what one might term a
Burke-shaped hole in domestic politics – and in particular to address
the three tasks of reforming public services; enabling Britain's vast
array of independent institutions to cope with rapid social change,
without undue dependence on the taxpayer; and rekindling the British
industrial spirit, the spirit of wealth creation and entrepreneurial
energy.

These are what we need to win the Prime Minister’s “global race”, and
it is hugely to his credit that his focus is so clearly long-term, and
so ambitious for the country.
To a people used to public spending, the next decade or more will not
be easy.  But there are real reasons for hope, even optimism.  The
past fortnight also saw the death of the great Ken Minogue, whom I
first met at a conference on social choice in Warsaw in 1990, and
whose work later I published in a book on Michael Oakeshott.
Ken used to say “Life is a better teacher of virtue than
politicians”. So it may prove in this case, once again.

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