Since June 23rd, I’ve got increasingly worried about the British economy. It is the effect on it not of Brexit, but of the current Conservative leadership battle that scares me. The Spectator rightly said recently that the candidates are largely united around certain themes – and it’s precisely this that terrifies me. For policy-wise, these themes are focusing the contest on a feelgood spending spree, with limited debate about its economic consequences, and big economic issues more broadly.
Last week, Theresa May echoed George Osborne and said that the aim of a surplus by 2020 (12 years after the recession began) was too challenging and had to go. Once she broke the dam, promised money flowed forth in ever-greater quantities. Michael Gove has money for social housing, for science and research, for the NHS. Angela Leadsom has money for broadband, rail and roads. Even Liam Fox argued for more on defence and ‘incentives’ for homes on brownfield land, though he did at least argue for less on aid and scrapping HS2.
Meanwhile, so keen was Stephen Crabb that a press release from his camp promised £100 billion more in capital spending, and said that such spending would not count toward the deficit – which is wrong. Even worse, while everyone focuses on who said what to who last week, this has not been picked up by a single national journalist or newspaper.
If you can’t stand up to pressure now, what chance successful trade deals?
This is not just worrying because economic policy is in danger of sliding into a repeat of Japan’s (more of that later). It is because if our new Prime Minister cannot get through a fortnight without promising money left, right and centre, how will he or she they get Brexit to work? Anyone can pledge to throw money at a problem to ‘solve it’ – though of course rarely does money fix broken systems, and eventually the drain that such spending causes means that the economy stops creating the money in the first place.
Moreover, standing up to spending is exactly the kind of courage that will be required on global trade deals – which we will need more than ever. Other countries are not going to do us trade deals as a favour. In return for opening their economies to us, they will demand politically painful changes in return. For example, consider a trade deal with China. In return for tariff-free access to their growing market, they might want lower tariffs for steel and cars. Or a deal with Mercosur, the Latin American trade bloc, who want lower agricultural tariffs and access for meat and milk in return for lower tariffs for UK exporters. Simply saying “we want trade deals” is a good soundbite, but a joke of a strategy.
The greatest social injustices are being ignored
Moreover, while the candidates talk frantically of social justice, Mark Carney prepares for more debt and more quantitative easing. QE works by injecting newly created money directly into the asset markets through bond purchases, lowering interest rates and driving up the value of assets. It thus massively benefits the rich who own assets outright, and hurts the middle classes (by devaluing saving rates) and low income households (who find it yet harder to own a home), as well as both groups by driving the pound down and so prices up for consumers.
The Bank of England itself agrees that the wealthiest five per cent were the overwhelming gainers from QE. So more QE means the rich would gain more, and everyone else would lose out from higher asset and consumer prices and lower saving rates. Once, the Conservative Party used to understand that sound monetary policy and money were the very bedrock of a stable economic policy. Now, despite the financial crash, it is not even mentioned. Stagnant incomes, poor returns on saving, and ever more expensive housing are are the biggest concern for most people outside of the SW1 bubble, regardless of gender, sexuality, class, race or religion.
Most of the 52 per cent who backed Brexit were not voting against the establishment to reform prisoner education, fix mental health issues, or because of worries about the development of babies’ brains. We do need such policies, and I don’t want to say otherwise – but they cannot be the only focus, or even the main one, of the new Prime Minister. People were crying out that the fundamental agreement between people and rulers – that vast majority of people’s lives get steadily better – looks increasingly under threat. Real wages are still down by more than five per cent since 2008, and there is already talk of the next recession. If the current model of large deficits (and, yes, £74 billion last year was a large deficit), low interest rates, consumer debt and high asset prices is not working for most people, why are people suggesting we push this economic model further rather than ringing the alarm bells?
I fear we’re turning Japanese – without the safety net
I fear the UK is turning Japanese. In the aftermath of the late 80s and early 90s recession, the Japanese slashed interest rates to zero, printed money (inventing quantitative easing), and embarked upon large scale government spending financed by large deficits. Failing companies and economic structures were propped up to ‘stimulate’ the economy. Since 1994 GDP Japanese growth has averaged well under one per cent. Even this limited growth was possibly only due to national debt spiralling to over 230 per cent of GDP.
Moreover, Japan started with a safety net in policy terms consisting of a large current account surplus, high savings rate, and social and political consensus – and has steadily eroded all three. We have none of these advantages – most notably, social and political stability.
Japan’s slide from roaring economy to stagnation was not just an economic error but a political one – the Japanese political system simply could not cope with difficult decisions in a low growth environment. Instead, spending kept being increased and monetary stimulus thrown at dysfunctional banks and related sectors.
In one sense, looking at Labour, any one of our three contenders could, in theory, beat Jeremy Corbyn in an election. But the new Prime Minister will face a more difficult situation than any Prime Minister since at least 1979. Simply arguing for motherhood and apple pie will not cut it. We need answers. How bad do you think the deficit could get? How far will you expose UK industries to overseas ones in trade deals? Will you protect or hammer savers? How will you ensure that developers actually build? Do you think the current model of monetary policy is working? Most of all how will you fix the broken model of government and governance that is simply not capable of meeting 21st century challenges?
If we cannot get answers at this stage, we must at least from the final two candidates – because our country’s future is at stake. Should the UK in a year be mired in recession and unable to extricate itself from the EU, the consequences will be severe, potentially unthinkable. And we need to stop pretending otherwise.