This piece opens a brief ConservativeHome series that seeks to identify five major policy decisions that confront the new Government as the political year begins.
These are not necessarily the most urgent facing the country. For example, we will not be asking: how should Brexit be managed? (Since we plan to do so elsewhere.) Nor have we included questions that the Government is unlikely to ask itself. (Such as: what should the net migration target be replaced with?)
None the less, all are bound up with key policy areas, and some touch on a point we raised last week. Namely, to what extent, if at all, an efforts to create ” a country that works for all” (i.e: all people) be squared with “a relentless focus on governing in the interests of ordinary, working people” (i.e: some people).
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“Monetary policy in the form of super-low interest rates and quantitative easing has helped those on the property ladder at the expense of those who can’t afford to own their own home,” Theresa May said in her Conservative leadership launch speech for the aborted membership stage…”for a Government that has overseen a lot of public service reforms in the last six years, it is striking that, by comparison, there has not been nearly as much deep economic reform.”
These words imply a major structural change to the economy from quantitative easing, rock-bottom interest rates, low saving, high debt and consumption to a more orthodox financial policy that features tighter monetary policy, higher interest rates, more saving, lower debt and investment.
Any sensible person believes that this shift is desirable. The question that remains is one of timing. There is little disagreement post-Brexit about the desirability of tax cuts – see the IOD’s call for a reduction in the top rate of tax; the Taxpayers’ Alliance’s advocacy of VAT cuts and tax reform; David Davis’s support on this site for a further corporation tax reduction (made days before his appointment as Brexit Secretary) and George Osborne’s backing, in his last days as Chancellor for corporation tax to be slashed to below 15 per cent.
But there is disagreement about how soon interest rates should be allowed to rise, and over the different but related question of whether the Government should aim for a surplus target. May said in her first leadership launch speech for the Parliamentary stage of the contest that “we should no longer seek to reach a budget surplus by the end of the Parliament”. Osborne swiftly followed her lead. Sajid Javid argued at the time that Britain should borrow tens of billions of pounds – taking advantage of low borrowing rates – to create “a ‘Growing Britain’ fund worth up to £100 billion.”
Will May – and, no less importantly, Philip Hammond – take these ideas up? Will the new Chancellor push the surplus target back, or even abandon it altogether? Or will he instead heed Ryan Bourne’s warning that, with a deficit of about £60 billion expected this year, “fiscal sanity” must be maintained – which implies not pushing such a target back very far? Alex Morton has argued on this site that “the Government should both raise rates and use the Milton Friedman concept of ‘helicopter money’ to stimulate consumer inflation”.
May and Hammond must choose between aiming for a surplus target as soon as possible, which would risk tipping the economy into post-Brexit recession, and putting it off or letting it go altogether – a hazardous course for a country that has a triple debt, deficit and balance of payments problem. Conservative Home believes that achieving a recession-free Brexit must be the present priority, which implies living with financial repression for a while longer.
The Chancellor is unlikely to offer the coming Party Conference a clear steer. We will probably have to wait until the Autumn Statement before he gives one.