Covid-19 is the most extraordinary peacetime crisis faced by any British government. It has, therefore, called for an extraordinary response, and the chancellor has unveiled levels of state intervention unparalleled in peacetime. A further £750m in support for charities announced on Wednesday shows how this has become a giant whack-a-mole style approach to governmental action.
Interestingly, parallels are often drawn with wartime, but this is wrong – what is happening now is far more fundamental. In a wartime economy, there is a shift in resources from one part of the economy (usually consumer and services) to another (production). What’s happening now is that large parts of the economy are in acute thrombosis and experiencing a stroke – and the subsequent recovery can be painful and slow. In short, economically, this is far worse than wartime.
As a party, we like to pat ourselves on the back that the government finances are in a much better state than when we took office. And yes, we certainly didn’t tread the path that Labour would have – unsupportable and desperately inefficient public spending disguised as investment, often culminating in a higher payroll in the unionised sector of the economy.
But to pretend that starting out today at a total debt nearly double what it was at the outset of the financial crisis is a good place to be, however cheaply it can be funded (due to a collapse in other investment asset returns), is kidding ourselves. We start this extraordinary period of economic dislocation and state interference from a fiscal position that’s far too strung out. We owe too much money today, never mind in a few months’ or years’ time.
Broad sections of the economy may remain on state-aided life support for a long time to come, receipts from corporation tax and VAT will be through the floor, and our national debt will be well north of 100 per cent of GDP in quick order. The sort of position we were chiding southern Europe for being in a decade ago.
Such conditions will make the strategy we were elected on – holding our debt-to-GDP ratio broadly level (at what I believe is still far too high a level) while investing in long-term infrastructure projects – impossible. The government’s programme will need to be shaped once again by an overriding objective of bringing our finances under control.
But how to do this? The bare figures could suggest another round of austerity, perhaps deeper than that launched in 2010. But after a decade of gradualist real terms decreases in spending (outside the NHS), there is far less low-hanging fruit than before.
What’s more, the very gradualist approach of the coalition government makes any narrative around restraint now much more difficult. The public have been told that what they have faced has been austerity – and some have genuinely encountered it – so even if they have actually got wealthier and found work, which millions have, they still feel that the past decade has been a struggle, and post-lockdown who really wants to go to the country and say that we’re back at square one – or in fact worse?
Ministers will also need to be very careful: with so much of the economy being propped up by the Treasury, cuts in the wrong places could actually forestall recovery, increasing demand for public spending in other areas and depressing tax receipts.
With limited room for manoeuvre, our interventions will need to be carefully judged. This means focusing tax cuts on SMEs and start-ups rather than big business – governmental business support is already too focused on the big players, which is in part a function of its ridiculous complexity.
We need a Thatcherite approach to start-ups and SMEs, supporting those who decide to use this moment to strike out and create. We need a laser focus on policies and regulations which will boost the sectors most likely to outperform the economy as a whole and generate the best return, such as the creative industries and tech.
Sacred cows, such as the legally enshrined overseas aid target, should also be looked at again. Not abandoned, but reformed. For example, by pegging the scale of our contribution to the size of the deficit, ensuring that our commitment is always in line with our ability to pay.
A clear-eyed audit of the structure of government, and a streamlining of the number of departments, should also be on the table. This was in play last year but was abandoned. However, there is now little choice – bravery, modernity and looking eastwards to successful economies must be our modus operandi. The only viable way to meet the deficit challenge is to boost growth by retrenching the dead hand of the state and allowing entrepreneurialism to flourish. This is the moment to make Thatcher’s brightest, most optimistic argument to the British people once again.
But the most important step of all will be making sure that we do a thorough job of re-liberalising the economy. The government must not give in to the temptation to try to keep some emergency powers on the books.
As Conservatives, we know that a tax regime that encourages investment, innovation and productivity is the surest foundations of a strong economy. Supply-side measures will be even more important because the fiscal leeway for the alternative – stimulus spending – simply won’t exist.
Crucially, this attitude must extend not only to businesses themselves but to their workers. The Treasury must not let its well-established desire to raise taxes on the self-employed undermine the foundations of the “jobs miracle” that Britain has witnessed over the past few years.
Beyond the domestic economy, we will also need to get on the front foot when it comes to striking trade deals, opening ourselves up to new markets and supporting British exporters. I’m proud to represent Solihull, one of the few places in Britain that enjoys a trade surplus in goods with the EU, and I know that a clear connection with the success of local businesses is key to winning public support for free trade.
At the same time, we must not be afraid to re-examine other parts of the pre-crisis consensus on globalisation. We can no longer cling to the optimistic assumption that free trade will inevitably draw countries towards liberal values. Where our supply chains depend on countries such as China, at least when it comes to strategic necessities such as medical equipment, the government should give serious consideration to incentivising the re-shoring of these types of manufacturing. The rules we currently apply to defence procurement could provide the template.
Finally, there has been a lot of nonsensical talk, including from pundits who should know better, that the response to the coronavirus crisis represents an abandonment of our Conservative values of limited government and liberal economics. This is nonsense: part of the point of restraining government in good times is so that it is well prepared to respond to crises when they arrive.
But it will be the end of the crisis that really tests whether or not we have the courage of our free-market convictions, and I look forward to working with 1828 to ensure that we rise to that challenge.
