Who will Win the Battle over Economic Orthodoxy?
Iwan Doherty considers the competing economic approaches of the Conservative and Labour parties in the 2019 General Election.
Politics in the first half of this decade was marked by a conversation dominated by deficit reduction, leading to the Conservative Party talking for a long time about the hard choices politicians have to make regarding the country’s finances.
However, this is no longer the case now that both major parties are discarding their focus on deficit reduction and focusing instead on policies that will promote growth. This means that next month’s General Election could, I believe, be a major turning point in British economics. Should the Labour Party win and introduce its manifesto, we could be living in an age with a new economic orthodoxy.
Labour has discarded mainstream market-based wisdom in favour of an investment-led growth strategy – an approach which has been successful in countries such as Portugal. Labour proposes to tackle the problems its sees with our economy through investment in public services and infrastructure.
The Conservative Party remains the party of markets and Boris Johnson has pledged to use a more liberal approach towards the economy. Labour’s re-nationalisation plans and a return to strong government, while decreasing inequality and poverty, are the antithesis of Tory economics. Neither can be called fiscally conservative, I believe, but they have very different ideas about how a government should spend its money.
The difference between the two schools of thought is best shown by the response to Labour’s new commitment to deliver free full-fibre broadband for all UK homes, while nationalising parts of BT. The policy is expected to cost an initial £20 billion with a £230 million running cost and the Conservatives were quick to label it ruinously expensive. However, Labour’s policy does make a lot of economic sense.
In fact, it is what business leaders have been crying out for to re-energise entrepreneurship in left-behind communities. The Institute for Public Policy Research, Institute of Directors, the Foundation for Information Society Policy, and even the Conservative Government have all called for new broadband to boost the nation’s economy.
But, unlike the Tories, Labour does not simply want to wait for the market to provide it. It is estimated that the policy would boost productivity by £59 billion by 2025 and save families £2.2 billion spent on mobile data due to slow wifi. The investment would bring about economic benefits in the long term.
It is these long-term benefits which have been forgotten since Thatcherism, Labour believes. Investment in fixed capital has fallen 10% since the 1970s and the situation is worse in public sector investment. In 2018, the UK ranked 24th out of 32 OECD ( Organisation for Economic Co‑operation and Development) countries, with public investment at 2.6% of GDP – 0.6% lower than the OECD average.
Corporations cannot provide all the investment in an economy and Labour’s push for state investment could push increase productivity and equality and therefore growth. Research from the New Economics Foundation has shown that the UK economy is up to £100 billion smaller due to the economic policies of austerity and Labour hopes to reverse this to unleash the economy’s potential.
The calculation Labour needs to make is how much to tax and spend. Its taxes could drive the same drop in spending that austerity managed if levelled against the wrong people and there are serious concerns that taxes may not yield as much income as the party expects. Labour plans to tax corporations that are often very mobile which can spur tax avoidance or capital flight. However, if it is clever with where it levies taxes, it could provide a new blueprint for prosperity.
The Conservative Party have taken a very different approach. Boris Johnson has yet to reveal his major economic policies, but it is likely to be mainstream market-led economics. The major economic pledge he made during the Conservative Party leadership campaign was a new round of tax cuts costing a total of £20 billion, marking the Tories’ turn away from deficit reduction to a more populist message.
The tax cuts are, at present, uncosted and £9 billion of them will only benefit the top 10% of earners. The other £11 billion, spent by raising the threshold for National Insurance, would benefit the majority of earners. It is a costly way of injecting money into the economy and too much goes to the rich, but it shows the methods the Conservatives will deploy to boost growth in the economy.
While Labour’s plans have clear analysis behind them and are more likely to have long-term structural benefits, Johnson’s plans have been dismissed as pure electioneering. Paul Johnson, the director of the Institute for Financial Studies, has said that the policies were “little more than a random throwing of sweeties at the children”. But, since their announcement, they have faded from public view without any reasonable explanation of whether this money will be raised via new taxes or new borrowing.
Labour will be able to push the UK’s lack of economic growth front and centre, especially with Brexit looming. If it wins the General Election, Labour will have won the economic debate and, I believe, this will fundamentally change the nature of the British economy and may drag the Conservatives further towards the centre. Corbyn’s socialist movement could be about to become economic orthodoxy.