The Free-Market Tories Britain Needed

To Americans who only dabble with British politics, the recent TV debate between Labour leader Keir Starmer and Conservative Prime Minister Rishi Sunak might have sounded familiar. That's because the Tory leader's electoral pitch on economics could have easily come from a Reaganite Republican. "Vote Labour, and your family's taxes will go up substantially," was Sunak's paraphrased message. "Not just that, but your fuel bills will jump as Labour ploughs on with unnecessarily rapid plans to decarbonize the economy." Here was Sunak sounding like Grover Norquist, warning that Britain's progressive left would increase people's taxes and ramp up costly environmental regulations.

To which a Brit would say: "the brass neck of it!" Yes, Labour will surely do more tax and spend and regulation than the Conservatives. But Sunak's own government has been no stranger to growing the state's footprint and raising taxes aggressively already. Indeed, under Sunak's chancellorship turned premiership, the UK's total tax burden has risen a whopping 3.4 percent of GDP since 2019 to its highest level since the aftermath of World War II. The Prime Minister has frozen income tax thresholds through a high inflation environment to deliver the largest stealth tax increase in British history. All this to finance a state that has already grown to over 40 percent of GDP - its biggest since the start of the Thatcher revolution - with the Tories pushing for new regulators for digital markets and football, their own net zero target, a further state takeover of early years childcare, and plans to (in time) totally ban smoking.

The truth is that, on economics, this is not the free-market Conservative party that Margaret Thatcher led. It is perfectly comfortable, on average, with a bigger state, with unreformed age-related entitlements, and with more extensive regulation. And that's a shame, because although Britain certainly doesn't need a 1980s tribute act, a healthy dose of economic freedom in several major areas could have significantly boosted its economic prospects. Britain's perennial problem since the financial crisis has been slow growth. Its economy is now 37 percent below where it might have been had real output continued on its pre-2008 trend. Though that is surely an unattainable yardstick, a prolonged stagnation since 2010 certainly justified a full-scale supply-side rethink to remove barriers to production and innovation. The Conservatives failed to deliver one.

Instead, over the Conservatives' 14 years in office, the public finances and fiscal policy have dominated most economic policy debates. David Cameron's coalition government inherited a deficit at over 10 percent of GDP and from 2010 through to 2016 made reducing it their primary goal, via restraining spending and raising several taxes, including VAT. Although borrowing did come down substantially, the party's free-market wing and outsiders like me said repeatedly that "deficit reduction is not enough." Britain was suffering from a sharp downturn in its sustainable growth rate. It needed a bold pro-growth regulatory and tax agenda to supplement the fiscal squeeze, focused on land-use planning, energy, and the structure of the tax system.

Although there were one or two policy areas that improved, that growth agenda never materialized. What did arise was the Brexit wars, which - in retrospect - sucked further attention away from growth and delivered an additional supply-shock to trade and investment flows. Boris Johnson then emerged as Prime Minister to a country increasingly weary of tight budgets and weak growth, promising a brave new world of higher public service and infrastructure spending.

Before he really got going, the pandemic hit, leading to vast fiscal relief and ballooning borrowing again. Sunak as Boris's Chancellor and then later leadership candidate sought to re-centre politics around fiscal repair once more, led by major tax rises. Liz Truss won the leadership campaign against Sunak because she opposed raising taxes further, but in attempting to both start cutting them while also lavishing the public with energy subsidies as Prime Minister, her projected borrowing spooked markets and led to her downfall. Sunak came in, seemingly vindicated, and delivered on raising tax again, pretty substantially.

After the highest inflation since 1982 and 14 years of tardy growth, the result is the Conservatives are now deeply unpopular. They've delivered high spending, high taxes, and high debt, yet public services are still also performing poorly and much of the public think they've been starved of funds. Hence the Conservatives' current manifesto, pitching the Tories as the tax-cutting party, seems a sick joke. It's really a core vote strategy to avoid a full electoral wipeout. For overall the Conservatives have largely acquiesced to accepting a bigger government as the population ages and have delivered big net tax rises to finance rising spending for the elderly. On slow growth - the ultimate cause of the underlying malaise - they just seem exhausted and out of ideas.

Could things have been much different? As a libertarian, I'm under few illusions that it would have been politically infeasible for the Conservatives to have delivered much deeper public spending cuts in the 2010s through completely rethinking the state, or that reforming the funding for Britain's National Health Service or cuts to the state pension - the two biggest drivers of growing spending - was ever on the cards. Yet without the privilege of a reserve currency, Britain ultimately does have to cut spending if it wants lower taxes sustainably. It cannot be fiscally reckless, as the Truss episode showed.

But if the Tories believed those political constraints binding, it was even more imperative to remove those regulatory barriers to growth, mobility, and opportunity. This supply-side reform agenda would have been the tax cuts that didn't cost any money, and could have incorporated an overhaul of Britain's antiquated land-use planning laws and urban growth boundaries, streamlined environmental regulations for transport and energy infrastructure, and deregulation of Britain's increasingly formalized childcare sector.

In terms of priorities, Britain has a huge problem getting anything built. A discretionary land-use planning system and green belt urban growth boundaries effectively ban new housing in productive areas where people want to live. But it's not just housing. The country has not built a new nuclear power station in 29 years, nor a new reservoir in more than 30. According to the campaign group Britain Remade, it can "cost up to 10 times more in Britain than it does in other European countries" to build new railways, trams, and roads, and takes thirteen years to build an offshore wind farm. Quite simply, Britain's regulatory state is hostile to economic development, rationing land and making development extremely expensive.

Tackling this was the obvious area to push on. Careful analysis by LSE economists John Van Reenen and Xuyi Yang found that the UK saw a sharper deterioration in productivity growth than France or Germany since 2007 because of weaker capital investment, which the financial crisis, Brexit and political uncertainty have exacerbated. Clearly, Britain can't go back and undo the financial crisis, nor the uncertainty generated by the Brexit referendum, but altering its planning laws to remove planners' discretion and blocking opportunities for NIMBYs was the major path to mitigating this weak investment.

The numbers show the pent up demand for housing and business premises in the UK is overwhelming, if only policymakers would facilitate it. Agricultural land in the South East of England can increase in value one hundred times when planning permission for housing is granted. In recent weeks, Britain has seen new efforts to block the building of hyperscale data centres for digital industries. The country's pharmaceuticals, chemicals, and life sciences sectors were expanding strongly prior to the financial crash, but are increasingly hampered by land rationing too. The estate agent Savills estimated back in 2020 that London had just 90,000 sq ft and Manchester 360,000 sq ft of suitable lab space available, compared with Boston's 14.6 million sq ft and New York's 1.36 million sq ft.

Raising economic growth prospects through policy is difficult. But Britain is now so far behind the United States and the technological frontier, that removing self-imposed barriers to growth could have delivered a meaningful boost to the country's GDP level. This agenda would have been politically grueling - entailing taking on what Truss described as the "anti-growth coalition" of environmentalists, NIMBYs and technocrats. Yet the juice would have been worth the squeeze. Higher incomes, cheaper housing, and cheaper energy would have significantly boosted living standards while easing the fiscal constraints. This was the free-market agenda Britain needed.