Leader: Resolving the British dilemma

For too long politicians have promised European-style public services and US-style taxation.

Illustration by Edmon de Haro

The United Kingdom is confronting a grim but familiar problem: the country is poorer than it thought. Ever since the 2008 financial crisis, Britain has recorded anaemic economic growth. But it now faces something worse: the longest recession for a century.

So dismal is the Bank of England’s forecast that it is hard to recall that until recently the Conservative government vowed to “turbo-charge” growth. Liz Truss was hardly wrong to highlight the UK’s parlous performance and sluggish productivity. Since the 2007-08 crash, the economy has expanded at an average annual rate of just 0.9 per cent (compared with 2.7 per cent before the crisis). Of the G7 countries only Italy has fared worse. But Ms Truss’s libertarian remedy of unfunded tax cuts and “creative destruction” proved all too destructive.

Her experiment was one of two recent attempts to break with the zombie capitalism – ultra-low interest rates and stagnant growth – that has prevailed since 2008. The other, from the socialist left, was Labour’s former shadow chancellor John McDonnell’s promise of £400bn of public investment.

The exhaustion of ideological alternatives means the UK is returning to an earlier era. Rishi Sunak and Jeremy Hunt have revived the fiscal austerity favoured by George Osborne from 2010 to 2016. The former chancellor recently paid a visit to Downing Street and his ex-chief of staff Rupert Harrison, now a Blackrock portfolio manager, has been appointed to Mr Hunt’s Economic Advisory Council.

But after a decade of austerity, the scope for spending cuts is far more limited than during the early Osborne years. As the Institute for Government has warned, “there is no meaningful ‘fat to trim’ from existing budgets”. Advance reports suggest Mr Hunt, who will deliver a fiscal statement on 17 November, will opt for a 50:50 split between spending cuts and tax rises, rather than Mr Osborne’s preferred ratio of 80:20.

Yet such debates mask a more fundamental choice that the UK faces. Its entire social model is under strain. The NHS is often described as the “envy of the world” but Britons, as the Financial Times revealed on 4 November, now suffer the worst access to healthcare in Europe. Over the past year, one in six adults has had a pressing need for medical examination or treatment and been unable to receive it. Britain also has the third highest childcare costs in Europe, a severe shortage of affordable housing, a dysfunctional public transport system and a deepening social care crisis.

This is in part due to the excessive austerity imposed over the past decade. But it also reflects a deeper contradiction: for too long politicians have promised European-style public services and US levels of taxation.

Ms Truss sought to resolve this contradiction in favour of low taxation and “supply-side reforms”. But the public, as well as the markets, were against her. Even before the disastrous mini-Budget in September, the British Social Attitudes survey showed that a mere 6 per cent of voters favoured a combination of tax cuts and spending cuts, compared to 52 per cent who supported higher taxes and spending.

Some Conservatives sought to grapple with such realities by advocating a more interventionist state in the wake of the Brexit vote. But under Mr Sunak, the Tories have no intention of resetting the UK’s social model: mere survival will be the priority.

Yet Labour is similarly avoiding the reckoning that Britain needs. It continues to promote the delusion that selective tax rises on the wealthy – such as abolishing non-dom tax status – will fund radically transformed public services. In reality, far more profound choices need to be made about the level and the scope of general taxation and what form a new economic settlement might take.

Higher economic growth would help soften the British dilemma by increasing state revenue. But it will not ultimately resolve it. If the country is not to be condemned to haphazard decline, it must answer the question that successive governments have ducked: what kind of country does it want to be?