Tackling unemployment might finally show us what sort of Conservative the Prime Minister really is

23 Feb

As the Prime Minister set out his roadmap out of lockdown in the House of Commons yesterday, there was for the first time a real sense that the nation might actually be on the path back to the distant, half-remembered state of ‘normal life’.

But today’s unemployment figures are a sobering reminder of the serious challenges the Government will face even when, deo volente, we have finally brought Covid-19 under control. According to the BBC:

“The Office for National Statistics said 1.74 million people were unemployed in the October to December period, up 454,000 from the same quarter in 2019. The figures show 726,000 fewer people are currently in payrolled employment than before the start of the pandemic. Almost three-fifths of this fall, 425,000, has come from those aged under-25.”

The figure for young people should be especially concerning. Voters in that age group are already deeply reluctant to vote Conservative, and have made huge sacrifices to protect older citizens during the pandemic. If ministers allow a joyous unlocking for some voters to be simply a transition to further economic hardship for others, they risk alienating an entire generation.

Fortunately, the ONS also reports that there are ‘tentative signs’ that the employment market is stabilising. But decisive action will be needed. We have previously explored what it might be, and looked at the measures already covered in the Plan for Jobs. Centre-right think-tanks such as the Centre for Policy Studies have also published their own proposals in reports such as After the Virus and A Northern Big Bang.

The Budget will therefore be illuminating because it might start to give us a firmer idea of what ‘Johnsonist’ economic policy might look like. Freed from the exigencies of the pandemic, the Prime Minister will have to start making more obviously ideological decisions than he has to date. Will he rely on traditional Tory measures, as the CPS would doubtless prefer? Or will he seek inspiration from John Maynard Keynes, as Jacob Rees-Mogg advises in our latest Moggcast?

A man with Johnson’s sense of history will know that his legacy may depend on getting it right. Memories of the Conservatives’ hard-nosed attitude towards unemployment in the 1980s (however justified) helped to lock the Party out of many of the ‘Red Wall’ seats he captured in 2019. Voters will be swift to punish, and slow to forgive, a perceived relapse to being the ‘same old Tories’.

Jethro Elsden: Failing to extend the stamp duty holiday would be a big mistake

23 Feb

Jethro Elsden is a Data Analyst and Researcher at the Centre for Policy Studies.

Reports that the Chancellor is going to try and use the budget to claw in a bit more revenue to try and pay for the cost of the pandemic are worrying. Even if the costs of the pandemic are eye watering, we are only just on the cusp of emerging from the pandemic, now is the time to go for growth not wallop the economy with tax rises.

Even more worrying is the fact that among measures being discussed is allowing the stamp duty holiday to end and the system to revert back to how it operated prior to the introduction of the holiday in July last year.

As the new paper we at the CPS have published lays out, failing to extend the stamp duty holiday would be a serious mistake. It would deliver a sledgehammer blow not only to the housing market but also the construction industry and act as a major drag on growth, just as we are trying to kick on and recover from the economic carnage the pandemic has caused.

After the pandemic hit and we entered the first lockdown back in March last year housing transactions plummeted, falling by over 100,000 in Q2 compared to the same period the year before. To try and reverse this collapse and help to stabilise the construction industry, Rishi Sunak introduced a Stamp Duty holiday in early July, raising the threshold from £125,000 up to £500,000, thus slashing the burden of the tax.

The impact of the measure was immediate and the housing market has not only recovered but positively boomed. Provisional data for the last quarter of 2020 shows transaction numbers at 316,300. To put that figure in context that’s up almost 50,000 on the same period the year before and is the highest number for quarterly transactions since the end of 2007, before the housing market slumped in the wake of the global financial crisis.

Because of this the construction industry has been stabilised. High transaction numbers have ensured that housebuilders have had the confidence to continue building new houses and haven’t cut back supply. In fact, despite the dire economic situation the number of new builds completed was actually 0.5 per cent higher in Q3 2020 than the same period the year before.

However, with the holiday set to stop at the end of March the Government risks delivering a sledgehammer blow to the housing market and the construction industry which they will take many years to recover from, just as occurred after the global financial crisis. This will weigh on the economy just as we try to recover from the pandemic. Transactions will fall significantly, and this will cause the number of new builds to move in the same direction. And while government revenues might rise slightly the economic damage that ending the holiday will do will be very significant.

To avoid this the Government must at the very least extend the holiday, by making the £500,000 threshold permanent on primary homes. Alternatively, the government could be more ambitious and opt for broader reforms which the CPS have previously proposed , either by keeping the threshold at £500,000 and lowering the rates above this back to their 2005 level for primary homes, or simply abolishing the tax altogether.

The economic distortions that stamp duty inflicts are widely acknowledged and it has a strong claim to be Britain’s worst tax, it is certainly far more damaging than either Income tax or VAT. Probably the worst impact it has is that by discouraging transactions it leads to a poor allocation of housing, and in the UK where housing supply is far from elastic this causes a large loss in welfare.

For example, by disincentivising downsizing it causes elderly people to remain in housing unsuitable for their needs, while preventing younger people having the opportunity to buy larger houses that the same elderly would otherwise be selling. Lower downsizing by the elderly means there’s less demand for housing specifically designed for their needs, which may explain why the UK has on an international comparative basis so little specialist retirement housing. And by making upsizing more difficult it can force young couples to delay starting a family. These are not trivial issues: the costs are real and significant.

The reforms we propose will help to minimise (or in the case of abolition, end) the damage and distortion that stamp duty causes. Furthermore, by increasing transaction numbers they will substantially increase the number of new builds each year. Because there is a well-established relationship of about one new build for every ten transactions that occur, we estimate that the increase in transactions that our reforms would cause would lead to an extra 20,000 new builds every year (or in the case of abolition, 23,000 extra new builds). This will not only be of significant economic benefit but will also go someway to helping the UK meet its target of 300,000 homes per year.

Because stamp duty is such a destructive tax the costs of these reforms, whether that’s just extending the holiday so that the £500,000 threshold is permanent or full-on abolition, are significantly lower than a superficial static analysis would suggest.

Of course, it is impossible to know the counterfactual where the holiday had never been introduced, but it seems likely given how weak the economy has been that transaction numbers and stamp duty revenue would have remained significantly below their 2019 levels. But let’s assume that in the second half of last year stamp duty revenue managed to climb back to 90 per cent of its 2019 level, that would mean the holiday cost about £1bn in lost stamp duty revenue. However, if the housing market had bounced back less strongly and revenues had only recovered to say 75 per cent, then the cost is only £300 million.

But on top of this the wider economic benefits of the holiday will have filtered through and helped support numerous other businesses, such as construction suppliers and estate agents, in staying afloat and not cutting back employment. Meaning less government spending on unemployment benefits and tax revenues such as VAT will have been boosted. This means that the true cost will be lower, perhaps substantially so.

Once you account for the increase in transactions, the extra tax money that will be raised from the complimentary spending which tends to occur when someone moves house, and the increase in new builds (and the extra revenue this will generate through section 106 etc), the cost of keeping the threshold at £500,000 and lowering rates is only about £500 million, while abolition on primary homes would cost only about £2bn.

No doubt in the coming months the Government will be looking at different policies to help boost growth and help the country recover from the pandemic. While it might involve a small cost in lost revenue, extending the stamp duty holiday by making it permanent on primary homes, or more broadly reforming the system by lowering rates or abolishing the tax, would be one of the best ways the Government could help to stimulate the economy.

If it fails to do so, the cost will be significant, and the housing market and construction industry will be dealt a body blow they may struggle to recover from for the next few years.

David Green: When it comes to economic rejuvenation, there’s no alternative to cutting Corporation Tax

9 Feb

David Green is CEO of Civitas.

With a Budget due on 3 March, the Government has been floating the idea of a windfall tax on ‘excess profits’ made during the Covid crisis. But instead of pondering how to punish companies that adapted successfully to the lockdown, it would be better to ask how we can most effectively accelerate our economic recovery

The case for some resolute tax cutting in the Budget is overwhelming. Excessive taxation can dampen the resolve of the most determined entrepreneurs. Top of the list should be a cut in corporation tax to ten per cent. At 19 per cent the rate is still high compared with several OECD members, and within the EU several countries charge much less. In Hungary it’s only nine per cent, in Bulgaria ten per cent and Ireland’s main rate is 12.5 per cent.

The low rate in Ireland has attracted a long list of international companies with at least a major office in Ireland, and often their European headquarters. Facebook has its European head office in Ireland, as does PayPal, while Google has a major presence. Airbnb has 500 employees, eBay has 900, and Microsoft 2,000. Other big names include LinkedIn, Accenture, HP, Apple, IBM, Pfizer and Pepsi.

It’s true that tax-avoidance shenanigans were heavily implicated in the location decisions of some of these companies, but the low headline rate was the clincher.

What would a cut mean for the public finances? In 1919-20 UK revenue from corporation tax was £63.2bn. If the rate were cut from 19 per cent to tern per cent this figure would be significantly lower, perhaps around £30bn.

However, we can predict a large increase in jobs, which in turn would increase revenue from income tax and national insurance. Both are far more important than corporation tax. In 1919-20 total HMRC revenue was £633.4bn, with income tax producing £193.2bn and national insurance £142.8bn. Revenue from both can be expected to go up sharply. Increased economic activity resulting from the cut in corporation tax would also raise the take from VAT, which brought in £129.9bn in 2019-20. If the revenue from these three taxes increased by only seven per cent it would more than make up for lower receipts from corporation tax.

Cutting the headline rate of corporation tax would also reduce tax avoidance and encourage companies operating primarily in the UK. It is notoriously easy for international companies to shift profits to overseas subsidiaries and pile costs onto their UK branches to reduce taxable profits. It’s much harder for companies whose operations are mainly in the UK to hide their profits, and a cut in the headline rate of corporation tax would be a just reward for their patriotism.

For many years the OECD has tried to reduce the scale of avoidance through its Base Erosion and Profit Shifting (BEPS) project. Member countries invariably give it lip service but little has been achieved. There is a huge literature about the devices deployed to avoid tax via controlled foreign subsidiaries, including strategies based on transfer pricing, the allocation of interest payments, and charges for intellectual property.

The lower the tax on profits, the less it’s worth spending on an army of accountants and lawyers to shift profits without breaking the law. And if international companies engage in fewer tax dodges, the Treasury can spend less on prevention. HMRC now has over 67,000 staff. Some could be transferred to more productive activities.

To make it clear that the aim is to incentivise job creation, the Government could also abolish capital allowances. At present when a company builds a factory or adds a production line it can’t treat the outlay as a cost that can automatically be deducted from taxable profits. Expenditure has to go into a special pool and is deducted from profits over time. It has long been recognised as a perverse incentive against investment, and in 2019 and 2020 the Government increased the capital expenditure that is deductible from £200,000 to £1m. Some want to increase this ‘annual investment allowance’ still further and to add to the list of items covered by the ‘first year allowance’, which is over and above the annual allowance.

But it would be lot simpler just to scrap the whole system and allow all investment in new productive assets to be a deductible cost. Such a dramatic step could easily lead to the multiplication of Nissan-style factories and well-paid jobs throughout the left-behind regions.

Cutting corporation tax would upset the European Commission, which may renew its protests against the evolution of the UK into Singapore-on-Thames. But having learnt nothing from the row over vaccine distribution, it will find itself vainly huffing and puffing again.

The Government is determined to spread prosperity to every corner of the land, but it should not be content with measures like posting civil servants to the North and redistributing infrastructure spending outside the South East. Improving roads, rail, ports and the internet is an essential component of a strategy of economic rejuvenation, but it’s no substitute for cutting corporation tax. Combining the two could be transformative.

Mario Laghos: More support, less regulation – how Government can help British industry thrive

23 Jan

Mario Laghos is a political analyst and the editor of Just Debate.

So many of our countryside towns, which are home to historic churches, school buildings and libraries, are increasingly blighted by the emergence of fresh-faced red brick town houses.

They buffet the existing architecture in the most jarring way, even though not too dissimilar in aesthetic quality to the sort of brown Soviet-style flats that were built in the 1970’s and 1980’s to facilitate those same town’s growing populations. Iconic villages are being swamped by the apathetic copy and pasting of dwellings whose one and only reason for existing is the cheapness involved in their construction.

In most if not all cases, however, these villages are sited next to quarries, from whence the original buildings’ constituent stone is derived. Yet those quarries sit dormant, even while so many of our youth suffer the indignity of precarious employment, or flee to cities for opportunity.

These sites could give meaningful work to the young whilst ensuring our historic towns are conserved by using local resources, local labour and local style. Why not honour our past, and capture its spirit for our future, by re-opening them?

Well, primarily because of cost, of course. It isn’t economical, prima facie. The steel we use for construction, and the coal required to forge it, are imported in such huge volumes – and from China no less – despite the fact that we sit atop a mountain of coal and are a nation home to some of the best steel workers in the world.

Our steel industry is essential to the defence of the realm. Much of our coal wealth sits beneath some of our most destitute regions. Yet we refuse to extract it for fear of emitting carbon. Far easier to have a freight ship carry it across the world, so as to keep the CO2 off of our books. After all, the cost of having to beautify the mine after it has been exhausted, erecting solar farms to offset emissions, and cutting all the red tape would no doubt be a costly and time-consuming affair.

Thus towns which were once the engines of the nation are resigned to destitution and sink into terminal decline, buoyed only by call centres, coffee houses, and betting shops.

In 1998, we imported 20 per cent of our energy. Today that figure stands at 40 per cent. We rely on Russia for the bulk of our solid fuel and much of our petroleum. Yet while many could be given high-skilled work and boundless opportunity by extracting energy via fracking, a technique which has made the US a net exporter of energy, we have placed a moratorium on it.

Worse, we are an island nation who continually fail to make good on our geographic gift; that we are surrounded by water. We are constantly told that we are set to become the Saudi Arabia of wind, but why not of tidal power, too?

We have become so infatuated with financial services and the City of London, we have lost sight of our nation’s traditions and its strengths. Thanks to the market economy we have become acutely aware of the price of everything: we know goods and materials from poor countries with inadequate labour laws are cheaper than those produced onshore. The start-up costs associated with brickmaking factories or quarries can be prohibitive – far better to buy them in then, and let balance of payments deficit grow further still.

The list goes on. We have found it convenient to be energy-dependent, particularly as self-sufficiency often necessitates government subsidies, a most unattractive proposition. And there is little profit in being readily prepared around the clock for a once-in-a-century medical crisis, as the state of our PPE warehouses attests.

But we must become more attuned to the virtue of value, rather than the seductive mistress of price. Rather than sending young people into the doldrum of recruitment agencies which recruit for recruitment agencies like Russian dolls, meaningful employment and national value can be found in traditional industry, and the kickstart costs incurred by the helping hand of governance will be paid back. High-wage taxpaying workers, the value added of energy self-sufficiency, the control of our destiny, and the improved social relations and reduced crime wrought by stable work and increased home ownership will pay back and more that which would be required to jumpstart dormant industries.

Of course, such work is not limited to simple labour, but will require the efforts of highly skilled engineers, architects and technicians, and administrators.

This rediscovery of the virtue of industry and meaningful work does not mean abandoning Conservative values. It should go hand-in-hand with a ferocious effort to cut the pointless regulation which holds back investment and development. Rishi Sunak’s task force should be just the start.

The UK is a leader in the global race to administer vaccines. But we could improve our lead, and once we finish in poll position could turn our resources over to benefit of the world.

But our programme, excellent though it is, was late off the blocks, its momentum partially scuppered by (now-scrapped) regulation which required vaccine givers to have completed 21 documents, including courses to combat terrorism and have adequate knowledge of human rights. It failed to move into fifth gear fast enough due to an evident reticence to involve the military. And it is set to be dealt a further blow still by our lack of onshore manufacturing capability, as Pfizer’s Belgium plant is having to ration its output.

Much like our dithering on extracting British coal, which has held up approval of a singular Cumbrian coal mine for years, and as with the moratorium on fracking, despite our willingness to import natural gas, it is another instance of tedious regulations which serve only to straightjacket Britain from fulfilling its potential – all while exacerbating the harms they are designed to mitigate.

It is time to throw a one-two punch. Market forces must no longer be allowed to hollow out towns, cities and villages with race-to-the-bottom-on-cost housing. Nor should they relegate to a footnote of history proud and noble industries with strategic value in favour of financial services and the City of London. And to achieve these ends the government must become adept in knowing when to step up and offer needed support, and when to step stand back by consigning counterproductive regulation to the dustbin.

Jo Gideon: Civic pride can help level up post-Covid Britain, but it needs Government support

21 Jan

Jo Gideon is the Member of Parliament for Stoke on Trent Central.

Community spirit has been integral to our fight against the virus. Looking beyond the pandemic, local areas must be empowered to harness civic pride to create the opportunities needed to level up the UK.

While there is no doubt that the last few months have been difficult, particularly as we enter another national lockdown, there are reasons to be optimistic. For starters, we are making fantastic progress with the roll-out of the vaccination, with more than 2.8 million vaccinations already administered across the UK.

But these next few months are also an opportunity to rekindle the civic pride we saw from local businesses, volunteers and communities during the first lockdown. According to national surveys, community spirit was high in April, but diminished alongside easing of restrictions. Now, we need communities to pull together again as cases soar and the latest outbreak of the pandemic threatens to overwhelm local health systems.

Civic pride is an important catalyst here. People in my constituency, Stoke-on-Trent Central, have a strong sense of belonging, and this is something that our community can build on, both to fight the pandemic and to deliver on levelling up.

Unfortunately, too many people lack the hope that things will improve for them and for their families. We need to find a remedy for this disconnect and help people believe in the potential of their local community once again.

Now that we have delivered on our manifesto commitment to get Brexit done and reclaim our sovereignty from Brussels, people and communities need to feel empowered. We must now hand back control to the community over their aspirations and opportunities, to build an inclusive economy from which everyone can benefit and to which everyone can contribute.

To unleash the UK’s productivity and create these opportunities, which will be the building blocks for our recovery, places need to be empowered through access to funding and greater decision-making powers. This means involving local social enterprises, businesses, and third sector organisations, who all have a hugely important role to play in providing jobs and training as well as vital services and spaces for people to support each other. These organisations, together with local decision makers, are better placed to identify and address local challenges and opportunities than policymakers in Westminster.

Not only must we recognise that engaging communities in the delivery of local infrastructure is essential for levelling up, we need also to expand our understanding of what ‘essential infrastructure’ is. Investments in physical infrastructure are undoubtedly essential for driving local economic growth, but social infrastructure is equally as important for communities’ prospects.

Research by the Centre for Progressive Policy (CPP) clearly demonstrates that investments in local skills, health and child services both offer comparable productivity returns to investments in physical infrastructure and are vital for generating that sense of civic pride that provides people with hope. CPP’s insights show that cuts to government spending on vital community services such as libraries, parks, and early-years offerings coincided with declining levels of civic action and engagement, showing how investment in these community assets is critical for fostering pride and hope in localities.

The national levelling-up fund announced by the Chancellor in November acknowledged the importance of ‘funding the infrastructure of everyday life’ for places’ economic recovery. In the coming months, local MPs like me should draw on the expertise of the community and business sectors to direct this funding to deliver the projects that are right for our communities. Showing people in places like Stoke-on-Trent Central that this Conservative Government is listening to and acting on their concerns will be essential for keeping hold of our newly won seats in the next election.

Levelling up should not be framed as the North vs the South, nor London vs the Rest. Poverty and inequality exist across the UK, and CPP has proved that investment in unleashing potential is required wherever there is a need for it.

To deliver on the levelling up agenda, all places must be afforded the same benefits as combined authorities, and influence of outfits such as the Northern Research Group. Stoke-on-Trent currently has neither, and we are less able to access funding drawn from central pots as a result.

For instance, we did not qualify for the first round of the Towns Fund due to the unique geographical make-up of the city and the historically linear nature of the city’s six towns. We also missed out on the last round of brownfield remediation funding, which went to combined authorities. Yet it is areas like ours that are particularly left behind and need this kind of funding.

The £4bn levelling up fund presents real opportunity to harness civic pride and local knowledge to reinforce cities like Stoke-on-Trent against the uncertainty of the future. To level up successfully, the Government must ensure that the fund gives real power to places and can be pooled with existing revenue streams to enable truly strategic and holistic investment. It must not become another centrally-controlled pot which pits communities against each other in a bidding war.

The civic pride present in constituencies like mine is a tremendous asset, which we must build upon to create a brighter future for post-Brexit, post-Covid Britain. Securing a landmark deal with the European Union was just the start. To win the next election for the Conservative Party, we must focus on delivering real levelling up opportunities for constituencies across the country.

Prioritising investment in local social infrastructure, growing our social asset base, and empowering local areas to deliver our local levelling up agenda can both bolster community spirit and support longer term economic prosperity.

Adrian Lee: Erhard’s economic miracle has lessons for Britain and Germany today

16 Jan

Adrian Lee is a Solicitor-Advocate in London, specialising in criminal defence. He served as a London Borough Councillor for 20 years and was twice a Conservative Parliamentary Candidate. Between 1994 and 1995, he served as Chairman of the National Young Conservatives.

On Tuesday 30 June 2020, amidst fear of economic collapse in the wake of the lockdown, the Prime Minister made a speech evoking the memory of Franklin Roosevelt and signalling his own willingness for government to intervene in the economy and launch their own “New Deal” to stimulate growth.

The message from Boris Johnson was that desperate times required drastic measures. Fair enough, but maybe we should consider the example of Germany in the immediate post-war years before we leap into a Keynesian spending spree?

At the end of the Second World War the German economic structure lay in ruins. It is hard today to contemplate the physical destruction caused by ground fighting, aerial bombing, population displacement, genocide, and Nazi demolitions of vital infrastructure. Millions of people had seen their homes destroyed and malnutrition and disease were starting to spread throughout the country.

Yet within a decade the newly created Federal Republic of Germany had started to enjoy a prosperity that would last until the present. One person was principally responsible for this turnaround: Ludwig Erhard.

Erhard was born on 4 February 1897 in the town of Furth, adjacent to Nuremberg. His father, originally of peasant stock, owned a small clothing shop which he had started himself in 1888 and had married the daughter of a glassblower. At the age of three, Erhard suffered an infantile paralysis that left him with a deformity of the right foot that led him to having to wear orthopaedic shoes for the rest of his life. He was at best a mediocre primary school pupil and when it came to him moving on to secondary education he was sent to a vocational school.

By attending this school, he was automatically excluded from going on to university, as vocational schools did not offer the Arbitur certificate required to enter higher education. Therefore, faced with few other options, in 1913 Erhard embarked on an apprenticeship at a textile firm in Nuremberg.

Despite having doubts about the Great War, he volunteered for military service in 1916 and became a gun-aimer in the 22nd Royal Bavarian Artillery Regiment. Unfortunately, his military career came to a sudden end on 28th, September 1918 at Ypres when he was struck by fragments of an Allied shell. He stayed in hospital until the Spring of 1919 and endured seven operations on his left arm and leg which resulted in the arm being shortened and his left leg permanently weakened.

Returning home to Furth in 1919, few would have laid odds on the success of this plump, disabled man with few qualifications. However his life was about to take a significant turn. Fed up working in his father’s shop, Erhard signed up for a course in business administration at a local college and all at once, found his vocation with the study of economics.

He received his diploma in March 1922 and was eager to undertake postgraduate studies, but once again there was a snag. The local college did not have the right to award formal degrees, so it took considerable lobbying by his tutor to have his star student accepted by the University of Frankfurt. In Erhard’s case an exception was made, and he was awarded his Masters degree in 1924. For the next decade Erhard worked as a researcher for a trade association in Nuremberg whilst studying for his Phd.

By the time that he had completed his doctoral thesis Hitler had come to power and, as Phd holders were allowed to take up academic posts, a precondition for graduation was membership of the Nazi Party. Erhard had no intention of joining the Nazis and so withdrew his thesis from consideration. Remarkably, throughout the period of the Third Reich, Erhard managed to keep his distance from the regime and continued working for bodies like the Consumer Research Company and his own Institute for Industrial Research.

Erhard believed that the key to Germany’s economic success lay in the re-direction of industry into the production of consumer goods. What he proposed was a significant break with Germany’s past, which until 1945 relied mainly on the heavy industries of iron, coal, steel, and chemical production. Erhard rejected fashionable criticism of materialism and argued that the purpose of economic activity was the satisfaction of consumer desires:

“Our economy serves the consumer, he alone is the standard and judge of economic activity”, as he put it. Economic goods helped to free people from mundane tasks so that they could pursue more lofty aims.

Erhard rejected Keynesian solutions and declared that currency stability should be accepted as a basic human right. He favoured balanced budgets and argued that only if tax revenues were available should the state spend money.

Another priority for Erhard was home ownership: “Property makes you free”, he declared in 1961. However, he wanted property to be attained through saving and not by receiving it as a grant from the state. In time, Erhard envisaged a society with wide share ownership in order to entrench acceptance of the free market. He rejected the concept of distributive justice as a society “…where everyone has his hand in the pocket of everyone else.”

In 1945 Erhard was swimming against the tide of economic thought. Britain had just elected the Attlee Government, committed to nationalisation, and the United States was still in thrall to the New Deal.

In Germany, the revived Social Democrats (SPD) had plans to collectivise the whole economy and institute a system of state planning. Their leader, Kurt Schumacher, spoke openly of the abolition of capitalism and the establishment of a socialist state. The opposition Christian Democrats (CDU) fell under the influence of a group of Christian socialists who lobbied the party to “curb capitalism” and to end the “traditional bourgeois society”. Indeed, as late as February 1947, Konrad Adenauer’s Ahlen Programme for the CDU stated: “The capitalist economic system does not correspond to the state and social needs of the German people.”

Erhard’s success seems to stem from the support that he received from US General Lucius D Clay, Head of the Office of Military Government in the American. occupation zone. Legend has it that Erhard turned up at their offices on the second day of American occupation to offer his services. Clay appointed him Minister of Economics of Bavaria and later Chairman of the Special Office for Money in Credit.

Throughout this period Erhard suffered immense political turbulence, which was not helped by his refusal to join any political party. The SPD opposed his policies on ideological grounds, whilst the Allies were still debating the merits of de-industrialising Germany. At one point, Erhard had to literally beg the Americans not to liquidate and dismantle BMW. However, he laboured on, putting the region back into working order and re-focusing industry on production of consumer goods, and on 2 March 1948 Erhard was elected Director of Administration for Economics for the whole western Allied zone. In this position he persuaded the Allies to implement currency reform by introducing the Deutschmark and allowing an end to rationing of consumer goods.

Eventually, with his policies starting to bear fruit, the CDU adopted Erhard’s policy of the “Social Market Economy”.

Erhard argued that the Social Market Economy differed from traditional laissez-faire in as much as it required a strong central state to act as umpire to prevent cartels and ensure the endurance of competitive markets. When questioned by Friedrich Hayek about the inclusion of the word “social”, Erhard explained:

“I hope you don’t misunderstand me when I speak of a social market economy. I mean that the market as such is social, not that it needs to be made social… The freer the economy, the more social it is.”

He would serve as German Minister of Economics for a total of 14 years and went on to serve as second Chancellor of the Federal Republic. In that time, he would argue with his adopted party, the CDU, on many issues, notably the European Community. Erhard was suspicious of creating European institutions, which he believed would lead to more planning and bureaucratic interference. He feared that a single economic or fiscal policy for Europe would inevitably fail and opposed tariffs against non-Community members.

Erhard died in 1977 and, therefore, sadly did not live to witness the 1980s, the era when his views gained wider acceptance under the Anglo-American alliance of Margaret Thatcher and Ronald Reagan. Yet we should remember how he harnessed the free market to lay the foundations of post-War Germany’s enduring economic strength, and his methods should be re-examined by Conservatives unconvinced by the long-term benefits of Keynesianism.

The Deal in Detail 2) Economics and regulation

30 Dec

Dr Gerard Lyons is a senior fellow at Policy Exchange and was chief economic advisor to Boris Johnson when he was Mayor of London.

It is not just leaving the EU but what we do when we leave that is key. From January 1, we will have left the EU and distanced ourselves from its inevitable march towards ever closer political union.

Naturally, it makes sense for us, the fifth-biggest economy in the world, to have a sensible future working relationship with the EU. Thus, the trade deal should be seen in a positive light.

The devil is not just in the detail but also in how it will be policed. There are reasons to be positive, but also many areas the UK needs to guard against. It sets a framework for the future. Crucially, it does not tie our hands (too much at least) on future domestic policy or on our independent trade policy.

To succeed, we need to reboot and rebalance the domestic economy and reposition ourselves in a changing and growing global economy, where the balance of economic power is shifting towards the Indo-Pacific and western Europe is the slow growth region. The fourth industrial revolution demands a willingness to embrace new technology that points to the need for the UK to be more innovative. Contrary to much that is often written, the domestic and global agenda that the UK needs are mutually reinforcing.

There are many things the UK needs to do domestically that it should have done while in the EU – but for whatever reason did not do. Yet, at the same time, there will now be a new sense of direction. The path we take will depend upon Parliament and the electorate. Crucially, we will be able to diverge where we see fit.

With the right pro-growth economic vision, there is every reason to be positive. In 2021, with the roll-out of a vaccine and with this deal, the UK economy could grow strongly from spring onwards, achieving growth above eight per cent and returning to its pre-crisis level by the first quarter of 2022. This deal removes immediate uncertainty and the misplaced worries about the downside of a no-deal exit. The financial markets have already given it the thumbs up.

Beyond the next year, or two, though, the UK needs to really seize the agenda, globally and at home. We need to become more competitive. Thus, in terms of the deal, how it is applied is important, as the rebalancing principle that both sides have accepted will look at how subsidies and regulations will impact future trade and investment and our competitiveness.

At Policy Exchange, earlier this year we identified the need for a ‘three-arrowed’, pro-growth strategy, built on sound and principled fiscal policy, monetary and financial stability, and a supply-side agenda of innovation, investment, and infrastructure, aimed at reducing inequality and getting the right incentives focused on tax and regulation.

Both sides have tried to position this deal in a different light: the EU suggesting the UK is losing access to EU programmes and that trade will no longer be frictionless; while in contrast the Prime Minster has highlighted a host of areas, including future trade without tariffs or quotas.

Overall, on the three areas of dispute, as one might have expected, it is a mixed outcome.

On fish, the UK did not achieve as much as it wanted. This was a disappointment and while we may be able in time to revisit future quotas, the UK should focus now on building up shoreside development, food processing, logistics, and maintenance, as part of a domestically-orientated agenda with strong regional benefits to many coastal areas.

Likewise, too, the creative industries, an important sector, will be disappointed with not being included on the list of workers not needing a visa to work, and so may need support in other ways. It highlights how the detail will impact different sectors. Despite this, no tariffs and a holiday on rules of origin were well received by the auto sector while road hauliers, another sector worried before the deal, seemed content.

However, in other areas there is some ambiguity as to whether we have accepted the EU’s precautionary principle.

In terms of the level playing field, this deal alleviated worries that Great Britain would be constrained significantly in future domestic policy. In the near-term we can follow through the levelling up agenda not tied down by the EU in boosting competitiveness via initiatives like free ports. Westminster also has scope to outline its own future independent subsidy regime. Meanwhile, there is nothing in the deal to suggest we will be held back by the EU in continuing with our high standards in labour, environmental and food areas.

Implementation of this deal and resolving future differences matters. Of course, there is no case law yet for areas of dispute. Businesses like certainty. Also, a dynamic UK must avoid the EU’s problem of protecting incumbents. The European Court of Justice will not have a future role. This deal will have its own 19 sub-committees and four working groups, as well as an intergovernmental partnership council. The UK’s focus should be on boosting competitiveness.

The big issue in coming months will be financial services. This trade deal did not cover these and outlined that a memorandum of understanding (MOU) is to be agreed by the spring. The City has lacked a cheerleader for some time and needs one now, although when Mayor, Boris Johnson was often its biggest advocate.

Since the referendum, firms have had to act based on their own business model. For some, this has meant boosting operations in other cities like Paris or Frankfurt. Given the uncertainty, that was understandable. Yet, London has continued to see employment gains in recent years. The combination of law, language, time zone, skills and infrastructure, plus London’s ability to position itself in financial technology and in new growth markets such as green finance, the offshore renminbi and Islamic finance, all auger well and suggest that it will dominate as Europe’s financial capital.

Financial centres thrive based on where clients want to do business and on the regulatory environment. In the years since the referendum there was a focus on mutual recognition, based on high level outcomes, and then on equivalence of each other’s regulatory regimes. While the EU has been stubborn, the UK has granted a temporary permissions regime to a phenomenal number of EEA-based firms, all keen to continue to do business in London. The main focus of this MOU should be on addressing this issue of equivalence and regulatory cooperation.

One important area for the City is the EU’s desire to see euro-denominated business carried out in the euro area. This would have happened regardless of Brexit. Lest we forget, when David Cameron reached his deal, the main area of concern was that the EU had made clear the euro was central to their project and thus non-euro members would no longer have a veto over future developments.

This push to have euro business in the euro area has continued. It will not succeed, leading initially to a fragmented and more costly market in the euro area, but it has the potential to be disruptive, as we are already seeing, with pressure placed on London-based firms to move business.

Finally, this trade deal can be reinterpreted in four years or so, after the next election. That is a worry if some, including the EU, try and bounce the Government into a much closer future relationship.

Instead, we should view this deal as an opportunity for the UK to focus on the need to boost growth, well-being and competitiveness, thus cooperating closely with the EU where it makes sense to do so and diverging where needed.

This is the second in a series of pieces from Policy Exchange looking at specific issues that arise from the Brexit trade deal.

Mark Lehain: The Government can’t afford to surrender in the war on woke

20 Nov

Mark Lehain is Director of the Campaign for Common Sense, and the founder and former Principal of Bedford Free School.

While the media and Westminster insiders have been excited about all the Cummings and goings at Number 10, one has to wonder what the rest of the country makes of it.

My hunch is that people care more about rising unemployment and falling incomes than who is up and down in Downing Street. That said, even if personnel changes had not occurred, we are about to enter a post-Covid and Brexit transition phase, and so it is fair to consider what the Government should do from here.

Among a whole range of other urgent issues, the country will have to confront the decimation of the private economy and public finances wrought by the pandemic and measures taken to combat it. Things will be challenging, to say the least.

So it’s quite understandable that some are arguing that as part of Boris’s Johnson’s Reset, the Government should stop its (so far modest) attempts to address the left-wing political and cultural biases that have spread unchallenged through so much of life.

They argue that it is a distraction from the business of economic recovery and government delivery, and that it is divisive at a time when the Government needs to bring people together. I think they are wrong for two very important reasons.

First of all, as a wise person once said, “culture eats strategy for breakfast.” And until recently, Conservative-led governments did little to address the spread of divisive values and ideas from academic faculties and leftist movements into the civil service, executive suites, and elsewhere.

Wary of appearing unkind or stuffy, a blind eye was turned as universities discouraged freedom of thought and imposed niche ideologies on staff and students. Ministers stayed quiet as children were taught by their schools that “white privilege” is a fact, or told by groups such as Mermaids and Stonewall that their sex is whatever they feel it is.  And they did little to challenge the sneering and condescension by the arts, media, and others towards those who didn’t share their outlook on life.

The facts of life are (small-c) conservative but, time and again, opportunities to point this out were avoided. Conservatives didn’t start the fire – that was the radical left – but neither did they try to extinguish the flames as they burned through society and scorched the common ground.

Only recently have ministers started to challenge the metropolitan grip on quangos, pushed back against Critical Race Theory, reminded schools that they should be politically impartial, and told museums they shouldn’t bend to the whims of activists. All this shouldn’t be remotely controversial for anyone in the centre ground of politics. They’re modest moves to allow some diversity of thought in sectors otherwise captured by groupthink – not Tory takeovers.

So this Government can focus solely on economic and environmental policies, and pretend that values and culture don’t matter. But if it does, woke ideas will continue to hollow out institutions, turn people against one another, and ultimately undo any other good work it does.

The other reason as to why I’d encourage Downing Street ‘21 to persevere with challenging the cultural hegemony is that it makes good political sense: it is where the vast majority of the public are.

It’s not that people are opposed to improving the lives of trans people or examining ways to reduce disparities in health or education outcomes by different communities – far from it. They lead rich and diverse lives, have friends from all backgrounds, and families of all shapes and sizes. They care deeply about others, and want to do their best for their community and country.

They just don’t want to be told that they have to do this in a certain way, or hold specific views, or “educate themselves” to see the world as determined by academics who’ve never had to turn a profit or balance a household budget.

Research at the Campaign for Common Sense has found this again and again – on everything from political correctness, to comedy, to protests, historical statues, and the BBC. In contrast to the impressions given by the media, arts and political sectors, across all ages, socio-economic groups, and regions, people hold common sense, down-to-earth views on values and culture.

I saw this as a parliamentary candidate in the north east last winter. I was repeatedly told on the doorstep that politicians patronised voters who didn’t share their views on things. People also said that under Johnson they felt they were finally being listened to. In so many ways, Brexit was a proxy for the desire for their views and communities to be respected, not treated as something to be made better by others.

Whoever has the ear of the Prime Minister when things settle needs to bear this in mind as they plan the next stage of things. Labour and the Lib Dems are still obsessed with niche causes, and Nigel Farage and Laurence Fox are waiting in the wings to peel away voters if the government drifts that way again too.

Come the next election, Brexit will have been long done. However, the voters who delivered such a stonking majority in 2019 can be held together, but only if Johnson and his team show respect for them and their values.

So the war on woke must continue – both to bring people together as a country and an electoral coalition. It might mean a few awkward conversations for people at posh dinner parties, but it’s the right thing to do. The next few years are certainly going to be interesting times.

Ryan Bourne: A British overspill from America’s result. Why the debate on the right over economics will now intensify.

11 Nov

Ryan Bourne is Chair in Public Understanding of Economics at the Cato Institute. 

Donald Trump loyalists might not yet admit it, but their man was defeated handily in the U.S. Presidential election. A post-mortem will soon be undertaken within the Republican party, and with it a debate that has been bubbling since his primary victory in 2016 on both sides of the Atlantic: what economics should conservatives champion?

Ideally, that debate would be about what policies actually work to improve our lives or liberties. But winning elections is politicians’ raison d’être. So it’s little surprise that those representing major strands of Republican economic thought have conflicting economic narratives of the results already as to what is electorally desirable, a division made somewhat easier by the fact that “Trumpism” blended free-market policies with protectionism and interventionism, in turn offering something for everyone.

Free-market Republicans’ story goes like this: tax cuts and deregulation delivered by a Republican Senate and Presidency delivered robust pre-pandemic economic growth, low unemployment, and rising household incomes. So strong was that economy before Covid-19, that even after a deep pandemic-induced recession, 56 percent of surveyed voters nationwide said their family was still better off financially after four years of The Donald in the White House. Tellingly, Trump led Joe Biden in every battleground state on who voters trusted most to “manage” the economy.

Combine that evidence with the party’s unexpected electoral resilience in the Senate, and huge pick up of Cuban-American and Mexican-America votes in Florida and Texas, and it’s easy to conclude, as former Presidential candidate Mitt Romney has, that more free-market Republican economic policies are not unpopular.

In fact, polls suggest voters baulked at the socialist ideas aired in the Democratic primary, and were wary of even Joe Biden’s quite ambitious progressive agenda, particularly on decarbonisation. What lost Trump the election was, in this view, not his domestic economic policies then, but his personal conduct, handling of Covid-19, and, possibly, even downsides of his trade wars, the most obvious consequences of which were government welfare for Americans farmers and manufacturers struggling with inflated input costs.

The “national conservative” counter-blast provided by, for example, Samuel Hammond in the Guardian, says the exact opposite. The last two elections supposedly show the party’s future is to reach into working-class communities of all ethnicities. This opportunity, in part, came about from Trump’s willingness to challenge traditional Republican views on free trade and industrial policy, giving him a hearing with voters suffering the effects of market-led deindustrialisation. The party should build on that to become a true “workers’ party” by embracing a more interventionist abour market and manufacturing agenda, according to the Missouri and Florida senators, Josh Hawley and Marco Rubio.

This interpretation even posits that Republicans may have failed to win the Presidency because they did not sufficiently embrace the “good government can do” (to use a Theresa May phrase.) Hammond postulates, for example, that Biden was able to pick up white working-class votes in the Rust Belt by going further on nationalistic “Buy American” agendas and tax incentives for re-shoring manufacturing jobs than Republicans would ever opt for. A more serious policy agenda and a compassionate Republican frontman could therefore build a whole new electoral coalition on this type of platform that Trump opened the door to, if only the Republicans could move on from Reaganism and their commitment to free market ideas.

Now, on the facts, I (perhaps unsurprisingly) find the first narrative more compelling. Exit polling shows that, contra the national conservative view, Republican support still skewed towards those on higher incomes, not lower. If preferences for a more interventionist agenda, as opposed to, say, the culture war or Donald Trump’s personality, are the dominant explanation of vote patterns, it’s difficult to square that with Republican Senate candidates, most of whom are more free market on economics than Trump, outperforming the current President. Of course, in reality voters don’t vote according to policy preferences, so a monocausal link between economics and electoral outcomes is dodgy ground on both sides.

But at heart here is a debate that we’ve heard plenty of in the UK: how far does the political realignment we are seeing necessitate a change in conservatives’ economic ideas? The new “national conservatives” in the U.S. and modern “One Nation” Tories in the UK, such as Nick Timothy, want to throw-off any libertarian influence  with the latter even thinking the 2017 Tory manifesto an appropriate place to caricature the “libertarian right,” as if voters would read that document and take that signal as a cue to shift their vote.

Two things have frustrated me about these intra-conservative debates to date. The first is that the anti-market conservatives appear to just assume that the left is correct and that economic policy is class-based: that policies that are pro-the interests of the working class must necessarily be more interventionist than conservatives have previously considered acceptable.

I’ve written before about why that is not true and how market-led policies could deliver pro-poor outcomes. The U.S. results also show that the assumption is a sham in electoral terms: working class minorities in the south were frightened of Democratic industrial strategies when it meant cheap energy was set to be sacrificed and vast new regulation of a structurally sound labour market were proposed.

But my second frustration is deeper. Thus far thinkers such as Timothy and others in the U.S. have written extensively on why conservatives should move on from free market ideas in the abstract. They document social and economic phenomena that have moved in the wrong direction in the past three to four decades, and then link these to the Thatcher-Reagan revolutions and supposed commitments to “market fundamentalism”.

Yet anyone who has followed conservative policy closely since the 1990s would find it laughable to frame recent offerings as being influenced by an unabashed commitment to libertarian ideas. So this narrative is best understood as rolling the pitch for an even more interventionist conservative economics.

What we have had far less off yet is the specifics: what, exactly, do those such as Timothy want from policy instead of what we see today? National conservative thinkers have hid behind the shield of big picture views of what is electorally desirable to win in the Rust Belt or the Red Wall as a substitute for outlining what actually should be done, and providing evidence for why those proposals would in fact work where previous dalliances with industrial planning have failed.

One consequence of this messy Presidential election outcome and its failure to clearly repudiate Trumpism is that those debates will now be crucial in determining the future direction of the Republican party. And stateside narratives have a tendency to be imported into UK politics too.

Eamonn Ives: The Government should be doing all it can to give Britain’s green entrepreneurs a head start

6 Nov

Eamonn Ives is a researcher who specialises in environmental and energy policy. He is the author of Green Entrepreneurship, which was published by The Entrepreneurs Network with the Enterprise Trust.

Unless you have spent the last several months under a rock – which is, admittedly, not the least attractive proposition right now – you’ll know that the economy has taken a beating.

Unemployment and the public debt are up, while gross output and business investment are down. For many of those who have managed to hold onto their jobs, their situation is precarious.

As well as fire fighting various economic challenges, the Government is also contending with the small matter of ensuring the house is in order before it hosts COP26.

Delivering on these two objectives need not be mutually exclusive endeavours. A new report, published by The Entrepreneurs Network and the Enterprise Trust, highlights a handful of ways in which the Government can unleash the inventiveness of Britain’s environmental entrepreneurs – simultaneously giving the economy a shot in the arm, and helping to deliver the sustainability solutions necessary to clean up our planet.

So, how do we advise the Government proceed? Fundamentally, the report argues that more needs to be done to address instances of environmental market failures.

This is not to say that we should be ruthlessly clamping down on every single source of carbon, or simply throwing what precious little cash the Treasury still has at every eco-idea under the sun. Rather, it means recognising that it is not unreasonable to expect polluters to take more responsibility for the harms they inflict on third parties. It also means that innovators who are developing solutions should be supported in doing so – such as through targeted R&D grants – given the benefits they bequeath to us all.

These are inherently conservative ideas, and it does appear that in the current Government the broad principles underpinning them are reasonably well understood.

As well as this general thesis, we make 20 separate policy recommendations. These focus on how to improve the environmental credentials of the energy we produce, the transport we make use of, and the consumer goods we buy. They are not an exhaustive list of how to combat each and every environmental issue, but taken together should at least point the country in a greener direction.

For instance, instead of using Britain’s foreign aid budget and export credit agency to promote fossil fuel projects abroad, why not funnel that money into renewables or ‘cleantech’ solutions being worked on by British inventors? Not only would the climate and green entrepreneurs benefit, but taxpayers would too, if it means less of a risk of loans defaulting on polluting projects which could soon become stranded assets as the pace of renewables accelerates.

Or, instead of effectively banning genetic engineering techniques, why not listen to the scientific community and allow trials to take place, opening up a huge market for crop scientists? Bigger yields would minimise how much space is necessary to grow the food we need, and this regulatory reform is a genuine example of a Brexit dividend, given how the obstacle to doing so emanates squarely from Brussels.

Or, to help deliver on a clean, modern transport system, what about committing to a comprehensive liberalisation of the rules pertaining to e-scooters, instead of clouding the industry in uncertainty? This would be a victory for common sense, carbon emissions, and air quality – and also for the entrepreneurial tech start-ups involved in developing software for platforms associated with them.

From polling we commissioned for the report, it seems that the business community is on board for the shift to a greener economy, too. Fully three-fifths believed that opportunities await them in a more sustainable future, while a mere eight per cent did not. Meanwhile, over half of businesses agreed that employees increasingly want to work in environmentally responsible firms – again, just eight per cent did not. We also found that there was no end to the sorts of environmental problems businesses believed their customers wanted to see addressed – from embracing sustainable packaging, to sourcing greener materials, to using cleaner energy.

British entrepreneurs could be at the forefront of developing solutions to all of these challenges and more – and indeed many already are. But the Government must go further still. In the case of environmental innovation, the case in favour is all the stronger.

Consider what the major industries of the future will be – green, clean, and environmentally conscious. The Government should be doing all it can to give Britain’s entrepreneurs a head start in these markets, lest it want the jobs, investment, exports and growth potential to be captured by other economies. 

With our hosting of COP26 just one year away, there is no time to waste. If the UK is to not be embarrassed in its own backyard, it has to be as ambitious as possible. The Prime Minister talks the talk better than most, but that counts for little if it isn’t backed up by a suite of tangible policies which facilitate entrepreneurs and the business community to do the heavy lifting behind the scenes.

Our report maps out a few extra ways he can make that a reality – delivering a cleaner, more competitive economy.