Ryan Bourne: A government that wants to Build Back Better must address supply-side constraints on the economy

26 Jan

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

Well, so long, “Plan B.” In jettisoning some of the most intrusive remaining Covid-19 restrictions, England (with the home nations to follow) could soon rival parts of the U.S. in being the most “normalised” policy environments in the developed world. Yes, mandatory self-isolation for those testing positive will remain, for now. But as with the vaccine rollout, Britain appears now to be leading the world into the new approach of “learning to live with the virus.”

This will bring with it an economic fillip, albeit disrupted in near-term statistics by Omicron. We have certainly been in need of one. Though headline GDP figures across countries can be misleading about the impact of the pandemic given measurement differences, an analysis by The Economist combining five indicators – GDP, household income per person, share prices, investment, and public debt – found that through September last year Britain had been the second most adversely affected major economy from the pandemic, behind only Spain.

In its ranking of 23 OECD countries, Britain was deemed third worst for the fall in household income (behind Austria and Spain), third worst for the decline in share prices (behind Chile and Spain), worst for the fall in investment, and second worst (behind Spain) for the public debt surge. With Covid-19 deaths per capita here relatively high – above all other major European or G7 economies except for the U.S., Belgium and Italy – we suffered a pandemic double-whammy of both poor health outcomes and a big economic hit.

Does analysing the change in these variables mislead about how the UK shapes up internationally after Covid? Perhaps. It’s not as if the public health crisis was the only thing happening during this time. And it’s important to remember that looking at changes to economic variables in the pandemic can hide that Britain entered it with significant structural strengths too.

In mid-2019, The FT’s Chris Giles was able to write that incoming Chancellor Sajid Javid enjoyed unemployment at its lowest rate since 1974, with the share of 16- to 64-year-olds in work at close to record levels, inflation bang on target, average earnings growing at their highest rate for 11 years, and public borrowing modest. The biggest ongoing economic weakness then was clearly productivity – with GDP per hour worked around 15 per cent lower than seen in France or the U.S., after a decade of weak economic growth.

So the UK entered the crisis with many macroeconomic variables healthy. Even the shock of the pandemic has therefore left the country’s headline statistics looking largely unremarkable in comparison with other economies.

UK unemployment is still low by international standards, for example. At 4.1 per cent for September through December 2021, the UK’s rate was similar to the U.S., and bettered only by Japan (2.8 per cent) and Germany (3.2 per cent) within the G7. The employment rate for 16-64 year olds of 75.5 per cent, although still 1.1 percentage points below its pre-crisis peak, is similarly only exceeded by the Scandinavian countries, Germany, and the Netherlands within Europe and then Japan too in the G7.

Pandemic-induced disruption and rising energy prices (on the supply-side) and huge macroeconomic stimulus (on the demand-side) has left us worried about inflation and a cost-of-living crisis. But, again, this is not an affliction unique to Britain, belying the idea it is mainly caused by Brexit. At 5.4 per cent in the 12 months to December, consumer price index inflation was almost identical to EU-wide inflation (5.3 per cent), and lower than some countries within it, such as Germany. Compared to G7 countries, the UK was decisively average too, with only Japan and France with significantly lower rates.

On GDP, it’s true that – putting measurement differences aside – the UK had one of the biggest headline falls in output during the pandemic. GDP in Q3 2021 was still 1.5 per cent below the pre-crisis peak, with only Japan having suffered a worse performance among G7 countries. But the OECD expects faster UK growth going forwards. And as economist Julian Jessop has noted, it’s highly likely that the UK will be doing better than the eurozone in terms of GDP relative to its pre-crisis peak through 2022, although still lagging far behind the U.S.

What about the public finances? Well, up to September 2021, the IMF had calculated that the UK had the third biggest total Covid-19 fiscal support package, amounting to a massive 19.3 per cent of GDP, and so behind only New Zealand and the United States. It’s therefore no surprise that public net debt has surged to new highs in peacetime. And yet, within the G7, the only country with a gross debt-to-GDP level lower than the UK is Germany and the UK is slap bang in the middle of the seven for its projected primary budget deficit this year.

The after-shocks associated with Covid-19 might be felt for years to come, through disruption to demand patterns, experiments with more home working, a spatial reallocation of activity and lingering effects on attitudes to risk. But the UK’s broad macroeconomic situation is not dissimilar to that of many other comparable countries. And that should make us ponder a few lessons from elsewhere as we tackle the immediate challenges we face.

In particular, the country that has stood out in suffering a worse inflation problem than the UK is the U.S. – where households were showered with cash such that the government effectively delivered a money drop to households. So why the guys at the Social Market Foundation appear to be urging the Chancellor to introduce a £500 “Rishi Cost of Living Allowance” as if that’s a cure to inflation here is beyond me.

Unemployment spiked very high and then plummeted in the U.S. below all G7 countries bar Germany and Japan – showing the long-term virtues of flexible labour markets. If Britain wants to regain its full, robust employment performance of 2019, it should beware new policies prioritising worker “security” over continuing a liberal hiring and firing environment as things normalise.

But, most of all, the UK’s key economic challenge – weak growth – remains and becomes even more pertinent given Covid-19-induced constraints. The pandemic has tested to destruction the idea that macroeconomic problems can be solved by throwing more and more stimulus and “demand” at things. If the Government is serious about “Building Back Better”, it needs to do the hard yards in thinking about the supply-side constraints on the economy and how to turn more demand into real growth, rather than rising prices.

Daniel Hannan: We should thank, not demonise, the patriots who donate to political parties

4 Aug

Lord Hannan of Kingsclere is a Conservative peer, writer and columnist. He was a Conservative MEP from 1999 to 2020, and is now President of the Initiative for Free Trade.

The Financial Times is becoming slightly unhinged in its dislike of Tories. The paper’s loyalties have always been mercurial: over my lifetime, it has endorsed all three parties. Having enthusiastically backed Tony Blair, it gave some support to the Coalition and then to Theresa May. But Brexit seems to have tipped it over the edge. Even when the alternative was Jeremy Corbyn in 2019, it could not bring itself to back Boris.

Now it has taken to insinuating that donations to political parties are somehow dodgy – an odd stance for a newspaper that still sees itself as a defender of the private sector. For several days, the FT has been running news articles, features and comment pieces that vaguely suggest – without actually alleging any impropriety – that there is something suspect about the Conservative Party’s receipt of private money.

Property donors provide one-quarter of funds given to Tory party,” was Friday’s headline. Oh dear, we’re meant to think, not property donors! Not those johnnies who put roofs over our heads! It is a curious feature of our present discourse that, despite an acute housing shortage, developers can be presented as being almost on a level with arms dealers or pornographers.

The following day, it fired its second barrel: “Elite Tory donors club holds secret meetings with Johnson and Sunak,” was its lead story, followed up by pages of analysis inside.

Gosh. Secretive, eh? Bad enough that they’re property developers. But these, we learn, are furtive property developers. How did the FT find out about the donations of this sinister cabal? It turns out that they’re all registered with the Electoral Commission. Anyone can look them up. The organisation that happened to do so is an outfit called Transparency International whose Director of Policy (and evidently the driving force behind this report) is Duncan Hames, who is married to the former Lib Dem leader Jo Swinson and was himself the Lib Dem MP for Chippenham from 2010 to 2015.

Nothing wrong with any of that, obviously. Indeed, I have always had a soft spot for Swinson, who served her party with diligence and good humour, and whose dignified reaction when the SNP took her seat was a model of how to do it. But this was hardly a disinterested piece of research, as the FT must have known.

It is worth stepping back for a moment and reminding ourselves of some basic principles. First, there is nothing wrong with individuals giving money to things they support. I’m sure most ConHome readers give to charity, and I’d be surprised if most of us don’t also pay subs to our local Conservative Associations. If wealthier people make proportionately larger donations, God bless them. It must surely be better for the rich to support whatever causes they favour than to spend their cash on themselves.

We are, of course, rightly suspicious of oligarchy. I wouldn’t want a system where big donations bought policy changes, and neither would you. Such things can happen, even in Britain. Most of us remember the 1997 Bernie Ecclestone affair, in which the Formula One magnate gave Labour a million pounds in exchange for exempting his races from the ban on tobacco advertising. Fewer of us, for some reason, remember the 2009 cash-for-amendments scandal, in which two life peers asked for payments in return for moving legislation.

By any definition, both these were cases of straightforward corruption – that is, of politicians being paid to do things they would not otherwise have done. But such cases are extraordinarily rare in this country. Bad behaviour by our MPs tends to be rather more Pooterish, involving bath plugs or fumbling adulteries.

There is no suggestion that any Conservative donor has tried to buy favours. Indeed, far from seeking advantages for their own firms, these benefactors seem to be pushing for open competition. As the FT reports, with a hint of corporatist distaste, “the top donors are Thatcherite free marketeers, and they have no qualms about giving Boris a piece of their mind.” If so, good for them.

Which brings us to a second basic principle. Private donations are admirable whether or not we happen to agree with the cause being supported. One thing I have learned from social media is that there is an almost total overlap between people’s definition of “corruption” and their definition of “views with which I disagree”.

To see what I mean, consider the way Left and Right respectively treated the Koch brothers and George Soros. Depending on which side you were on, one was an example of high-minded generosity while the other was a conspiracy against the public weal.

ConHome readers should admire donors from all sides – philanthropists like Lord Sainsbury of Turville, for example, who, alongside vast charitable contributions, has given millions to Labour, the Lib Dems and various pro-EU outfits. We should likewise salute Keir Starmer’s ambition to increase the proportion of his party’s spending that comes from private contributions.

It must be better to live in a world in which rich people give their assets away. The alternative is a world in which we are forced to support political parties with our taxes. Quite apart from the tax bill being high enough already, this strikes me as morally repugnant. As Thomas Jefferson put it, “To compel a man to furnish contributions of money for the propagation of opinions which he disbelieves is sinful and tyrannical.”

What applies to donors applies even more to the people who volunteer to fundraise for parties. Here is a truly thankless job. Make the slightest slip and you’ll be treated as a crook. Indeed, the chances are that you’ll be hounded and accused whatever you do. In 2012, the then Conservative treasurer, Peter Cruddas, had to resign following newspaper accusations that he had been peddling cash for access. He sued for libel and won substantial damages, but he was not reinstated and, nearly a decade on, the original story was still being used to keep him out of the House of Lords.

Cruddas comes close to living up to John Wesley’s injunction to “earn all you can, save all you can, give all you can”. Brought up in a council house in Hackney, he has set up a £100 million scheme to help kids from deprived backgrounds. Had he not also backed the Conservatives, he’d have been in the Lords years ago.

A similar campaign is now being waged against the party’s current Co-Chairman, Ben Elliot – again, a successful businessman who has given up a great deal of time to take on a role for which the only payment is abuse. He is the real target of the press campaign. The original allegations in the FT prompted a bizarre story in The Sunday Times which seemed to be based around the idea that there was some impropriety in his arranging for a wealthy donor to back one of the Prince of Wales’s charities.

Again, does anyone think it is a bad thing for successful people to volunteer as Elliot is doing? If he raised cash for Prince Charles’s good causes, we should applaud him. If he raises cash for the Conservatives (and he does, with extraordinary effectiveness) we should likewise applaud him.

We are in danger of driving public-spirited individuals out of politics altogether. The assault may come in the form of negative press, as with Cruddas and Elliot. It may come in the form of actual legal harassment, as with Alan Halsall, the big-hearted businessman who was pursued for three years by the electoral authorities after acting as the treasurer of Vote Leave (all the allegations were eventually shown to be nonsense, but the stress and the financial burden of those three years can never be undone).

A combination of partisanship and purse-lipped puritanism threatens to make politics a no-go area for patriots who want to support a cause bigger than themselves – whether on the Left or the Right.

So, just this once, let’s say it. Thanks to everyone who is prepared to act on principle. Thanks to all those who put their money where their mouths are. And thanks, especially, to those who give up their time and risk their reputations to make the system work. Without you, our public life would be colder, meaner and smaller.