Britain’s economy: is the right right?

Britain’s economic performance since the Coalition government took over in 2010 has been as dismal as today’s cold, damp and grey London weather. Negligible economic growth; government finances that stubbornly refuse to improve, even as services and benefits are cut; and although unemployment is trending down, this is at the cost of pay and hours being squeezed. In political and media circles most of the debate about this state of affairs is around managing total economic demand: the “Keynesian” critique (quotation marks since using a dead economist as a source of authority does not do justice to the critique). Much less prominent is a right-wing critique. Yesterday Allistair Heath, Editor of City AM produced a 10-point plan in The Telegraph online, which neatly summarises this perspective. It is worth thinking about this a bit.

Mr Heath’s 10 points, in his “Supply-Side Manifesto” are as follows:

1. Cut corporation tax to 11pc; abolish capital gains tax

2. Cut current government spending by 2pc this year

3. Wage war on zombie firms

4. Reform the labour market

5. Allow private sector to finance big transport projects

6. Build 300,000 homes a year

7. Scrap renewable energy targets

8. Create mini-jobs for welfare recipients

9. Allow for-profit firms to run schools

10. Make it easier for consumers to switch suppliers

The basic premise of this is that it is what Britain needs is a supply-side revolution to get going. In other words it must be made easier for businesses to grow, and there must be greater incentives for private sector investment. There is something to this. Britain’s economy before the crisis struck in 2007 was unsustainable, and much of the growth in the preceding half-dozen years was a mirage. The most convincing evidence of this is the country’s current account deficit – consistently 2-3% of the economy (and the trade deficit much worse). This seemed to be the result of an inflated exchange rate. As the crisis struck, the pound duly depreciated. And yet, as the Economist pointed out a couple of weeks ago, the current account deficit has not recovered (unlike after 1992, when the pound fell out of the ERM). This bespeaks a deep malaise in the economy. This is much more that a dip in the business cycle that can be cured with fiscal stimulus and/or loose monetary policy. Indeed both such policies could make things worse by pushing out needed investment.

It is common wisdom that the British economy needs to be “rebalanced”: but this seems to be happening only very slowly. Reduced dependence on financial services and public expenditure are clearly both part of any such rebalancing, and we do seem to be making some headway here. But what is to take their place? Thinking about the “supply-side”, or how the economy actually delivers the goods and services it needs, is a welcome relief from banging on about aggregate demand, and its assumption that all this can be left until later. But it is here that I mostly part company commentators such as Mr Heath. Let’s have a quick look at the ten points.

  1. Cut capital taxes to encourage investment. This idea has a respectable intellectual history, but there is a problem. It tends to encourage wealth creation by the rich without much impact on the rest of society. And as the rich tend to save rather than spend their incomes, this doesn’t do much to fix the wider malaise. I’m not so sure that attracting footloose international capital will help much in an economy of our size anyway, (unlike Ireland).
  2. More cuts to government spending: no ring-fences. I do agree that government has to be smaller and more efficient – but the country is very dependent on government sponsored services, such as education and health. We are up against what economists call “Baumol’s Disease”, as well as demographics; there is a limit to amount we can expect from efficiency savings. There is plenty to discuss about how these services are to be funded and structured, but crude cuts are a blind alley.
  3. Allow more companies to go bust. I have more sympathy with this one, though I am not convinced that this is really what is blocking investment.
  4. Labour market reform: reduce job protection. I am more ambiguous on this than most liberals, perhaps hardened by my experience as a middle manager. Improvements can be made, but the evidence that this is what is holding us back is weak.
  5. Big transport projects financed by private sectors (tolls, etc). Easier said than done. The cost of big capital projects is escalating, and returns less certain. I think the current government is pushing ahead with this as fast as politics will allow.
  6. Housebuilding. Here the right wants to unleash the private sector by overcoming planning constraints. Mr Heath is being a bit disingenuous here: he means plastering the green-belts with cheap and shoddy new housing estates. But there is a housing shortage; and we do need to compromise on the green belt. But we need good quality homes and more social housing, with development gains being used to finance social infrastructure, such as schools.
  7. Junk renewables for coal and gas. I’m not sure that an economy built on cheap, carbon intensive energy is the right way to go. I expect that Mr Heath does not believe in climate-change. Moving away from cheap energy dependence is one of the pieces of rebalancing that has to be achieved. Green energy should be part of any growth strategy.
  8. 9., & 10. These are throwaway ideas given a sentence each. I don’t necessarily disagree, even with for-profit state schools, but I don’t think they will help the supply side by much.

So there’s me being very negative about a whole series of practical ideas. So what do I think? First point is that we need to accept that, for a whole variety of reasons, growth in most developed countries will be very slow for the foreseeable future. We need to adapt our expectations to this, and think more clearly on how to deliver improved human wellbeing without it. Second, we need to think hard about under-used human resources: that means mainly people living outside the English South-East and a few other hot-spots. Simply building more houses across London’s greenbelt and moving people there does not feel right. There are no big ideas here, but lots of little ones. Dumping big government agencies in these places is not one of them, though. Third we have to rethink public services. The reforms need to focus on improved commissioning and getting results. But we also need to think about such politically toxic issues as co-payment – since taxes will not be enough to fund the nation’s needs. Plenty of ideas for future blogs, but that’s enough for now.

So the left bangs on about Keynesian demand management, in the hope that longer-term problems can be solved later; the right chases a fantasy of growing businesses unleashed by smaller government. The public seems sceptical of both. Rightly so.

London’s schools: awkward facts for both left and right

Last Friday I attended and seminar for school headteachers and chairs of governors addressed by Sir Michael Wilshaw, head of Ofsted, the body that inspects English schools. It was convened by the London Borough of Lambeth, for whom I am a primary school chair of governors, and where Sir Michael himself spent much of his school career (at least that is what he implied – though the secondary school he described sounded as if it was just over the border in Wandsworth, and very near where I live). He used the occasion to heap praise on the acheivements of Lambeth’s schools, and schools elsewhere in London too. He made his point by drawing a comparison to England’s second city, Birmingham, whose results, he implied, were mediocre. The progress that London’s state schools have made in the last decade is one of the most important facts about public services in Britain. But it is little talked about because it poses awkward questions for both left and right.

First the facts. My main source is a pamphlet produced by CentreForum in late 2011. The data may therefore be a little old, but the story hasn’t changed in the period since. London’s state school results, at both primary and secondary levels, are close to the English average. But the proportion of pupils attending school from the lowest income groups is much higher than in any other English region. About 70% (I’m a bit vague because I’m having to read off a graph without the exact numbers being in the text) of its pupils are in the lowest two income quintiles, compared to under 50% for most other regions (a bit over 50% for the North East). A lot of higher income parents send their children to private schools, especially in London, and this no doubt accounts for a lot of the skew to lower income levels. So London’s schools are achieving these results in spite of much higher levels of deprivation. The more you dig into the data, the more impressive this achievement looks. But London’s schools used to be awful.

When I have mentioned this achievement in various policy forums I get some rather strange reactions. People quickly dive in with data-less explanations which leave their basic world view intact. One economic liberal type started to lecture me on how much more aspirational London parents were. A more left-leaning type (with direct experience of London schools) attributed it to an influx of African immigrants displacing poorer performing white and Afro-Caribbean ethnic groups. Others have complained about preferential funding for London’s schools. But the data shows that, let us say, none of these explanations is anything like sufficient. But they did educate me in how selective many policy commentators are in their insistence on the use of proper evidence.

How have these results been attained? This is a lot less clear. No doubt the capital does have some inherent advantages in aspirational families and a better pool of potential teachers – which had not previously been exploited. But the main explanation seems to be strong political leadership. The boroughs led the way, but central government (under Labour) was bearing down on them, with initiatives such as the London Challenge (started in 2003, focusing on secondary schools). For Sir Michael, who was very much in the middle of it, the main point was that heads and governors were made more accountable for their results. Failure to achieve good results resulted in schools being hauled over the coals. The “Satisfactory” rating for an Ofsted inspection was in fact regarded as “Unsatisfactory”; Sir Michael has since changed that nomenclature. I have certainly seen how school leadership teams have focused more clearly on how to reach out to families from poorer backgrounds, with extended school facilities (handy for working parents) and family learning, as well as individually tailored interventions.

Why is this so awkward for mainstream politicos? The left, drawing support from the trade union movement, do not want to put schools and their staff under too much pressure. They would rather promote the fiction that England’s schools are generally good, but that they cannot overcome the social issues created by poverty – which need to be tackled through anti-poverty measures. And yet it seems that if you chivvy (and even bully) schools hard enough you can dramatically improve the results of pupils even from very challenging backgrounds. There is a very uncomfortable paradox here: leftist political activists get very worked up about deprivation, but this translates into low expectations of what deprived families can achieve, which in turn becomes a self-fulfilling prophesy.

Things are just as bad on the right. They say that the problem is that parents lack choice, and that the state runs schools badly. So the focus is to reduce state control by converting schools to semi-independent Academies, and letting interest groups set up brand new schools. Choice and competition will drive up standards. And yet the London results show that this is at best irrelevant. The results have been achieved with existing political structures.

If London’s schools show anything, it is the effectiveness of the last Labour government’s methods – Tony Blair’s Third Way. And yet this has become deeply unfashionable in political circles. In fact there was plenty wrong in Labour’s education policies, including a very wasteful school building programme, which converted necessary school upgrades into prestige architectural projects. But the basic idea was sound: good old fashioned political leadership and accountability can transform public services – provided you are prepared to take on the vested interests of those working within it.

Or to put it another way, and to bring it into one of the main themes of this blog: effective commissioning is the secret to better public services, both at the level of whole communities and at the level of individual users. London got a lot better at both.

Britain’s ungovernable Conservatives

I can remember when Britain’s Conservative Party was thought to be the country’s natural party of government. This feeling reached a peak after John Major’s shock win in 1992, when the party looked all but unelectable. The journalist Will Hutton wrote a best-seller “The State We’re In” which explained why. The party was deeply embedded into the country’s establishment. The discipline of its membership was legendary. Its hunger for power also made it adept at judicious compromise. It was a well oiled machine to keep an elite in power. The brief intervals of post-war Labour government in 1945, 1964 and 1974 seemed like awkward aberrations. Now, as the party wrestles with today’s vote on same-sex marriage, many observers of the British political scene wonder whether the party will ever secure a majority in the House of Commons after that win in 1992. What went wrong?

The party’s troubles are clearly deep. When David Cameron took over, after the party’s third successive defeat in 2005 it was clear that the party’s image with the public was toxic. Polling showed, the story went, that if the party came out in favour of a particular policy then that was reason enough to turn people against the policy. Mr Cameron’s mission was to re-brand and de-toxify the party, much as Tony Blair did with the Labour Party after that defeat in 1992. It seemed to be working. Mr Cameron embraced liberal causes like environmentalism and the inclusion of gays, while putting the party’s obsessions with Europe into the background. In doing so Mr Cameron put the party’s official position in a place where most Britons would not disagree with it. The party’s enthusiasm for the privatisation of public services was, and is, the only major exception.

He failed to win a majority in 2010, but by embracing coalition with the Liberal Democrats, he seemed burnish the party’s liberal credentials. While the Lib Dems were thrown into existential crisis, it seemed that the Tories were on a stepping stone towards power in their own right. But then people started to discover what the new Conservatives were really like. The problem wasn’t so much the Coalition’s programme of austerity and public service reform – “The Cuts”. These have produced a deafening whining sound from the left of the political spectrum. But these mainly originate from a complacent Labour establishment who had got used to a way of doing things, and it is not resonating with a majority of the British public. It is more of a problem for the Lib Dem element of the coalition than the Conservatives, though the NHS reforms remain a danger to both parties.

The real problem for the Tories comes on just those symbolic issues where Mr Cameron had tried to change the mood music. An obsession with the European Union and calls for a referendum on it have come to the fore. Reform to the House of Lords was firmly squashed, notwithstanding a seeming commitment to it in the party’s 2010 election manifesto. And now same-sex marriage (“equal marriage” to its supporters, “redefinition of marriage” to its opponents, “gay marriage” to the BBC). I must admit that this is an issue I struggle to get worked up about. But most of my friends are for it (though at least one is a passionate opponent), and it fits with my generally progressive outlook on life. Our understanding of what marriage is has changed over the years. But to many people in the country the reform is the last straw in a constant process of the undermining of traditional values. Such people feel that the political system tramples over them regardless, and their frustration makes them angry. They are in a minority, but not a voiceless one. They are particulalry well represented in the ranks of the Conservative Party, and many Tory MPs are taking up their cause.

This leaves three problems for Mr Cameron and his modernising allies. First is that it exposes divisions in his party, and that makes it look less credible as a governing party. Second it shows that whatever Mr Cameron may promise, even if it is in the election manifesto (same-sex marriage wasn’t in the main manifesto, it has to be said, but in separate party publications for the gay community), he cannot deliver on liberal, reforming policies that do not involve privatisation. Third is that there is a risk of defection from the traditional wing of his party in protest, reducing the party’s potential in the electoral ground war, and potentially helping UKIP, which is positioning itself as a vehicle for just such traditionalists. Under the country’s electoral system it is tough enough for the Tories to win outright. Surely it is now impossible?

Of course Mr Blair faced major challenges from Labour traditionalists, but still forged a highly effective political machine that still looks in good shape, even after its heavy defeat in 2010. But Mr Cameron does not command anything like the same loyalty amongst party apparatchics, and above all MPs, that Mr Blair commanded at the equivalent stage in his government. Mr Cameron never attempted Mr Blair’s “Clause 4 moment”, of a deliberately engineered confrontation with his critics to show he was boss.

Is it all lost for Mr Cameron? Not quite. There is always the example of 1992. Then the Tories were able to demonise the Labour Party and its leader sufficiently to scare first the press, and then voters into voting for it in large numbers. Ed Miliband, like Neil Kinnock, Labour’s leader in 1992, does not cut a particularly prime ministerial figure. There may well be an opportunity to stoke fears about tax rises under Labour too. As the General Election approaches Mr Cameron could rally the dissidents. He can still call on rich donors and much of the press will still rally to their cause.

But the Conservatives are no longer the party of the establishment. Their hidden advantages, so strong in the 20th Century, are eroding away. The 2015 election looks like another stalemate.