Without economic growth, our country cannot succeed. No growth means, axiomatically, that no one in society can get a real-terms salary increase without someone else being paid less.
It means that aspiration is crushed and our society becomes dog eat dog. Capital that must be accumulated to start up new businesses won’t be accumulated. Businesses that don’t grow will wither and die because they don’t accumulate the resources to beat their competition (particularly from abroad).
And a no-growth economy isn’t static; it sooner or later shrinks, because the unceasing demands of voters at each general election, never strong on deferring gratification, mean that politicians who want to be elected promise (and as often as not deliver) more money, more stuff; and in the absence of growth to pay for this largesse, put taxes up, higher and higher.
Growth (and particularly growth per capita, the most important metric) has collapsed in the UK and the European Un
ion, while countries in other parts of the world have motored ahead, with much higher growth rates than ours. Why? Because social democracy, their chosen political approach, is inimical to economic growth.
The key, growth-destroying features of the social democratic experiment are bigger government, higher taxes, and an ever-shrinking private sector to get those taxes from. It’s a pattern with only one eventual outcome: national bankruptcy. For most of this century, the UK has been increasingly drawn into that doom loop.
It’s hardly groundbreaking to point out the importance of economic growth; indeed, the political weather has changed so much that the three most recent prime ministers, facing the reality of a lamentable lack of growth in the past few decades, have each said that growth is their number one goal. Yet the policies each has proposed to achieve that growth are quite different from each other and it is a racing certainty that at least two of those growth policies have got it wrong; the policies they proposed would destroy, not create, growth.
So how is growth created? And will the current Government’s policies lead to economic growth? If not, what should it change? As I show in my upcoming book, Return to Growth, most of Labour’s policies are, with a few exceptions, growth-destroying.
This means that over the next five years, our economy is going to take a sharp turn for the worse. While Labour’s policies are bad, in many ways they are just a continuance of a social democratic experiment that’s been pursued by successive governments, including Conservative ones, over the past 30 years.
Unless we turn our back on that failed approach, we face ever-increasing hard times. The experiment has seen the state grow inexorably, ratcheting up the tax burden on everyone, particularly on the growth-producing parts of the economy. It has also created a regulatory thicket that has made it harder and harder for anyone to set up, or expand, a successful business.
The challenge for whoever wins the Tory leadership race – whether it is Kemi Badenoch, Robert Jenrick, Priti Patel, Mel Stride, James Cleverly or Tom Tugendhat – will be escaping this trap and charting a course back towards the free market model that made Britain a historic success.
How do we create an environment where the electorate can be brought to see the truth of the above assertions, so that a cohesive national effort can be made to remove those growth-destroying elements of our economy? In Return to Growth, I argue that agreement on two key principles – neither of them that controversial – is both necessary and sufficient to create an environment where economic growth per capita can smartly accelerate, to the benefit of all.
The first of these is that jobs are created by people, not by government. One of the more peculiar features of the modern era is the claim, by government after government, that they will “create“ jobs, often particularising this to their creating the jobs in this or that sector.
It’s a barefaced lie for any government to say they can do this. The overwhelming experience of history is that the more a government interferes with and dictates what’s going on in the economy, the less it will grow.
Economies that are run from the centre, by those who say “we know best,” always have dismal economic outcomes. In the extreme, you end up with complete collapse, as with Soviet Russia, or (more recently) Cuba or Venezuela.
Reversal of fortunes
There are plenty of reasons why this is so. In free markets, economies, entrepreneurs and businesses invest their capital where they think they can get the best return: this comes from providing goods or services that will meet the needs of the population. In socialist economies, however, central planning results in the misallocation of resources and the production of goods and services that don’t meet people’s needs and wants (heat pumps, anyone?) The more a government seeks to direct the economy, the more rent seeking, crony capitalism and lobbying for subsidies occur; all of which leads to economic stagnation.
As Peter Mandelson immortally said about New Labour’s industrial policy: they thought they were picking winners, but the losers were picking them. A particularly meretricious claim is that a government will create a host of “green jobs”. It’s nonsense, and I’m just one of many, from the Financial Times on, to say so. Do politicians really believe that they will, that they can, create a host of jobs? If they do believe it, they must be very stupid; if they don’t, they are wicked.
The Government can certainly create more government jobs, paid for through your taxes. Indeed, for most of this century, they have blithely done so – while productivity in the public sector has collapsed and services have declined.
But this does not grow the economy, except in the most make-work sense; rather, it just expands the state and sucks activity away from, while further taxing, the private sector, the place where true growth-producing jobs are created.
These private sector jobs are created by a combination of entrepreneurs, businesses and investors.
The relatively free way in which, for the 200 years or so before this century, these actors – largely unconstrained by government – were able to work their magic resulted in the most extraordinary level of economic growth in Britain’s history: wealth, living standards, health, longevity, human achievement all increased dramatically, and in the process we pioneered an economic system that has given the entire world unparalleled prosperity.
Entrepreneurs settle in countries that welcome them and allow them to get rich if they are successful, at the same time as their work adds to human happiness and prosperity.
In the same way, big business invests in countries that don’t seek to suck the last penny out of them in taxes. Just ask AstraZeneca, who in 2022 were planning to invest £400 million in building a plant in the UK. Had they done it, it would have created all sorts of economic growth and jobs.
But they changed their plans when Jeremy Hunt increased corporation tax to 25pc: the factory is now being built in Ireland where, at 12.5pc, the corporate tax rate is exactly half ours. AstraZeneca, which had always taken great pride in its success in the UK, is just one of scores of companies that have shunned Britain in the past two years – thanks, Conservatives.
Sadly but unsurprisingly, the Labour Government shows signs of making the position worse, not better, so the flight of wealth creators will continue. In sector after sector, companies are leaving the UK. Depressingly, this is particularly evident in some of the former crown jewel sectors of the UK – pharma, finance, oil and gas, petrochemicals.
It’s not just large companies that are leaving the UK: we have the third largest number of millionaires in the world leaving the UK. This has been happening for a number of years, long before Rachel Reeves entered Number 11 Downing Street; the number leaving seems to increase year after year.
Non-doms have been driven out. Entrepreneurs of all sorts look elsewhere to make their fortunes. Most depressingly, the brain drain has started up again, with young high-earners fleeing to the US, Australia, Dubai and elsewhere.
High levels of taxes and regulation also result in many who could help with economic growth no longer doing so: potential entrepreneurs and business builders “resigning from the economy”, prematurely retiring or becoming “digital nomads”. Until we recognise that it is people in the private sector, not governments, who create jobs, we can’t even begin to return to growth.
Large state, low growth
The second key principle is that while governments can’t create jobs and growth, they certainly can create an environment that enables the private sector to do so.
What is that environment? This is something that has been studied over and over again, and the vast majority of conclusions from these studies say the same thing: the three key devils that prevent growth are first a too-large, unaffordable level of government expenditure (several quantitative economists have claimed that the optimal size of public sector expenditure is 26pc of the economy; most politicians will assert this is too low a number to achieve, but I would settle for what we in the UK had in the country not too long ago, government expenditures at 33pc of the economy); second, too high a level of taxation (growth is significantly decreased the more taxes you suck out of the economy; I would argue for tax revenues that were no higher than 30pc – with the Government getting another 3 or 4pc of GDP from other revenues, so that it maintained a balanced budget); and finally, larger and ever-increasing regulation.
These three devils can be found in every social democracy, and are in the main what is keeping our level of economic growth so low. Let’s discuss each.
First: that a small state is a necessary driver of economic growth is irrefutable. Think about this impeccable logic: if the public sector is sucking up 25pc of GDP, three private sector workers can divide up the burden of carrying one public sector worker or beneficiary, but at 50pc of the economy, each single private sector worker has to carry that burden of the public sector worker or beneficiary. How well is that likely to work out? Chart B, below, shows one out of many studies (many of which prove it’s causation not just correlation between the two factors) illustrating the point – large state equals low growth.
And yet the size of the UK’s public sector has inexorably increased, from around 30pc of GDP last century to, during Covid, over 50pc; even now it is around 45pc. The number shows little sign of reducing.
Second: along with a large state comes the corollary: high taxes. Over and again, academic studies have shown that the higher the tax as a percentage of GDP, the lower the growth. Yet, again, we keep raising taxes – even, let us say particularly, under recent Conservative governments.
And when those governments meet resistance on increasing income tax or corporation tax, they invent all sorts of unconventional taxes – often wrapping up the reasoning for imposing them in faux-moral posturing, so that the taxpayer can feel bad about indulging in the activity, while paying stiff taxes on it. But Art Laffer – still denigrated, while always right – showed that all these tax rises result in less compliance, less economic activity and less tax revenue than predicted.
Large government and high taxes are bad enough, but what really kills growth is the third devil: excessive regulation.
Bit by bit, governments fail to resist the temptation to interfere with the wealth creators. Sector after sector gets more and more regulated and can innovate less and less. Capital requirements on banks steer them away from lending to small companies. Regulations on pension funds encourage them to invest in government bonds, not private sector equities. The car industry is told what cars to make; the boiler industry told not to make boilers. Formerly privatised industries must be re-nationalised. The insanity of EDI, ESG and the like – compulsory carbon literacy training, anyone? – forces companies to affirm and act with a primary purpose to achieve social nirvana rather than delivering goods and services that people want. Good luck with that nirvana stuff; in the meantime, forget about achieving any economic growth.
So, two simple and fairly obvious principles, but in the past 50 years most western democracies have done the opposite, ignoring the clear evidence that exists on how to improve their people’s wealth and living standards.
There are three general models of how countries are run in this modern age; at the worst end, we have the brutal bandit dictatorships such as Russia, Venezuela, North Korea, Iran, Nicaragua and Cuba.
These mostly emerged as the logical endpoint of socialism/communism, with leaders hanging on to power by terrorising their own citizens and indulging in brutal military adventures abroad.
The second model is Social Democracy. It takes a lot longer to fail, but ends up with stagnation and in consequence, over time, national bankruptcy, as is currently being predicted to befall, for example, France.
The third model is the Free Market economy, still pursued in countries around the world, all of which show startling and continued levels of growth, bringing wealth, health, longevity to their citizens. The USA is still one, despite Obama’s and Biden’s efforts; the wealth of its citizens grows at an astonishingly greater pace than the average EU citizen, so that salaries and wealth further and further outstrip ours. Post war, Europe was at first successful, but bit by bit its countries moved from free markets structures to social democracy, where saying you care, but acting to damage, is the norm.
The ever-increasing welfare bill led to the ravages of QE, and bouts of inflation that we cannot be sure are fully behind us. Doctrinaire polemicists now spout more and more reckless social nonsense, such as claims that our wealth is built entirely on the fruits of rapacious colonialism; the promotion of diversity hires; the bizarre assertion – to take just one example – that the socialised NHS, one of the worst health systems globally, is a national treasure and the envy of the world.
Drain the swamp
Leaving the EU has made it possible for us to break away from the European social democratic model. But we haven’t capitalised on this opportunity.
Instead, every government since 2016 has doubled down on social democratic policies, with predictably catastrophic results. The only leader who tried to break free and create a dynamic economy was Liz Truss, before being immediately betrayed by her own side, who encouraged all to embrace the fairytale that a disturbance created by bad regulation (the rolling collateral calls on leveraged LDI funds), compounded by the Bank of England failing to support the LDI funds as they sorted themselves out, amounted to “Liz Truss crashed the economy“ (economic growth that quarter, it eventually turned out, was positive, refuting the ONS’s previous claims that it had shrunk).
With her own side aggressively pushing her to failure, the political opposition and left-wing commentators had little work to do to ensure Truss’s departure, to be replaced by their always-preferred candidate, Rishi Sunak.
His new government had no principles to guide it, beyond the desire to cling on to power – and it even seemed to lose interest in that, calling, unforgivably, a premature election that it was bound to lose.
The new Starmer government promised to reduce regulation in the building industry so that the economy can get a boost, but then after that good start a raft of growth-destroying measures have been introduced, such as giving massive pay rises to the public sector and abandoning all attempts to reduce the vastly excessive number of civil servants, if only back to pre-Covid levels.
It doesn’t have to be this way. In previous centuries, we led the world with a few basic principles, summed up in the phrase “laissez-faire” — just let entrepreneurs, business and investors get on with building the economy, rather than stuffing them up with high taxes and drowning them in swamps of regulation. Other countries, like Switzerland and Singapore, are showing us there is no limit to the economic growth that a country can achieve if you rein in the state; in consequence, they deliver enormous benefits, of all kinds, to their people. There is absolutely no reason why we can’t do the same.
In addition to eliminating these three devils, there are of course many other things we have to do to get growth going; key among them are improving our state education system, which the wonderful Katharine Birbalsingh has shown us how to do – yet the new Labour government seems determined to do the opposite. We have to bust up the employee monopolies of the public sector and the semi-nationalised industries, banning strikes by state workers. We have to find a way, above all, to get immigration down so that economic growth per capita becomes possible. We have to do all this.
Without returning this country to growth, we can only expect decay, decline and (eventually) financial default. One way or another, our economy has to be restructured. Better sooner than later. We have to hope our Government is paying attention – although the chances are that Labour will follow its Conservative predecessors in sticking with more of the same, failed approach.
So in the meantime we have to wait, build the case, and keep pressing it: helping all to understand that growth will only come by reverting to the free market principles that transformed our country into the workshop of the world, thus eventually transforming the wealth of the whole world.
Jon Moynihan’s book, Return to Growth, will be published by Biteback on September 10th,2024.
