Tim Pitt is a former senior adviser to two Conservative chancellors, an Onward Policy Fellow and a partner at Flint Global. He writes in a personal capacity.
It is easy to dismiss Trussonomics as a short aberration – a moment when conservative economics briefly lost its bearings. In truth, it was just the latest manifestation of conservatism having become unmoored from its economic foundations.
For over 40 years those foundations endured, best summarised by Nigel Lawson in his 1984 Mais Lecture: the British experiment, he argued, “consists of seeking…to provide increasing freedom for markets to work within a framework of firm monetary and fiscal discipline”.
The last six years have seen Conservative adherence to Lawson’s creed challenged by factors from low growth to Brexit to austerity fatigue, as well as the extraordinary nature of Covid and energy-driven government interventions.
As a result, the Conservatives have veered one way then another on economic policy, driven at different moments by political expedience, economic necessity and raw ideology.
Liz Truss’ arrival at least provided the Government with a clear strategy. It did not, however, survive contact with reality, based as it was on a superficial economic analysis and a half-baked version of Thatcherism.
The immediate task facing the Chancellor is to fix the public finances. More broadly, it is to restore the Conservatives’ shattered economic credibility. Yet in seeking to do so the risk is that the Tories simply revert to the comfort blanket of Lawsonian orthodoxy, desperate for stability and some kind of economic narrative.
Because for all its undoubted strengths, that orthodoxy was designed to tackle the economic challenges of half a century ago. Lawson’s framework should serve as a foundation, but the Conservatives need an economic strategy to deal with today’s challenges.
The starting point must be a clear diagnosis of those challenges. They are threefold.
First, low growth. The Truss administration was right to focus on growth, vital as it is to drive up living standards. But contrary to that administration’s anti-declinist narrative, a failure of Government policy is only a partial explanation for the UK’s low growth. Economic and productivity growth have been slowing gradually in the UK for decades, driven by a range of structural factors, including demographics and the gradual shift into lower productivity services.
While policy can make a difference – particularly given the UK’s relative under-performance compared to its peers – these structural trends will continue to weigh on growth. It is therefore unrealistic and, because conservatism is anti-utopian, un-Conservative, to think any government holds within its power the ability to transform the UK’s trend growth rate back to pre-financial crisis levels. So increasing growth can’t be the sole focus of Conservatives economics.
Second, economic inequality. In his mini-budget speech, Kwasi Kwarteng said that “for too long in this country, we have indulged in a fight over redistribution. Now, we need to focus on growth”. In doing so, he echoed Thatcher, who argued in 1975 that part of the “British sickness” was down to the “progressive consensus” that the state should actively redistribute wealth and income.
But these two statements were made in totally different contexts. When Thatcher was speaking, economic inequality across income, wealth and regions was at historically low levels. Today, inequality is high by both historic and international standards. This should be anathema to Conservatives, undermining as it does core conservative values, notably social mobility and political stability. With no evidence that reducing inequality need mean lower growth, tackling it must be a priority.
Third, the public finances. On every occasion the Office for Budget Responsibility has produced a fiscal sustainability report, it has concluded that the long-term fiscal position is unsustainable. This is driven in large part by rising health and pensions spending as the population ages, technology improves and chronic conditions become more prevalent. Conservatives therefore need to get real about the fiscal challenge. This includes accepting that the tax burden’s recent rise is not some temporary aberration, but a necessary reality as the UK begins to deal with these structural pressures.
An approach to these challenges must then be grounded in enduring conservative principles. The contemporary focus on Thatcher ignores the fact that conservative economics has ebbed and flowed over the last two hundred years. Robert Peel’s liberalising agenda was followed by a long period of scepticism towards laissez-faire, and it was only with Labour’s rise that the party shifted by defining itself against socialism. The period after 1945 nonetheless saw the Tories make peace with the welfare state and preside over a mixed economy, before Thatcher’s rolling back of the state.
As the late historian of conservative thinking E.H.H. Green argued, however, this continual adaptation is “not to deny [conservatism’s] existence as a constant or consistent political and historical entity”.
Throughout, four principles have endured.
First, pragmatism. conservatism has tended to be sceptical and grounded in realism, eschewing the rigid ideological framework that socialism has provided Labour. Indeed, the history of conservative economics can partly be defined by opposition to ideology: to laissez-faire liberalism in the nineteenth century and to socialism in the twentieth.
Second, stewardship. conservatism has welcomed economic change, both for the progress it can deliver and as necessary to ensure the political and social stability which conservatives believe so important. The challenge is to manage it, gradually and sensitively, to ensure that people and communities are protected.
Third, One Nation. Contrary to the contemporary perceptions of the left, conservatives have believed in the need for prosperity and opportunity to be shared broadly. This thinking runs from Disraeli’s concerns about “Two nations”, rich and poor, to Macmillan’s belief that Conservatives had a “clear duty” to those not sharing in economic progress.
Fourth, an empowering state. Conservatives have rejected the interventionist state that has been an obsession of the left. But conservatism must not be confused with libertarianism. As Thatcher said: “we are not anti-State…we seek a proper balance between State and society”. Instead, Conservatives have seen the state’s role as to enable, rather than control, economic activity.
Rather than an ideological approach, these four principles – pragmatism, stewardship, One Nation and empowerment – should be the foundations of Conservative economic policy.
Applying them in practice, a stable macroeconomic foundation is essential. A conservative approach to fiscal policy must be driven by the pragmatic principle: Conservatives should be prepared to use fiscal policy aggressively in downturns, particularly when monetary policy is at the zero lower bound, but acknowledge that to build space for that, the debt-to-GDP ratio must fall materially in good times.
As the UK economy prepares for significant structural shifts, the stewardship principle should shape the Conservative approach to the labour market, ensuring the workforce have both the skills and safety net needed for a rapidly changing world. This means investing in human capital as much as physical capital, backed by a package of reforms to the social security system that restores the contributory principle that William Beveridge originally envisaged.
Truss’ focus on supply side reform must be maintained. It should be guided by the empowerment principle, with the state providing the enabling conditions for the private sector to thrive. Necessary reforms include going further on devolution, building a new framework for industrial policy, strengthening competition rules, creating a pro-innovation regulatory regime, liberalising planning, delivering infrastructure, and shifting innovation policy to prioritise diffusion.
Finally, the debate on tax needs to shift from the overall burden to reform. Improving incentives to support growth and raising revenue to tackle the fiscal challenge are both important, but given the scale of the inequality challenge the One Nation principle should be at the heart of tax reform. Changes across the taxation of earnings, business, property and wealth should be prioritised.
As Arthur Balfour, Conservative Prime Minister at the beginning of the last century, argued: “every phase of civilisation requires its own political economy”. As it has done many times before, conservative economic thinking must evolve again.