The past 14 years have been a white-knuckle ride for the British economy. Record low interest rates, money creation from the Bank of England on an industrial scale, Brexit, millions of workers furloughed during the pandemic, the biggest fall in output in at least a century – all that, and a record number of people inactive through long-term ill health. Boring it hasn’t been.
At the end of it all, there is a sense of deja vu as Jeremy Hunt puts the finishing touches to next week’s budget. When Liam Byrne departed the Treasury in 2010 he left a note – meant as a joke – for his successor as chief secretary, which said: “I’m afraid there is no money.” After almost a decade and a half of economic underperformance, Byrne’s words have come back to haunt the Tories.
Under pressure from Rishi Sunak to deliver pre-election tax cuts, the chancellor is scrabbling around for cash to fund the much-anticipated giveaways. The economy is officially in recession and money is tight. Opinion polls suggest the Conservatives are heading for a polling-day pummelling when the election is held, and the state of the economy is the principal cause of voter discontent.
Gordon Brown, Byrne’s old boss and the last Labour prime minister, says it should come as no surprise that the electorate is unhappy. “In 2010, I predicted a decade of austerity when we left office. We have actually had a decade and a half of austerity.”
Brown says that what motivated the Conservatives in 2010 was the idea of a small state, to be achieved through austerity and debt reduction. But austerity did not work. Slow growth meant deficit targets were missed and the public finances suffered from a chronic malaise. Productivity growth in the past 14 years had been the weakest since the Industrial Revolution, the former prime minister says. “We no longer have stop-go, we have different levels of stop, with crisis after crisis.
“Britain is a low-growth, low-productivity, low-investment, low-wage economy. And that means higher levels of poverty, destitution and inequality. We are entering a doom loop,” Brown says.
Hunt’s case is that since 2010 the UK has grown faster than Spain, Italy, France, Germany or Japan, and that after hitting a 40-year high of 11.1% in October 2022, inflation is coming down fast. Last year’s autumn statement included 110 measures designed to boost growth.
Economists say George Osborne blundered when he imposed severe austerity measures on a still-fragile economy
Voters may take some convincing that the Conservatives can again be trusted to run the economy. Living standards for workers are on course to be lower at the end of this parliament than when it started in 2019. Real average wages – pay adjusted for inflation – are no higher today than they were 16 years ago.
What is more, after 14 years the Conservatives can no longer blame their difficulties on their legacy from Labour. Over the past 45 years, parties have enjoyed long interrupted periods in office: 18 years for the Tories between 1979 and 1997; 13 years for Labour from 1997 to 2010; 14 years for the Conservatives since then. After that length of time, governments are judged on their own record, and the one Hunt is defending is markedly worse than the one the Conservatives could boast of in 1997. Back then, growth was much stronger, debt was much lower, and the balance of payments was in surplus.
Similarly, in 2010 the economy seemed to be slowly on the mend after the shock caused by the near-collapse of the global banking system two years earlier. Economists say George Osborne – David Cameron’s chancellor – blundered when he imposed severe austerity measures on a still-fragile economy.
Gerard Lyons, economic adviser to Boris Johnson when he was mayor of London and now chief economic strategist at Net Wealth says: “The whole period after 2010 was one of major fiscal mistakes. Austerity was wrong and badly executed. The ability to borrow cheaply was staring at us as a huge opportunity but was never taken.”
Lyons is also critical of the Bank of England for keeping interest rates low for so long. The official cost of borrowing was cut to 0.5 % in March 2009 and remained below 1% for the subsequent 13 years. “Cheap money was an absolute disaster. It led to asset price inflation, greater inequality, zombie companies and inflation.”
Lyons says the past 14 years have widened the UK’s divisions, and not just those between north and south. “It is London versus the rest of the country, cities versus rural places, coastal communities versus those inland, homeowners versus renters, the old versus the young and the skilled versus the unskilled.”
Although politically dominated by one party, the period since May 2010 divides neatly into three distinct periods: the austerity years at the start; the Brexit years in the middle; and the pandemic years at the end. Jagjit Chadha, director of the National Institute for Economic and Social Research thinktank, says there is a thread running throughout.
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“The supply side of the economy has been very badly managed after the financial crisis and has suffered because of the way Brexit was brought about. That meant we were unable to cope with Covid and the cost of living crisis in the way we might have done. The economy was made riskier just as the global economy became riskier.
“Wealth and income inequalities have expanded. There has been the growth of the working poor, who need state support. That has led to a structural budget deficit and a continual squeeze on public investment that has further weakened the economy’s supply side. Things have come together that have not been tackled by our political masters.”
Lyons supported Brexit and remains convinced that it will be positive for the economy if the opportunities are seized. Even so, he says the three and a half years between the referendum in June 2016 and the December 2019 general election – when it was unclear on what terms the UK would leave the EU, if it all – created political instability that depressed investment. Within months of Brexit being finalised, the economy was in the grip of the pandemic.
All of which has left the sense of a country stumbling from one crisis to another, and never getting to grips with underlying structural problems that have been evident for decades.
Back in 2003, Mervyn King, then governor of the Bank of England, said the economy had enjoyed a NICE – non-inflationary, consistently expansionary decade – in which Lady Luck had smiled on the UK.
That ceased to be the case five years later when the UK was one of the countries worst affected by the global financial crisis, and it has never really recovered in the 16 years since. Pre-2008 the economy doubled in size every 32 years. The Office for Budget Responsibility now says it will take 40-45 years for that to happen, and on current trends even that looks optimistic. The one positive surprise is that despite everything that has been chucked at the economy, unemployment has remained low.
Rachel Reeves, Hunt’s Labour shadow, says the party that wins the next election will have the direst inheritance of an incoming government since the second world war. The chancellor would disagree with that assessment. Voters might not.
