In search of Governing Economics

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The current Conservative leadership contest has been dominated by economics. Liz Truss and Rishi Sunak have laid out differing visions for tax and spending – and then repeatedly argued over the impact their respective policies will have on inflation, economic growth and the budget deficit. It has recently been suggested that the economics is inconclusive and divided. This is not true. There is broad-based, if never unanimous agreement, on the impact of each candidate’s proposals. These are worth summarising such has been the smokescreen that has surrounded each claim, and counterclaim.

First, and most salient for UK households according to recent YouGov poll is inflation. 64% of Britons believe this should be the priority for the new Prime Minister. Consumer prices are currently rising at a rate of more than 9% a year and are expected to peak around 13% when the energy price cap rises sharply in October. There is no getting away from the fact that proposals for the government to spend more, or tax less to support households and businesses will add to inflation. Who these changes benefit will determine how much extra inflation these changes will generate. More support for poorer households will generate less inflation that similar financial support spread across the income distribution. But it is also true that neither candidate’s ideas are going to make a dramatic impact on prices. Events in global energy markets continue to swamp any decisions made domestically.

Second, and linked to the inflation surge, has been overt or implied criticism of the Bank of England for failing to control inflation. Again, the economics suggest there is a kernel of truth here. Earlier action to raise interest rates or end Quantitative Easing earlier in 2021 would have reduced the peak of inflation. However, on any reasonable timetable the impact would have been marginal. This is not to absolve the Bank of England of blame – they have made some considerable missteps in recent months – but there is more than a whiff of them being a convenient alternative scapegoat for public anger. 

Thirdly, there are claims from both sides that their proposals for the UK economy will support faster growth and stabilise public sector debt. From Liz Truss it is the suggestion that reversing the recent increase in National Insurance contributions and the upcoming increase to Corporation Tax will trigger higher economic growth. From Rishi Sunak it is that tight fiscal discipline will themselves support higher levels of growth. The latest evidence, internationally and domestically, is that neither set of proposals will make a material impact on UK trend growth. Looking at the impediments to economic progress in recent years a greater focus on occupational health post-pandemic, establishing a stable relationship with the EU and less frequent tinkering with the UK’s industrial strategy are more likely to improve the UK’s growth performance.

There is one area however that unifies the economics of all prospective Prime Ministers, on all sides of the House of Commons. This is the chasm they generate between their Campaign Economics and Governing Economics. This is the big divide in UK politics. It is rarely now a battle between Monetarists and Keynesians; Libertarians and Socialists. It is between the perennial Campaigners and the potential Governors. 

Campaign Economics is characterised by ignoring trade-offs and wishing away inconvenient truths. From Climate Change to Brexit, from the Cost-of-Living Crisis to Building Homes. Party Elections, General Elections and Referenda are won by Campaign Economics. They are ideas that rarely, if ever, survive contact with Governing Economics.

Governing Economics is when expertise – either from the Civil Service or from external professionals – is presented to ministers and brings these trade-offs and truths into sharp relief. This frustrates everyone. The public become frustrated that Campaign Economics is not being delivered. Ministers become frustrated that the world is more complex and imperfect than they had hoped. Advisers become frustrated that they get labelled as objectionable blockers.  

Campaign Economics has promised incompatible visions for the UK outside the European Union. Governing Economics is about deciding between lower regulatory standards or low friction trade with your biggest economic partner. Campaign Economics has promised a low tax economy. Governing Economics is the funding requirements of an ageing population. Campaign Economics has promised to ‘Level Up’ the UK. Governing Economics is deciding which regions receive less public funding to provide more for poorer ones. 

Why does this stuff matter? Politicians have always said whatever was necessary to get elected. It is one of the easiest traps for opinion columnists to fall into – the idea that any socioeconomic issue is novel. They are almost always old issues but recast by contemporary themes. But there are three elements that feel genuinely new and where a disconnect between campaigning and governing generates heightened jeopardy. Climate change, the UK’s evolving relationship with the EU and living endemically with COVID-19. Campaign Economics polarises these issues raising expectations of radicalism. Governing Economics is about delicate cost-sharing, balancing intergenerational transfers and making long-term commitments often far beyond the five-year parliamentary cycle.

In this regard UK economics has a helpful template. Almost twenty years ago the Pensions Commission was set up to address chronic undersaving in retirement. The Commission’s gathering of evidence and bipartisan support enabled its recommendations, first published in 2005, to survive five changes of government and remains the bedrock of policy today. It has dramatically improved workplace pension saving in the UK and with it the financial status of millions of Britons in retirement. The key was allowing the evidence behind Governing Economics to crowd out space for Campaign Economics. This was why I continue to believe that Michael Gove’s comments in 2016 that the public “have had enough of experts” was one of the most damaging statements by a UK politician in decades.

Bringing this back to the ongoing leadership campaign, the challenge is therefore not to take each candidate’s Campaign Economics at face value. It is to establish their willingness to pivot to Governing Economics. In this regard a former Chancellor with low tax aspirations thwarted by the realities of office is preferable to a Foreign Secretary who continues to wish for an undeliverable resolution in the stand-off over the Northern Ireland Protocol. The polling seems to suggest most Conservative members still prefer campaigning to governing.      

10th August 2022

Simon French

Managing Director, Chief Economist

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