The Conservative Party leadership election is only days away, but the main battle lines have already been drawn. On one side stands Rishi Sunak, proclaiming his Thatcherite creed of small government, balanced budgets and national debt reduction. On the other, all the other candidates proclaim their Thatcherite principles of low taxation and low spending. While the latter all promise immediate tax cuts if elected to lead, Sunak warns against these “comforting fairy tales”. Unfortunately, neither interpretation of Thatcherism will solve the country’s current economic problems.
To understand this confusing debate, one must delve into conservative history and mythology. It is simply not true that Margaret Thatcher cut taxes. Yes, it reduced tax rates. During his tenure as Prime Minister, between 1979 and 1990, the base rate was reduced from 33% to 25%, and the top rate from 83% to 40%. But at the same time, it increased both VAT (from 8% to 15%) and national insurance contributions. The result was that the overall share of tax in the economy barely changed: it was 30% in 1978-79 and still 30% in 1990-91.
Thatcher reduced the size of the state. During his tenure as Prime Minister, total expenses managed (ie without social benefits) fell from 44% of GDP to 38%. But that was the result of economic growth, not spending cuts: in real terms, public spending has increased under Thatcher by just over 1% on average per year. The strong economic growth of the last period of his premiership also enabled Thatcher to reduce public debt: from 42% of GDP in 1978-79 to only 23% in 1990-91.
Thus, of the two claims to follow Thatcher offered by leadership candidates (tax cuts or debt cuts), Sunak’s is the more accurate. Yet you can see why every other leadership candidate wants to cut taxes. by Sunak recent and upcoming tax increases will raise the share of tax in national income to its highest levelnearly 36% of GDP, since the late 1940s. But it happened for two reasons that the contenders can’t just wish for.
One is the growth in post-COVID public spending which they have all supported – notably on the cost of living crisis, the NHS and the supply of arms to Ukraine. The other is Brexit, which almost everyone also supported. The Office of Budget Responsibility believes that Brexit will lead to a 4% drop in GDP. After nearly a decade of low growth during the austerity years, the result is a large tax revenue shortfall.
But that is not, in fact, the main reason why the Conservatives’ continued preoccupation with Margaret Thatcher is unnecessary. It is that the British economy today is fundamentally different of the one who confronted Thatcher when she was in Downing Street. In the mid-1980s, the manufacturing sector accounted for almost a quarter of national production, services for 60%. The financial sector was around 6%. 13 million workers belonged to trade unions. Thanks to newly abundant North Sea oil, for most of the 1980s the UK ran a trade surplus. Today, thanks in part to the policies of Thatcher and in part to the continuing processes of globalization and deregulation that have since occurred, the UK economy has changed enormously. The manufacturing industry now represents around one tenth of national production, services 80% and the financial sector 9%. Union membership has halved and nearly 4 million people are in low paid and precarious work. The UK has a persistent trade deficit.
Another type of economy requires different types of economic policies. The reason why wages have barely increased in the UK since 2008, it’s because productivity has been almost stagnant. To improve productivity, we need investment. In the mid-1980s, investment fluctuated between 20% and 25% of GDP. Today it is around 15%.
How to increase investments? All Tory leadership candidates except Sunak will pledge to drop his plans to raise corporate taxes, hoping this will encourage businesses to invest more. But there is little evidence that will be the case. Germany has a higher level of business investment than the UK despite a corporate tax rate of 30%, compared to 19% in the United Kingdom. Companies do not invest because of the tax rate on their profits. They invest when they are convinced they will Craft profits, because there will be sufficient demand for their products.
Thus, increasing the rate of investment requires more government, not less. It needs an active, national industrial strategy in which public investment is backed by the private sector. There are huge needs and opportunities for such investments, from green infrastructure (such as home insulation, railways and renewable energy) to innovative export sectors (such as life sciences and electric vehicles) to care sectors (physical and mental health, social assistance, and childcare). The latter will allow more people, especially women, to enter the labor market, which the economy desperately needs. At the same time, only a clear and concerted commitment to supporting aggregate demand will give businesses the confidence to invest. Only this will allow productivity to rise, thus allowing wages to rise without inflation. And in turn, that alone has the hope of making “upgrading” a real policy, rather than just a slogan.
Aware of all this, Theresa May made industrial strategy a central element of economic policy. She drew on an important Conservative tradition now generally associated with Michael Heseltine, when he was in charge of the 1980s equivalent of “leveling up” in Thatcher’s cabinet. But that’s not part of Thatcherite mythology, so it doesn’t matter what the real economic needs of the country are today; none of the current leadership candidates will support him.
Given that they have to appeal to an almost entirely Thatcherite electorate – first their fellow MPs, then the entire Tory Party membership – we shouldn’t really be surprised at any of this. But one of those suitors will be the next prime minister. And then their preference for ideological nostalgia over economic reality will risk making our already weak economy even weaker.