Larry Elliott, 26 Jul 2019
So farewell then, Project Fear. Out go the predictions of imminent economic catastrophe, in comes Mr Brightside and his vision of the sunny uplands that lie ahead. Before he became prime minister, Harold Wilson talked of how the Britain of the future would be forged in the white heat of the technological revolution. For Boris Johnson, it is full-fibre broadband.
Little has changed since 1963. Then, as now, Britain was strong in science and rich in new ideas. Then, as now, it was less good than other countries at exploiting them. Wilson’s optimism drained away after he arrived in office, as Johnson’s may well also, and for the same reason: a sterling crisis. But for now the country will be love-bombed with the new prime minister’s can-do spirit.
Eyebrows have been raised at the brutal way Johnson defenestrated members of Theresa May’s cabinet, but he approached the task like the new chief executive of a once all-powerful company making colossal losses. Businesses tend to be ruthless in those circumstances; they get rid of the old, failed management team and bring in a team committed to the turnaround strategy.
This strategy has two elements. The first is to take Britain out of the EU on 31 October. The second is to show that there is life after Brexit, kicked off by a voter-friendly budget that will prepare the ground for a possible early election. Johnson has pledged to spend more on schools, the police and better transport in the north, and he will increase borrowing to pay for them. His enemies underestimate him if they assume he is all bluster. Britain is about to get rightwing Keynesianism of the sort pioneered by Ronald Reagan – another incurable optimist – in the 1980s.
Johnson knows – or should know – that breezy self-confidence and budget giveways can only get him so far. The message from May and her team as they leave office is that the economy is fundamentally sound, a view based on record levels of employment and – by historical standards – modest improvements in living standards.
The apparently healthy labour market, pumped up by low-paid, insecure jobs, is a Potemkin village that hides a dysfunctional economy. Not much unites the remainers and leavers in the Conservative party, but they are as one in being delusional about the state of modern Britain. Remainers such as Philip Hammond and his predecessor, George Osborne, believe that the economy was going great guns when the referendum was held in 2016. Leavers like Jacob Rees-Mogg think departure will unlock the gate to a promised land of prosperity and happiness.
The truth is somewhat different. Project Fear was a failure not just because all the lurid predictions were well over the top, although they were. It was also a failure because it followed years of voters being hoodwinked by governments of both left and right that the economy was stronger than it actually was. Among the many myths peddled were that making things no longer mattered, that the market would regenerate communities stripped of their mines and their factories, that better education was all it took to make a success of globalisation, that boom and bust had been abolished, that rising house prices were a sign of strength and that wealth would trickle down from rich to poor.
A more honest appraisal would go as follows. For decades Britain has consumed more than it has produced, with the result that the UK has the biggest deficit on its current account of any member of the G7. In the past, deficits this big have led to sterling crises. A breakdown of the current account shortfall shows that since the early 1980s a colossal deficit in manufactured trade has been partly offset by a surplus generated by services and by the investment income from trade in financial assets. Put simply, the UK has hollowed out its industrial base and developed the City into a global centre of finance.
The economy was kept going through the boom years of the 1990s and 2000s because cheap imports meant inflationary pressure was weak and interest rates could be kept low, allowing consumers to load up on debt to buy ever more expensive real estate. Rising property prices made people feel richer than they actually were. They borrowed to trade up to bigger homes and they borrowed to fit them out. Personal indebtedness soared.
A short-lived property bubble helped David Cameron win the 2015 election, but prices rose to levels that made them unaffordable to the next generation of home buyers. Owner-occupation rates among the under 30s have collapsed. The baby boomers who have done so well out of the regular property booms since the early 1970s are now getting older. In the future, Britain will have more longer living pensioners in need of expensive care and fewer people of working age to support them. The choice is to make baby boomers pay for their own care or tell the asset-poor younger generation that they will have to pay for Granny and Grandad’s care through higher taxation.
To sum up, Britain has a trade deficit problem, a London versus-the-rest problem, a debt problem, a housing problem and a care problem. The fact that Johnson has referenced some of them already indicates that he knows that they are there. All of them predate the EU referendum, gigantic wake-up call though that was.
May realised that it was impossible to pretend that the Brexit vote hadn’t happened, and promised to get Britain out of the EU while tackling the “burning injustices” which led to the leave vote. She did neither. In part, that was because attempting to deliver Brexit left no time to do anything else; in part, because structural economic problems required a complete rebooting rather than May’s tinkering.
Johnson wants to quicken the pace, making it clear that he intends to be tougher than May on Brexit and tougher than May on the causes of Brexit. Voters in Conservative-Labour marginals are his target.
There is a paradox, though, in a cabinet that includes Thatcherite true believers such as Sajid Javid and Liz Truss boasting that it is qualified to deal with the economic distress which was such a big factor in the referendum result. The causes of Brexit lie not in leftwing economic policies but in Thatcher’s scorched-earth wipeout of manufacturing in the 1980s and the austerity that targeted the weak and vulnerable after 2010.
Being tough on the causes of Brexit means changing the culture of business so that it boosts investment. It means rethinking the role of the state so that Britain leads rather than follows in the fourth industrial revolution. It means spending more on infrastructure, especially in the north. It means a mass housebuilding programme. Put simply, it means doing stuff not normally associated with politicians who think the free market is always right.
• Larry Elliott is the Guardian’s economics editor
The Guardian