Britain must reindustrialise

A truly conservative economics must prioritise making, not speculating

Artillery Row

Conservatism is “an instinct rather than a political stance”. So said Sir Michael Oakeshott, the philosopher who alongside Disraeli, Lord Salisbury and Sir Roger Scruton has done most to shape conservative thought. This is only partially right. Oakeshott’s claim is most valid regarding questions of conservative economic thinking, on which the party’s history has been profoundly non-ideological. For the most successful parts of its history, anyway.

Sir Robert Peel famously broke with Tory tradition by embracing free trade in the 1840s, when the party first decoupled from its landed interest. Laissez-faire dominated for half a century, but was abandoned from 1931 onwards in a delayed victory for the Tariff Reformers of the early 20th Century. Protectionism, combined with poverty relief and house building, characterised conservative economic policy in the decade running up to the Second World War.

British conservatism stands on the edge of a similar departure point now

The party under Harold Macmillan sought a “Middle Way” between statist socialists and “doctrinaire liberals”, seeking to synthesise a property-owning democracy with an active state to promote the common good. Most famously of all, the party revolutionised Britain’s economy by ending the nationalisation of industry and the power of the unions under Margaret Thatcher. Time and again, Tories have been ready, almost eager, to jettison consensus when the needs of the nation demanded it.

Addressing his party conference as Prime Minister in 1958, Macmillan restated his earlier commitment to a “Middle Way”. Aghast at the proposals of the other two parties, he exclaimed: “there is one thing that sticks out a mile. We are up to date and they are not. We are realistic and they are not. We are relevant and they are not.” Looking back to the book he authored before the war, Macmillan was astonishingly bold. The “speculative evils” of the Stock Exchange needed greater supervision, he argued, and the “humiliation and restraints of unnecessary poverty” should be ended. “Anti-social” private monopolies should be broken up, and the “economic orthodoxy of the pre-war world” left behind. Hair-raising stuff from a Tory MP, but he was speaking to the needs of the nation, now radically different from what they were in Victorian Britain.

British conservatism stands on the edge of a similar departure point now.

In the spirit of Oakeshottian instinctive Toryism, there are many basic assumptions that nearly all conservatives share. Property owning democracy is preferential to socialism. Shared prosperity is better achieved through opportunities for good work than through redistribution. The national interest should usually be placed first. Institutions should be respected. There is potential in the future but also wisdom in the past. Human nature and society cannot be perfected, but can gradually be improved. Ideologies should be viewed with caution.

However it is time for conservatives to rediscover their heritage as the non-doctrinaire party. The Conservative Party has been at its best when it has adapted to meet national challenges as they are, and when it has reverted to dogma it has tended to lose. And the fact is the hurdles our country faces are wholly different from those faced in the time of Jim Callaghan, Margaret Thatcher and Neil Kinnock. We are in fundamentally new territory and this calls for new, conservative, solutions anchored in the present but informed by the past as argued for by myself and Nick Timothy in our new report for Onward, A Conservative Economy.

Manufacturing has declined far below international comparators as a share of GDP

Productivity growth has stalled, leading to stagnant living standards. GDP per capita a much better measure of prosperity than national income either flatlined or actually fell for seven consecutive quarters before the present one. This is not due to Britain’s (admittedly high) tax burden most people are taxed less than they were in 2010. There are definitely irrationally high marginal rates, especially on higher earners, but these only affect a minority.

The root cause lay elsewhere Britain has too few productive sectors, with too little capital formation going into machinery, equipment and technology. Manufacturing has declined far below international comparators as a share of GDP. National savings are ill-deployed, stuck in stagnant bonds or real estate instead of UK industries. Our country has one of the lowest rates of overall investment in the OECD. Supply chains are more precarious than ever, with Britain reliant on imports from some of the world’s least stable regions and most authoritarian economies.

Inequality is more of a problem than in the recent past. Those on lower incomes have largely been protected by the National Living Wage, but average incomes have failed to move for years and property ownership is becoming a remote prospect for many – the average age of first purchase is now 34, with astonishingly low rates of ownership among younger cohorts. Intergenerational wealth transfers are becoming a more important part of our economy, with 40% of 18-34 year-olds still living with parents. Despite stagnating average wages, executive pay has continued to skyrock relative to workers. For those stuck renting, rent rises continue to outstrip pay growth, making the journey to ownership even less achievable.

It is meaningless to talk about “equality of opportunity” when the main thing younger workers want to do buy a house is out of reach. Cutting the higher rate of tax will not fix this. Likewise, cutting corporate taxes will not magically transform investment and output. Inequality also prevails across regions – only London and the South East sustain themselves fiscally, with all other UK regions net recipients of public money. Unless the output of those regions can be improved, our expensive internal transfer union will only become more costly.

Key to all of this is Britain’s trade deficit. The deficit on the UK’s current account the measure of earned income from export of goods and services relative to what is imported and consumed stands at over 3% of GDP. We have become used to this as a feature of our national economy, but it only emerged as a permanent deficit under New Labour. This means the UK buys more from the rest of the world than it sells. This must be financed through overseas persons and entities buying UK assets – we rely on foreign investors and speculators to buy our houses, companies and debt. This is one reason we are subject to such high levels of overseas ownership. Some 58% of UK quoted shares are beneficially owned overseas, and Britain is reluctant to interfere in complex ownership structures of its infrastructure and assets – from nuclear power stations to Thames Water or even Admiralty Arch (now to be turned into a Qatari owned hotel).

Mass migration is a symptom and a cause of poor productivity and living standards. Artificially raising the supply of labour relative to demand compresses wages. Yet net migration has effectively trebled since Brexit. While migration from Europe has subsided, migration from the rest of the world has soared 1 in 60 people in the UK arrived within the last 12 months. Without radical house building or investment in public services, this simply dilutes Britain’s capital stock and hence living standards. And migration of less skilled people from developing economies in turn disincentivises investment in labour-saving technology or capital by keeping Britain a low-wage, low-skill economy.

Unlike in previous decades, Britain’s biggest underlying challenge at the moment is demographic. The number of retired people being supported by the working population continues to rise. Economic inactivity is on the rise, further diminishing the workforce. Fertility is well below replacement levels. If British families don’t start having more babies, the tax burden will only inflate further – or we will have to accept profound demographic and cultural change due to immigration.

There was, however, an optimistic flash within British conservatism in 2019 when Boris Johnson won a majority on the strength of offering economic pragmatism, a better social contract between regions and classes, and a renewed sense of national cohesion symbolised by Brexit. Sadly, this vision of an “upswing” was swallowed in the doldrums of a global pandemic and the scandals associated with his leadership. It is a lost opportunity the Tory party is yet to recover.

Britain must become an exporting nation, able to capitalise on its own innovation

But the tested conservative instincts are still the right ones. After all, as Thatcher said, the facts of life are conservative. Statist socialism will do nothing to improve living standards it would simply transfer existing private sector problems to the public sector. A potential Labour government shackled to the pay demands of public sector unions will not offer a new economic dawn. The things voters want rising living standards driven by growth, access to housing, less immigration, less inequality, more economic security are clear, and could be achieved with a robust national plan for regeneration.

But they cannot be achieved by a reverse-ferret to economically liberal dogma, as Liz Truss attempted despite everything the 2019 mandate was built on in her disastrous 49 days. If the Tories embrace a patriotic pragmatism and commit to a refreshed economic vision, prioritising growth and fairness as necessary partners, they can become the party of “one nation” once again.

Britain must become an exporting nation, able to capitalise on its own innovation, with rising wages and living standards, and the chance of home ownership for all. It must follow the rest of the developed world in adopting industrial policies to serve the domestic economic interest. And it must be willing to tackle nefarious speculation, monopolies and all vested interest whether in the public sector or the private.

These ideas are, we suggest, profoundly conservative ones. Our current consensus has ceased to be conservative. The party’s next evolution must correct this.

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