Return to Growth E-Book

Jon Moynihan

• Herausgeber: Biteback Publishing
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 459

Veröffentlichungsjahr: 2025

Beschreibung

The acclaimed Return to Growth Volume One by Jon Moynihan – one of our finest economic thinkers – addressed the mystery of why growth has deserted western democracies like the UK and wrote a tough prescription to cure our economic ills. Continuing his vital examination in Volume Two, Moynihan looks at the causes of our stagnation, reminding readers of the three 'devils' that affect our ability to achieve growth – high government spending, excessive tax and regulation and too much bureaucratic interference and waste – and finding that the new UK government shows no sign of addressing them. He then isolates and delves into the three crucial 'angels' that support growth in the economy and that we urgently need to embrace – free markets, free trade and sound money. He concludes with a set of practical steps on how we can restructure our government and economy, so as to return it to the growth the UK has been so desperately lacking for the past several decades. In this powerful manifesto for economic change, Moynihan combines his extraordinary business acuity with a profound political overview, making an authoritative moral case for action, outlining the steps we can take both to reverse our decline and to avert impending economic disaster.

Leseprobe

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praise for return to growth volume one

“A rare, detailed diagnosis and set of recommendations to get the country back on course … [Moynihan] incisively cuts through the UK’s tax system, regulation, government spending and civil service, outlining specific savings, reforms and tweaks that could unleash growth and reduce impediments to it … This is a highly valuable contribution to a debate that can often be short on detail.”

Tej Parikh, ‘The best new books on economics’, Financial Times

“As (Lord) Jon Moynihan points out in his fine new book Returnto Growth, public sector productivity has stagnated for a quarter of a century, a truly gobsmacking statistic when you consider the innovations that have happened during that time.”

Matt Ridley, Daily Mail

“[Moynihan makes] many brilliant arguments [distinguishing] between things that reflect the modern ideological opposition to growth and things that are really policy measures that impact negatively on growth. The larger the government, the less growth we’re going to have, and the higher the tax rate, the less growth we’re going to have. That will make sense to a lot of people … The book shows the extraordinary benefits that growth has accomplished for humankind and also for the planet that we live on.”

Brendan O’Neill, The Brendan O’Neill Show

“The book is a collection of good judgements … Moynihan offers something robust and thinkable … He supports [his] suggestions with not only extremely close consideration of the facts, but also close examination of the economic theories that support his claim. His book is long, but can be read in a few hours if one reads it with the right attitude. And even a politician or civil servant should be able to make sense of the summaries of the argument which Moynihan conveniently places at the beginning and the end of the book. [It is an] important book … A copy of this book should be on the desk of every politician, every civil servant, and every journalist.”

Professor James Alexander, Daily Sceptic

ii“A must read for any would-be Chancellor. It is a compelling blueprint for how to end decades of economic malaise.”

Andrew Pierce

“A trenchant, eye-opening and controversial tour de force from one of our foremost economic brains. Anyone who wants growth and wonders why it has become so elusive in western social democracies needs to pick up Return to Growth and take urgent note. Jon Moynihan shows, in crystal-clear and accessible prose, that you can either have ever greater government expenditure or you can have decent levels of growth. Contrary to cakeism, you can’t have both. Rising public-sector expenditure brings greater debt, inflation and ultimately, if it is not controlled, national bankruptcy. A smaller state which does not crowd out the private sector is better able to preside over higher economic growth, which raises standards of living for the country as a whole. If the analysis of how we got into our current economic predicament is sobering, Moynihan’s meticulously elucidated prescription offers a more hopeful way forward for those brave enough to take it. Return to Growth is an essential and compelling read for policymakers and general readers alike.”

Justin Marozzi

“Jon Moynihan is right – it’s time for a fresh look at how our economy should work. Growth and aspiration will only return when private-sector entrepreneurialism is allowed to thrive in a low-tax, free-market setting. More hard work and less regulation is the way forward.”

Lord Bamford

“If Rachel Reeves is serious about her growth agenda, she should buy herself a copy of Jon Moynihan’s book. Lucid, passionately argued, contemptuous of the groupthink that landed our country in debilitating stagnation; here is a manifesto to get Britain motoring.”

Allison Pearson

iii“Since the election, Conservatives have been desperately looking for a solution to Britain’s economic malaise that isn’t just a retread of the failed policies of the last twenty-five years. They need look no further. This book is the answer. Future governments will ignore it at their peril.”

Toby Young

“Jon Moynihan combines serious business acumen with a firm grasp of the political big picture. Return to Growth is an important and timely book – a route map to a more dynamic, secure and prosperous Britain, by someone who knows what works.”

Liam Halligan

“In terms that the economic layman can understand, probably because he’s not a professional economist himself, Jon Moynihan lays out the economic, political, but also moral basis for how Britain can get growing again. These ideas are so practical, achievable, logical and overdue that his thesis is frankly unanswerable. It represents nothing less than a manifesto for national revival and has profound implications for economies beyond the UK too.”

Andrew Roberts

“This may well be the most important economics book of recent years. Moynihan’s book is an urgent appeal to stop the decline and set western economies on the road to growth and prosperity.”

Matt Ridley

“Moynihan challenges the bovine assumptions of ‘social democracy’ that will inexorably lead to fiscal collapse. No doomster, he asserts convincingly, ‘We needn’t keep doing things this way. We needn’t keep digging our own graves.’ Clear, readable, riveting and vividly illustrated.”

Lionel Shriver

“Moynihan reviews three enemies of growth: high expenditure, high taxation and high regulation. His inescapable – and well-supported – conclusion: raising taxes, bloating spending and bureaucratic meddling just make things worse. I love this book.”

Art Laffer

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‘We have been forced from the Gold Standard, so it seems to me, and others not unworthy of a public hearing, because of the insufficiency of money in the hands of consumers. Very well. I suggest to you that our contemporary anxieties are not entirely vested in the question of balance of payment, that is at least so far as current account may be concerned, and I put it to you that certain persons, who should perhaps have known better, have been responsible for unhappy, indeed catastrophic capital movements through a reckless and inadmissible lending policy.’ … said Widmerpool. ‘Now if we have a curve drawn on a piece of paper representing an average ratio of persistence, you will agree that authentic development must be demonstrated by a register alternately ascending and descending the level of our original curve of homogeneous development. Such an image, or, if you prefer it, such a geometrical figure, is dialectically implied precisely by the notion, in itself, of an average ratio of progress. No one would deny that. Now if a governmental policy of regulating domestic prices is to be arrived at in this or any other country, the moment assigned to the compilation of the index number which will establish the par of interest and prices must obviously be that at which internal economic conditions are in a condition of relative equilibrium. So far so good.’

… suddenly, the scene was brought abruptly to a close.  

‘Look at Le Bas,’ said Templer.  

‘It’s a stroke,’ said Tolland.  

Anthony Powell, The Acceptance World(1955)viii

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Contents

Title PageEpigraphCaveat to the ReaderRecap:Three Key Drivers of Economic GrowthPrologue:Events Since Publication of Volume OneIntroduction:Three Free-Market Approaches the UK Should Embrace AnewChapter 1:Let Free Markets ThriveChapter 2:Let Free Trade FlourishChapter 3:Let Sound Money PrevailConclusion:Returning the UK’s Economy to GrowthEpilogue:And Here’s How We Do ItAppendix A:Methodology for Chart 3.1Appendix B:The Growth ModelAcknowledgementsIndexCopyright

Readers who connect with this QR code can access web links to the referenced works in this book

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Caveat to the Reader

An important note about this book: as I caveated in Volume One, I am not an economist. Volume One was, and indeed this Volume Two is, about the UK’s economy and the economic steps that governments can do, and sometimes do or don’t do, to make it grow, and what practical steps we should take to make faster growth happen. Volume Two goes deeper into various topics that are very much the domain of an economist – for example, price theory, trade theory, monetary economics and policy. As with Volume One, I do my best to make it clear where I disagree with economists on these topics, while making my own prejudices clear.

On occasion, in both books, I slip into economists’ language, talking as though I am an economist. I’m not. Any authority I have to say the things I say, I derive from my careful research into what economists have concluded and written about; from my decade or more working closely with the traders who actually deal with the financial commodities – currencies, exchange rates, tax rates, surpluses and deficits, regulations – that governments use to control and impact the economy; from the knowledge gained from my reasonably extensive reading; from my many decades of interacting (until recently) with economists at the MIT Sloan school, particularly the much lamented Rudiger Dornbusch, where I served for over xiitwenty years on various advisory committees; and, above all, from having spent fifty years in business advising, starting and building firms that had to deal on a daily basis with the consequences of decisions made by governments over that time.

On some of the more recondite economic matters discussed in this volume, I have benefited more recently from listening to, and discussions with, economists, politicians and central bankers such as Tim Congdon, Patrick Minford, Roger Bootle, James Forder, Julian Jessop, Gerard Lyons, Don Lessard, Mervyn King, Terry Burns, Norman Blackwell, Norman Lamont and the late Nigel Lawson. Of course, I recognise that, as so often in economics, some of these economists might disagree entirely on any one particular point with other economists and even more so with any conclusions I draw. I have had to pick my own way among opposing views – and mention of these eminent economists in no way implies that any one of them supports any of the views I put forward here.

I hope all that is enough to make my conclusions in this book sensible and acceptable. I have throughout the writing of it benefited from research work and advice and reaction from the economics consultancy CEBR. All mistakes and misstatements are, of course, my own fault.

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Recap

Three Key Drivers of Economic Growth

In Volume One of Return to Growth, I covered three ‘devils’ that inhibit a country’s economic growth: too-large government expenditure, too-high taxes and excessive regulation. I showed how, before these devils came to be the norm in the UK, economic growth had taken off like a rocket for the past 200 years, in one of the greatest epochs of human history. Economic growth first made us the richest nation on earth and then, spreading to other countries, created numerous societies across the world whose citizens had their lives transformed.

I showed that without economic growth (and that has to mean economic growth per capita), our country cannot succeed. No growth per capita means, axiomatically, that no one in society can get a real-terms salary increase, ever, without someone else being paid less.i It means that aspiration is crushed and our society becomes dog eat dog. Capital that will be needed to start up new businesses won’t be accumulated. Businesses that don’t grow will wither and die because they don’t have the resources to beat off competition, particularly from abroad. And a no-growth economy isn’t static; it sooner or later shrinks because the unceasing demands of voters mean that politicians who want to be elected promise more xivmoney and more stuff at each general election. In the absence of growth, to pay for this largesse they have to put taxes up, higher and higher.

Chart A: Real GDP and Real GDP-Per-Capita Growth in Major Western European Economies, 1960–2019

Even pre-Covid, annual GDP-per-capita growth had shrunk to 1 per cent or less in major western European economies.

Source: International Monetary Fund, Maddison Project, moyniteam analysis Also published in Volume One as Chart 1.7

As I show in Chart A, both growth and growth per capita have collapsed in the UK and in the major economies of the EU. Countries in other parts of the world have motored ahead, with much higher growth rates than ours. Why? Because social democracy, our and the EU’s chosen political approach, is inimical to economic growth.

It’s hardly groundbreaking to point out the importance of economic growth; indeed, the political weather has changed so much in recent years that at the time of Volume One’s publication, each of the xvmost recent three Prime Ministers, including Keir Starmer, discussed the lamentable lack of growth in the past few decades by saying that growth was their number one goal. Yet the policies each proposed to achieve that growth contradicted each other, and although politicians on the left and the right have ardently committed to creating growth, few of them seem to have a handle on how that can be done.

So how is economic growth generated, and what policies will promote it? In Volume One, I essentially argued that agreement on two key principles – neither of them very controversial – was necessary to create an environment where economic growth per capita could smartly accelerate.

The first proposition is that productive jobs are created by people,not by government. One of the more peculiar features of the modern era is the claim by government after government that they will ‘create’ jobs, often particularising this to their creating jobs in this or that sector. It’s just not true to say that government is what creates productive jobs. The overwhelming experience of history is that the more government interferes with the economy and dictates what’s going on there, the less will it grow. Economies that are run from the centre by those who say ‘we know best’ always have dismal economic outcomes. In the extreme, you end up with complete collapse as with Soviet Russia, Cuba or Venezuela.

There are plenty of reasons why this is so. In free-market economies, entrepreneurs and businesses invest their time, skills and capital where they think they can get the best return: they know that this will come from providing goods or services that will best meet the needs of the population. In socialist economies, however, central planning hands out resources, including capital, on personal whims (‘we know best’) and results in the misallocation of resources, and the production of goods and services that don’t meet people’s needs xviand wants (heat pumps, anyone?).ii The more a government seeks to direct the economy, the more rent-seeking, crony capitalism and lobbying for subsidies occurs and the less opportunity there is for the entrepreneur to deliver effectively, all of which leads to economic stagnation. As Peter Mandelson immortally said about Labour’s industrial policy in the 1970s: they thought they were picking winners, but the losers were picking them.

A particularly meretricious claim is that a government will create a host of ‘green jobs’. It’s nonsense, and I pointed out in Volume One that I was just one of many, from the Financial Times on, to say so. Do politicians really believe that they can be the driver of growth-producing job creation, particularly with doctrinaire central directives? If they do believe it, they must be very ignorant; if they don’t, they must be wicked to say so.

The government can certainly create more government jobs, paid for through your taxes. Indeed, for most of this century, they have blithely done so – while productivity in the public sector has collapsed, and the quality of its services have declined. But government jobs do not grow the economy, except in the most make-work sense. Rather, they just expand the state and suck activity away from, while further taxing, the private sector – the place where true, growth-producing jobs are created.

These private-sector jobs are created by a combination of entrepreneurs, businesses and investors. The relatively free way in which, xviifor the 200 years or so before now, private-sector actors, largely unconstrained by government, were able to work their magic, resulted in the most extraordinary level of economic growth in Britain’s history: as I have shown, wealth, living standards, health outcomes, longevity and human achievement all increased dramatically, and in the process we pioneered an economic system that has given the entire world unparalleled prosperity.

Those same private-sector actors (entrepreneurs, small and large business investors) have always flourished when they could operate in environments such as the one we saw in Britain in those high-growth centuries: low tax, fewer bureaucratic constraints, altogether less regulatory interference from governments. Entrepreneurs are most likely to settle in countries that welcome them and allow them to get rich if they are successful, and their products, services and the jobs they provide add to human happiness and prosperity. In the same way, big businesses invest in countries that don’t seek to suck the last penny out of them in taxes. Just ask AstraZeneca, who in 2022 were planning to invest £400 million in building a plant in the UK. Had they done so, that would have created significant economic growth and jobs. But they changed their plans when the then Chancellor, Rishi Sunak, increased corporation tax to 25 per cent: the factory is now being built in Ireland where, at 12.5 per cent, the corporate tax rate was exactly half. AstraZeneca, who had always taken great pride in their success in the UK, are just one of scores of companies that have fled the UK in the past two years – thanks, Conservatives. In sector after sector, companies have been leaving the UK. Depressingly, this has been particularly evident in some of the former crown jewel sectors of the UK – pharma, finance, oil and gas, and petrochemicals.

I recounted in Volume One how it was not just large companies xviiithat are leaving the UK, but we also had the third-largest number of millionaires in the world leaving the UK. This has been happening for a number of years and the number leaving has been increasing year after year, particularly in 2024. Non-doms were driven out. Entrepreneurs of all sorts looked elsewhere to make their fortunes. Most depressingly, the brain drain has started up again, with young high earners fleeing to the US, Australia, Dubai and elsewhere. High levels of taxes and regulation also result in many who could contribute to economic growth deciding no longer to do so: potential entrepreneurs and business builders are ‘resigning from the economy’, prematurely retiring or becoming ‘digital nomads’.

The second key principle was that while governments can’t createproductive jobs and growth, they certainly can create an environmentthat prevents the private sector from doing so. What is that? It is something that has been studied over and over again, and the vast majority of conclusions from those studies say the same thing: a too large, unaffordable level of government expenditure,iii too high a level of taxation to cover those expendituresiv and finally, larger and ever-increasing amounts of regulation – the default option in recent years having been to pile one more regulation on top of another, with so many perceived problems ‘dealt with’ by passing a new law creating a regulator and introducing more regulations.

I showed how these three devils have increasingly dominated the social democracies and are in the main what is now keeping both our, and the EU’s, level of economic growth so low.

xixIt is irrefutable that a small state is a prerequisite for economic growth. I offered the following logic: if the public sector is sucking up 25 per cent of GDP, then three private-sector workers (the remaining 75 per cent) can divide up between them the burden of carrying one public-sector worker or beneficiary (the 25 per cent). At 50 per cent of the economy, however, each private-sector worker has to carry on their back, undivided, the ‘entire burden’ of an entire public-sector worker or beneficiary. How well is that likely to work out? I show in Chart B – one out of numerous studies that prove there is causation, not just correlation, between the two factors – that a large state results in low growth.

Chart B: Size of Government and Annual Growth of Real GDP in OECD Countries, 1960–2019

It is clear that small-sized government is a precondition for growth.

Source: International Monetary Fund,1 moyniteam calculations An earlier version of this chart appeared in Volume One as Chart 2.5

xxAnd yet, in a short space of time, the size of the UK’s public sector has increased from near 30 per cent of GDP in the last century to over 50 per cent during Covid – and even now, it is around 45 per cent, and looking likely to increase further under the new government.

Along with a large state comes the corollary: high taxes. I showed how academic studies have demonstrated that the higher the tax as a percentage of GDP, the lower the growth. Yet we keep raising taxes – even under Conservative governments. And when those governments meet resistance to their increasing income or corporation tax, they invent all sorts of unconventional taxes – often wrapping up the reasoning for them in faux-moral posturing, so that the taxpayer can feel bad about indulging in the activity while paying stiff taxes on it. But Art Laffer – still denigrated but always right – showed that these tax rises result in less compliance, less economic activity and less tax revenue than predicted.v

Large government and high taxes are bad enough, but what really kills growth is the third devil, excessive regulation. Bit by bit, governments fail to resist the temptation to interfere with wealth creators. Sector after sector gets more and more regulated and can innovate less and less. Capital requirements on banks steer them away from lending to small companies. Regulations on pension funds encourage them to invest in government bonds, not private-sector equities. The car industry is told what cars to make; the boiler xxiindustry is told not to make boilers. Formerly privatised industries must be renationalised. The insanity of diversity, equity and inclusion (DEI), and environmental, social and governance (ESG) policies and the like (compulsory carbon literacy training, anyone?) forces companies to affirm and act with the primary purpose of achieving a fantastic social nirvana, rather than to deliver goods and services that people want. Good luck with that nirvana stuff, and in the meantime, forget about any economic growth.

So, two simple and fairly obvious principles, but, as I showed in the previous volume, most social democracies have taken the opposite view in the past fifty years, ignoring clear evidence on how to improve their citizens’ wealth and living standards.vi

I discussed three general models of how countries are run in this modern age. The first model, at the worst end, is the brutal bandit dictatorships such as Russia, Venezuela, North Korea, Iran, Nicaragua and Cuba, which mostly emerged as the logical endpoint of failed attempts to build socialism or communism, their leaders hanging on to power by abandoning any pretence at democracy, terrorising their own citizens and indulging in lethal military adventures abroad. The second model is social democracy. It takes a lot longer to fail, but results in economic stagnation and, in consequence, severe economic crisis – as is currently being predicted for France, for example.2 The third model is the free-market economy, still pursued in many countries around the world. These economies show startling and continued levels of growth, bringing wealth, health, and usually longevity to their citizens. The US is still one (in the main), despite Obama’s and Biden’s efforts, and the wealth of xxiiits citizens grows at an astonishingly greater pace than that of the average EU citizen. The salaries and wealth in those free-market economy countries outstrip ours, further and further.

Post-war, western Europe at first used the free-market approach and so was successful at growing its economies, but bit by bit these countries moved from free-market structures to a social democracy framework, where saying you care but acting to damage is the norm. Their ever-increasing welfare bills led to the ravages of quantitative easing, and consequent bouts of inflation that we cannot be sure are fully behind us. Doctrinaire polemicists now spout more and more reckless social nonsense, such as claims that national wealth was built entirely on the fruits of rapacious colonialism and slavery, such as claims that modern monetary theory allows endless printing of new money, such as the promotion of diversity hires, such as the bizarre assertion that the UK’s NHS, one of the worst health systems in the developed world, is a national treasure and the envy of the world.

I discussed in Volume One how leaving the EU had created the conditions for us to break away from the European social democracy model. But we haven’t yet capitalised on that. Instead, since then, governments in the UK have, presumably with an eye to short-term political gain, doubled down on social democratic policies with predictably catastrophic results. Our economic model forecasts a dire long-term outcome from that (see Chart C).

In a review of the costs, taxes and regulations that we could get rid of, I showed in Volume One that it doesn’t have to continue this way. In previous centuries, we led the world with a few basic principles, summed up in the term ‘laissez-faire’ – just let entrepreneurs, businesses and investors get on with building the economy, rather than stuffing them up with high taxes and drowning them in swamps of regulation. Other countries, such as Switzerland and xxiiiSingapore, have shown us there is as yet no limit to the economic growth that a country can achieve if you rein in the state; in consequence, they deliver enormous wealth and benefits of all kinds to their citizens. There is, I argue, absolutely no reason why we can’t do, and achieve, the same.

Chart C: Forecasted ‘Status Quo’ Development of the UK’s Economy 2024–39

The outcome is predictable. If we continue with current policies, our annual growth in the long run will settle at below 1 per cent a year. GDP per capita will grow at an even slower pace, and government debt will inexorably balloon to some 150 per cent of GDP in fifteen years.

Source: moyniteam modelling

In addition to exorcising the three devils, there are of course many other things we have to do to get growth going. Key among them is improving our state education system, which the wonderful Katharine Birbalsingh’s Michaela Community School has shown us how to do. It is also important that we break up the employee xxivmonopolies of the public sector and the semi-nationalised industries, banning strikes by public-sector workers. And third, we have to find a way, crucially, to get immigration down – so that economic growth per capita becomes possible. We have to do all these things, and more.

Finally, I showed that unless we return this country to growth, we can only expect decay, decline, and (eventually) financial default. One way or another, our economy has to be restructured. Better done sooner than later – although, I acknowledge, the chances of our having a government that will do that any time soon are slim to zero. My work across both volumes of Return to Growth can only hope to, at best, lay the foundations for future change. But I hope these volumes can be a good start for an eventual return to these principles, and thus a return to growth.

267NOTES

1 International Monetary Fund, ‘Public Finances in Modern History’, https://www.imf.org/external/datamapper/datasets/FPP

2 Victor Mallet and Paola Tamma, ‘France’s national auditor sounds alarm over national finances’, FinancialTimes, 15 July 2024, https://www.ft.com/content/1d41857d-8d6d-4e0a-a44b-fc6fcce5650f

i Assuming equivalence with wages per capita.

ii Handing out £400 or possibly £500 million, apparently on the whim of a senior government adviser, to OneWeb, a satellite company that was later sold to the French for peanuts, was one of the (admittedly, one of many) low points of the Boris Johnson administration. See Matthew Field, ‘Taxpayers facing £200m loss on satellite venture OneWeb after Dominic Cummings engineered rescue’, Daily Telegraph, 26 December 2023, https://www.telegraph.co.uk/business/2023/12/26/taxpayers-200m-loss-satellite-oneweb-dominic-cummings/; Oliver Gill, ‘UK taxpayers put £400m into OneWeb. Now its tech “is a gift to France”’, TheTimes, 4 February 2024, https://www.thetimes.com/article/656bd77c-c106-47c3-840b-674e9efc4f0e?shareToken=39c3f988388d0bf131945b0b0475491a; William Turvill, ‘OneWeb satellite boss quits a year after French merger’, The Times, 13 August 2024, https://www.thetimes.com/article/899e259f-74cb-4558-a2da-22defcdf17eb?shareToken=3dbc0b909af314785c80f389a26abbeb

iii Several quantitative economists have claimed that the optimal size of public-sector expenditure is 26 per cent of the economy. Most politicians will assert this is too low a number to achieve in practice, but anyway, I would settle for government expenditures at, say, 33 per cent of the economy – a level that’s not much lower than what we in the UK had just a quarter of a century ago.

iv Growth is significantly decreased the more tax money you extract from the economy; I argued in Volume One for tax revenues that were lower than 30 per cent, with the UK government receiving inflows of another 3 or 4 per cent of GDP from other revenues, so a balanced budget could be maintained.

v As I write this, I hear news on the radio that the Liberal Democrat Party – usually the one to sneer most noisily and aggressively against the Laffer curve and the overall concept of dynamic responses to changes in tax rates – are campaigning for VAT to be removed from sun cream, so that more people will use it and thus less people will get skin cancer. That is a blatant and outright assertion of the power of the Laffer curve (see Volume One). See Claudia Savage, ‘Lib Dems call for VAT cut on sun cream to tackle skin cancer’, The Independent, 19 August 2024, https://www.independent.co.uk/news/uk/vat-daisy-cooper-lib-dems-government-nhs-b2598167.html

vi Denmark’s a unique exception – with a flexible labour market, a stronger working ethic, and lower regulation, even though it has high taxes and high spend.

xxv

Prologue

Events Since Publication of Volume One

The weeks between when Volume One was written and its launch were politically and economically active. (The further weeks more, that will take place between my writing these words and you, the reader, seeing them, will no doubt result in yet more change.) This short section is devoted to reviewing what changes have taken place so far since I wrote Volume One.

A new Labour government has come into power, with a large majority that will certainly see them through a five-year term. The new Chancellor, Rachel Reeves, had tweeted before Labour came to power, ‘The lifeblood of economic growth is private sector investment which can create good jobs and spread productivity in every part of the country.’ These words we can certainly agree with. They are better words than our previous Conservative government usually managed – although that is a low hurdle. She went on to say, ‘I’m determined that the next Labour government is ready from day one to put our plan for growth into action.’ Her words then, and since, have not, unfortunately, revealed the logic of what that growth plan involved.1

Let’s look at progress on my three desiderata: smaller government, lower taxes, less regulation. First, what progress on reducing the size of the state? Remarkably, the new government came straight out of the box with one cut that I was gratified to see – one xxviof my suggestions, removing winter fuel payments for those not in poverty. (Ignobly, I would have preferred that announcement had not been made so quickly, since as a result the book became available to the public only after Rachel Reeves had made her announcement, raising the possibility that I might have copied her and, in any event, making my suggestion far less interesting. But nonetheless, I approve of her action, of course.)

This was good news: a cut was being made in benefits. (Depressingly, the Conservative Party, maintaining its recently acquired modern reputation for fiscal incontinence, campaigned to restore them.) Labour’s promising start was, however, obliterated by a flurry of expenditure commitments. More job destruction by raising the living wage by an above-inflation amount; a large increase to the state pension because of the commitment to stick with the pension triple lock; awarding public-sector workers well-above-inflation increases despite no increases in productivity.2 The number of civil servants earning over £100,000 has now gone up by 40 per cent to a total of almost 3,000.3 (Admittedly, most of that increase will have predated the new government.) Already overpaid rail workers received an ‘above inflation’ 15 per cent pay rise, but immediately after the £100 million award was announced, stated they will go on strike for three months in a dispute over working conditions.4 Other public-sector workers, having noted that militancy works, also announced industrial action to get equivalently high pay raises.5

The public sector’s impunity is further demonstrated by the news that a number of arm’s-length bodies, such as the Bank of England, now offer private healthcare as a benefit to their staff at a cost to the taxpayer of tens of millions of pounds.6 (So much for ‘our’ NHS!)

The cost of benefits continues to rise at a startling pace. The xxviinumber of children under eighteen who are the subject of Disability Living Allowance claims has risen, since November 2019, from 534,000 to 730,000. Claims for neurodevelopmental conditions have gone up by a third to 337,000. Claims for ADHD are up to 72,000. The DWP is forecasting that almost 1 million under-sixteens will be in receipt of disability benefits by the end of the decade; the bill for health and disability payments to people of all ages is rising to some £100 billion a year.7 Some 7 per cent of schoolchildren were receiving disability benefits in 2022.

This is not some simple case of complaining that money is being paid out to undeserving malingerers; it is far too hard to come up with some magic measuring wand that will say which young person is truly in need of disability benefit and which person just needs their behaviour adjusting through appropriate discipline at home and at school. There is no doubt that approaches to teaching; dubious diets; and the giant disruption that took place during Covid have accustomed many children to the idea that they are incapable of sitting still in class, behaving themselves or absorbing what the teacher is saying – so they need not do any of these things, and their parents receive payments to reward their non-compliance. The fact that there is a financial benefit at the end always distorts behaviour, and in this case guides the parent towards medicalising the condition, rather than finding a family-based solution. It would take an educational giant to parse out the problem and resolve all competing claims; in Volume One and here, I take the simpler view that the money is just not there for all this. Rachel Reeves has been quoted as saying that ‘if we cannot afford it, we cannot do it’.8 But they are doing it regardless. I agree that we cannot afford it. Unless we cut the coat of our compassion to the xxviiicloth of what we can afford, it is hard to see how we can get out of our economic problems. And for both children and adults, a ‘tough love’ (warm/strict) policy is the only way to get the numbers down.

At the time of writing, the autumn Budget has just arrived. Spending is up by almost 2 per cent, taxes ditto by £40 billion, with major increases in capital gains tax, inheritance tax, business windfall tax, and employer national insurance, all directly disincentivising business. Non-dom status is scrapped; more will leave.9 So no, taxes will not be going down. And in the meantime, the Office for Budget Responsibility (OBR) is going even further in ruling the roost with its strange modelling formulations – ones which, despite the exciting lead set by the Lib Dems on their ‘remove VAT on sun cream’ campaign, implicitly reject that there is economic benefit from reducing taxes, or that there will be negative consequences from increasing them. The growth metric remains GDP, not GDP per capita.

Again, all of this is the result of using the wrong paradigm. More expenditure is said to be necessary or inevitable, a ‘black hole’ is declared to exist – all culminating in the narrative that there is no alternative but to raise taxes. The Overton window does not, it seems, currently allow a narrative that says: we can’t afford all this, so here’s how we are going to cut this expenditure, and when we do reduce our spend further, it will allow us to cut taxes and thus promote growth, so that eventually we will be able to afford more benefits for our people.

And regulation? Depressingly, in the run-up to the recent election, all major parties proposed swathes of new rules and regulations. The Liberal Democrats proposed 128 new major regulations. The Green Party proposed 104. The Labour manifesto included sixty-two proposals to increase the regulatory burden (along with thirteen xxixproposed reductions). The Institute for Economic Affairs (IEA) estimates a £1,000 per year cost to each household from the ban on new petrol and diesel cars, a £1 billion cost from the renters reform bill, an £80 million cost for the football regulator, £2 billion for the smoking ban and £664 million for the junk food advertising ban.10 Meanwhile, it’s looking more and more like the new government won’t allow much deviation from ongoing EU law across the UK (if only because of the ongoing malign influence of the Windsor Framework, which applies EU law to Northern Ireland; as a result, if we wish to preserve the union, we can’t change things elsewhere across the UK). Blithely ignoring the clear public backlash against woke diversity initiatives, the civil service continues to double down on DEI. Diversity teams in various departments are being expanded, and pay rises are being offered to those who ‘champion diversity’.11

What are the long-term expected outcomes from all this? It’s going about as we might expect. Already, the UK’s cash borrowing was £3 billion above the earlier OBR forecast in July 2024. Far from reducing electricity prices, the cost of ‘renewables’ is going up and up – costs which will come back to every household, but will also further drive manufacturing out of the country. The rich continue to decamp: Volume One described how every year, more and more millionaires had been leaving the UK. In 2022/23 that number was 4,200. Henley & Partners’ annual report on wealth migration now tells us, startlingly, even before the Budget, that number has more than doubled, to 9,500 millionaires in 2023/24. This has to be shameful. The loss of capital, of entrepreneurial job-creators, of all sorts of tax revenue paid by those now departed is enormous; over the next few years we will find out what the negative impact was on tax revenues. The UK was for a century or more just about the top destination worldwide for millionaires. Now we are, astoundingly, xxxthe country with the second-highest rate of millionaires fleeing from it, with only China worse than the UK. How can that be considered a good thing? Are we really now agreed that the UK should have a policy that makes it highly unattractive for rich people to come and settle here? Because such a policy has now become the reality.

The ultimate outcome will, of course, be the collapse of our national finances. I predicted in Volume One that our national debt as a percentage of GDP would rise to some 150 per cent from its current 100 per cent within fifteen years if nothing is changed. In coming to that number, our modelling team sought very hard to avoid being overly pessimistic. And yet the OBR itself forecasts far worse; they said that by 2060 our debt-to-GDP number would actually be rising towards 300 per cent.12 (It is worth noting that the gilt market ructions of 2022, allegedly caused by the Truss mini-budget, resulted from forecasts that were a tiny fraction of such numbers.)

So, overall, not a good start to our project of getting expenditure down, taxes down and regulation down. Instead, and particularly with an expected slow growth in GDP in the next few years, expenditure as a percentage of GDP is likely to rise; and tax revenues as a percentage of GDP will, most likely, and despite some swingeing increases in tax rates, not go up by nearly as much as expected. Nonetheless, the high tax rates will still keep GDP growth down. And regulation will, it seems, keep going up and up. Volume One’s ‘pessimistic’ status-quo forecast for the coming years is therefore likely, if anything, to turn out as having been overly optimistic. The prospects for the economy and therefore for our citizens are poor, and the lives of frustration and anger for many, that will be the result of this, are painful to contemplate.

NOTES

1 Caroline Wheeler and Jill Treanor, ‘Rachel Reeves hires City high flyers to unlock billions for Labour’s economic plan’, The Times, 10 March 2024, https://www.thetimes.com/uk/politics/article/rachel-reeves-unveils-big-business-squad-labour-wealth-fund-g6rjdq3j9

2 Nick Gutteridge, ‘Reeves set to sign off above inflation rise in minimum wage’, Daily Telegraph, 10 August 2024, https://www.telegraph.co.uk/politics/2024/08/10/reeves-set-to-sign-off-above-inflation-rise-in-minimum-wage/; Jo Faragher, ‘Reeves confirms public sector pay rises of 5-6%’, Personnel Today, 30 July 2024, https://www.personneltoday.com/hr/public-sector-pay-rises/

3 Dominic Penna, ‘Civil Servants on over £100k rises by 40pc in a year’, Daily Telegraph, 9 August 2024, https://www.telegraph.co.uk/politics/2024/08/09/civil-servants-earning-more-than-100000-rises-by-40pc/

4 Andrew Ellson, Steven Swinford and Oliver Wright, ‘Train drivers to strike for three months despite £100m pay deal’, The Times, 16 August 2024, https://www.thetimes.com/uk/transport/article/train-drivers-to-strike-for-three-months-in-wake-of-100m-pay-deal-rh5gp7q57

5 ‘Local government employers must improve pay offer to avoid strike threat’, Unison, 4 September 2024, https://www.unison.org.uk/news/2024/09/local-government-employers-must-improve-pay-offer-to-avoid-strike-threat/

6 Jonathan Walker, ‘£40m private health bill for “public sector” staff’, Sunday Express, 11 August 2024, https://www.pressreader.com/uk/sunday-express-1070/20240811/281934548246786

7 Szu Ping Chan and Tim Wallace, ‘Record number of children on disability benefits after autism and ADHD surge’, Daily Telegraph, 13 August 2024, https://www.telegraph.co.uk/business/2024/08/13/record-number-children-disability-benefits-autism-adhd/

8 HM Treasury and The Rt Hon Rachel Reeves MP, ‘Chancellor statement on public spending and inheritance’, Gov.uk, 29 July 2024, https://www.gov.uk/government/speeches/chancellor-statement-on-public-spending-inheritance

9 ‘Rachel Reeves’ tax updates for non-doms: What you need to know’, Gravita, https://www.gravita.com/rachel-reeves-tax-update-non-doms-2025/

10 Matthew Lesh, ‘Shadow Expenses: uncosted regulatory burdens in election manifestos’, Institute for Economic Affairs, 27 June 2024, https://iea.org.uk/publications/shadow-expenses-uncosted-regulatory-burdens-in-election-manifestos/

11 ‘Civil service expanding diversity teams across the board’, Guido Fawkes, 14 August 2024, https://order-order.com/2024/08/14/civil-service-expanding-diversity-teams-across-the-board/

12 Sam Fleming, Valentina Romei and Delphine Strauss, ‘UK government finances are on an “unsustainable” path, watchdog warns’, Financial Times, 12 September 2024, https://www.ft.com/content/8d131ebf-d06a-478c-8c42-943abfac2449; ‘Fiscal risks and sustainability – September 2024’, Office for Budget Responsibility, 12 September 2024, https://obr.uk/frs/fiscal-risks-and-sustainability-september-2024/

1

Introduction

Three Free-Market Approaches the UK Should Embrace Anew

In Volume One, we discussed the three biggest drivers of faster economic growth: small government, low taxes, minimal regulation. But what about the surrounding environment in which an economy can best operate – the sea, as it were, on which a high-growth economy prefers to sail? Here, in Volume Two, we review the philosophical approaches that underpin the liberal free-market perspective. These approaches are timeless and well-established yet somehow, in recent decades, have fallen out of fashion. As we look at the growth-inhibiting philosophies and policies that are currently espoused by all the major political parties in the UK, it is clear that these traditional growth-promoting principles have to be rediscovered and re-explored with every new generation.

What, beyond the three social democracy ‘devils’ of large expenditure, high taxes and swamping regulation, are the mistaken approaches that governments take, which prevent a country developing a liberal free-market economy? There are, again, three further inhibitors: dirigism, mercantilism and Keynesianism.

Dirigism is most closely associated with France; its heyday there was under Charles de Gaulle, whose perfect economic ignorance allowed him to give full rein to the concept of national champions, directing investment into chosen sectors and parachuting senior civil servants into top executive positions in the private sector. While the French state 2was still small post-war, with low taxes and low regulation, capital could nevertheless be attracted into that economy, and large-scale investment (particularly from the US’s Marshall Plan) led to significant economic growth. But the approach carried the seeds of its own defeat. When steel, transportation, energy, armaments and the like were in need of significant investment post-war, a dirigist set of decisions was unlikely to go very wrong in deciding where to invest and how to build capacity – particularly when the state could go arm in arm with a given industry in agreeing a regulatory framework that would support the rapid growth of the industry.

But once that capacity was built, and at the same time international competition began to challenge France in these industries, the disadvantages of the approach became stark. Sclerosis set in, with civil servants who were insufficiently trained in the given industry to understand its challenges and opportunities, and workforces who had been bought off with high compensation and stultifying work rules who were not prepared to be flexible in changing to meet emerging needs. By the end of the 1970s, the right-wing government was thrown out because of the major ructions that were taking place in the economy as a result of this sclerosis. It was left to a left-wing government, under François Mitterrand, to sort it out. He first tried to double down on this semi-socialist approach, but then, as things only got worse, wisely opened up the French economy to competition (across Europe, at least). The result, as Peter Hall of Harvard University has written, is that France has in the main stepped back from dirigism, and has embraced a more neo-liberal, competitive market-based approach.1 (It might be said that the apogee of that change was Macron’s decision, in 2021, to close the cradle of dirigism, the ENA, where future top bureaucrats had been getting their education.2) France today is still very far away from being a paradise of free-market policies, but it has learned its lesson regarding dirigism.

3And yet much of the dirigiste spirit survives across Europe, and that includes the UK. In the 1970s, the UK was happily dirigiste in many areas, such as banking. It took Margaret Thatcher to wrench the economy out of that approach. But then, bit by bit and particularly in the economic reign of Gordon Brown, and of successive Conservative governments that saw themselves as the ‘heirs to Blair’, the state reverted to interfering more and more in the economy. In the last decade or two, government after government wasn’t able to help but be attracted to the idea that they were going to be able to pick winners, to tell companies how to run themselves, to interfere in different sectors. The dirigism impulse may not be as strong in the UK as elsewhere, but to interfere is so tempting, and the potential downsides are so little understood, that massive state interference in the economy has happened here, is happening here and will worsen here.i In the coming decade, as one sector after another is ruined, the staggering level of damage to the economy will become clearer. Will the situation then be turned around? It depends on how much will be left to salvage. In the meantime, the importance of free markets in liberating economic growth just has to be emphasised over and over again. As we discuss in Chapter 1, dirigism must be shunned, and free markets allowed to flourish instead.

Mercantilism, an approach to trade that dominated world commerce for hundreds of years, is a dog-eat-dog view of trade that reliably reduces worldwide economic growth, while impoverishing the population of those countries that adopt the approach. In simplest terms, it is the view that I should sell as much as possible of my output to you, while buying as little as possible of your output in 4return. I do this by being protectionist, and by seeking to monopolise certain sectors. In that way, I hope to accumulate wealth in my country. Instead, of course, my actions will encourage a retaliatory, even more mercantilist response from you. Evidently, mercantilism will work better for powerful countries with large armies that can threaten other countries; it doesn’t work so well in a peaceful, mutually respectful world.

The Soviet Union imposed this system on its satrapies, and China is creating such a system, both with advanced economies and with its predatory behaviour towards many of the poorer countries around the world. Trump (at the time of writing not yet elected) threatens a supersized version of the mercantilist approach, evidencing his economic ignorance – although considerations of national security as regards chipmaking in Taiwan and many electronic goods manufactured in China and south-east Asia, for example, do complicate the question and give some credibility to his concerns. Biden, although more inclined towards free markets, didn’t massively resile from the mercantilist policies of his predecessor (and his successor) Trump.

The problem with mercantilism is that by insisting on everything being manufactured at home, you raise the price of goods for your own people in many areas, and invite retaliation by other countries. Raising tariff barriers or quotas creates an additional cost to imports, again increasing the cost of goods for the population. (Tariffs are, of course, just another form of taxation.) As we discuss in Chapter 2, allowing free trade between free countries is essential to promote global wealth.

Keynesianism is the final of these three opponents of a successful economy. As Tim Congdon stated in an excellent recent CapX paper, the foundation of Britain’s original economic upsurge was that our country ‘conducted its public finances and international commerce according to a mere three principles: maintaining the 5gold standard, balancing the budget, and leaving British citizens free to buy whatever they wished – with no tariff or other impediments – from the rest of the world’.3 For the first of these three, as Congdon points out later in his paper, the complexity of the world economy now makes maintaining the gold standard no longer feasible – a different approach to preserving price stability and managing the sterling exchange rate is necessary. That new approach is monetarism, combined with the general principles of balanced budgets and sound money – to which, as Congdon points out, there are no alternatives. These principles are discussed in Chapter 3.

Unfortunately, the tendency for governments to interfere means that they are constantly tempted to go against these simple principles. The idea that ‘we know best’ is so strong, bolstered by a reverence for the often vulgarly interpreted ideas of Keynes, plus modern-day policies that are still driven by a lingering belief that more government stimulus (as opposed to less destructive regulation on banks) is almost always the indicated response to any economic problem, that governments and central banks, as I describe in Chapter 3, find it hard to resist pouring money into the economy, whenever, however.4

As Congdon describes, the high priest of Keynesianism was Paul Samuelson, whose textbook went through nineteen editions, indoctrinating generations of economists. In its earlier editions, it confidently predicted the triumph of the Soviet system’s planned communist economy. Obviously, that position became increasingly difficult to maintain, so the later editions removed it, but that did not prevent the gospel of stimulus from ruling the roost throughout the post-war period, almost up to the present day, extending so far as to give widespread recent credibility to a nonsense belief in the power of printing money without consequences (modern monetary theory or MMT). As Chapter 3 shows, allowing too much growth in 6the money supply has led to massively damaging bouts of inflation in the UK, impoverishing large parts of our society.

These three enemies of a well-functioning economy have to be battled against and eliminated. For a free-market economy to work and deliver satisfying and wealth-producing growth for its people, there must be a classical liberal economic policy, based around the core principles of small government, low taxes and minimal regulation.5 This is achieved when, as opposed to the three devils described in Volume One, we embrace the three angels of the modern neoclassical, free-market economic approach:

Chapter 1: Let free markets thriveChapter 2: Let free trade flourishChapter 3: Let sound money prevail

268NOTES

1 Peter A. Hall, ‘The evolution of economic policy’, in Howard Machin et al. (eds), Developments in FrenchPolitics II (Palgrave, 2001), https://scholar.harvard.edu/files/hall/files/evolution_of_econ_pol_2001.pdf

2 ‘École nationale d’administration’, Wikipedia, https://en.wikipedia.org/wiki/%C3%89cole_nationale_d’administration

3 Tim Congdon, ‘There is still no alternative to monetarism’, CapX, 2 August 2024, https://capx.co/there-is-still-no-alternative-to-monetarism/

4 Ben Bernanke, ‘Why can’t your neighbour burn down his house?’, The Decision Lab, https://thedecisionlab.com/thinkers/economics/ben-bernanke#

5 ‘Classical Liberalism’, Wikipedia, https://en.wikipedia.org/wiki/Classical_liberalism

i See my earlier note on the fiasco of the £400 million investment in OneWeb in 2020.

7

Chapter 1

Let Free Markets Thrive

PRELUDE: WHAT IS MEANT BY A FREE-MARKET ECONOMY AND WHY IS IT SUCH A BIG DEAL?

A free market is one where transactions and exchanges between individuals and organisations take place without, or with only minimal, interference from governments, regulators, monopolists or other distorting entities. Its foundations are voluntary exchange, self-regulating price mechanisms, rule of law and sanctity of contract. Prices are determined by supply and demand, whereby the market (the locus where interaction between buyers and sellers takes place) discovers what price a purchaser is prepared to pay for a particular good or service and whether there are providers who are willing to part with the good or service for that price. Through a freely discovered price, only those goods or services are produced that buyers actually want to purchase and that other sellers are prepared to provide; both parties expect to gain from the transaction. Central planners are not allowed to impose their own concept of what prices should be.

The concept of a free market has been around for ever. In ancient Greece, a man with torn trousers could come to a tailor, who would say ‘Euripides?’ The man would reply in the affirmative and ask ‘Eumenides?’ All that would be necessary after that conversation would be for a price to be agreed, the transaction shaken 8on and the bargain ultimately fulfilled. Now, at first sight, the preceding words may appear only as my fruitlessly introducing a couple of feeble puns into my beige text, trying but failing to spice the book up. Not at all: the story is offered up as a near-perfect example of a pure free-market transaction between two autonomous citizens.i