The great dividing line in British politics

March 22, 2013

By Stephen Evans, Director of Employment and Skills at Working Links. The opinions expressed are his own.

Chancellor Osborne’s latest budget may have been good news for beer drinkers, but it highlighted a growing dividing line in British politics that will shape the 2015 general election.

The Budget contained further downgrades to growth forecasts and the public finances, with the Resolution Foundation projecting that living standards will take a decade to return to pre-recession levels. Increasingly, it seems that 2015 will be a living standards election – who do the public blame for the continuing fall and who will they trust to improve things?

It is, then, little wonder that George Osborne announced a range of measures designed to stimulate growth and ease the cost of living. The cut in beer duty (a sort of anti-pasty tax); Government backing for mortgages; and tax-free allowances for childcare are all intended to make our pay packets stretch further. Against this, the Chancellor sought to portray his opponent’s alternative as simply more borrowing.

But beyond the debate about the levels of tax and spending lies an increasingly stark divide between the major parties about the role of the state in 21st century Britain.

The Conservatives (and Orange Book Liberal Democrats) tend to start from the principle that markets generally work best when left alone.  They believe that the key economic challenges derive from the supply side and hence government’s role is to provide the right incentives for markets to run well, and then step back. For example, government-backed mortgages to kick start lending and reforms to the planning system are based on the belief that the market will then respond to increased demand by building new homes.

On the wider issue of economic growth, the budget’s headline measures were a further cut in corporation tax and the easing of National Insurance payments, again on the assumption that these improved financial incentives will encourage businesses to grow and invest. (There were of course other measures too, I highlight some key ones here to illustrate the broad philosophy).

The right tools for the job?

The risk is that on the cost of living we could be trying to solve a supply side problem with demand side measures, and on economic growth we could be trying to solve a demand side problem with supply side measures.

Let us take the cost of living first. The fundamental reason that house prices and rents are so high is that we haven’t built enough homes in decades. In the 1970’s around 80 percent of public spending on housing went on building new homes and 20 percent on rent subsidies. Today the position is reversed. Indeed, in the last century only when there has been a major public sector house building programme has growth in supply matched demand. Increasing housing demand does not on its own lead to increases in housing supply, rather it pushes up prices. To get rents down and help people get on the housing ladder, we need to combine support for mortgages with a major house building programme equivalent to the post-War Homes for Heroes.

Similarly, childcare costs are high in the UK in part because the provider market is fragmented and lacks stable demand. Subsidising costs for individual parents is unlikely to increase affordability on its own – it is more likely that prices will continue to rise, as has been the case over the last decade. An alternative would be to move at least some of the current subsidy to individual parents into investment in long-term, high quality supply side provision, as they do in Denmark.

In other words, for both housing and childcare we have significant supply side problems that are driving up people’s cost of living, but the policy response has focused more on subsidising demand.

The inverse could be true of economic growth more broadly. A key reason private sector companies are not investing today, despite generally strong balance sheets, is because they don’t think consumer demand is there. A 1 percent cut in corporation tax isn’t going to change this by itself – supply side measures will not resolve lack of consumer demand. Instead, one could argue that a modern industrial strategy, based on a mix of investment from the state and private entrepreneurs, is needed to deliver prosperity in the 21st century.

Individually, these are all interesting debates to have. But add them up and you get fundamentally different views of the way a modern economy operates and the role of the state.

On the one side, a view that government has a role setting incentives but then needs to free up people and businesses to make their own decisions. On the other side, a view that the state has a strategic investment and enabling role in partnership with the private sector.

There will be many, many debates between now and May 2015 across a wide range of issues. And of course the position of all parties is more nuanced than this in practice. But the underpinning dividing lines are becoming clearer. The 2015 election will be a choice about the role of the state in promoting growth and prosperity in a 21st century economy.

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