And yet the size of the UK’s public sector has inexorably increased, from around 30pc of GDP last century to, during Covid, over 50pc; even now it is around 45pc. The number shows little sign of reducing.
Second: along with a large state comes the corollary: high taxes. Over and again, academic studies have shown that the higher the tax as a percentage of GDP, the lower the growth. Yet, again, we keep raising taxes – even, let us say particularly, under recent Conservative governments.
And when those governments meet resistance on increasing income tax or corporation tax, they invent all sorts of unconventional taxes – often wrapping up the reasoning for imposing 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, while always right – showed that all these tax rises result in less compliance, less economic activity and less tax revenue than predicted.
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 the 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 industry told not to make boilers. Formerly privatised industries must be re-nationalised. The insanity of EDI, ESG and the like – compulsory carbon literacy training, anyone? – forces companies to affirm and act with a primary purpose to achieve social nirvana rather than delivering goods and services that people want. Good luck with that nirvana stuff; in the meantime, forget about achieving any economic growth.
So, two simple and fairly obvious principles, but in the past 50 years most western democracies have done the opposite, ignoring the clear evidence that exists on how to improve their people’s wealth and living standards.
There are three general models of how countries are run in this modern age; at the worst end, we have the brutal bandit dictatorships such as Russia, Venezuela, North Korea, Iran, Nicaragua and Cuba.
These mostly emerged as the logical endpoint of socialism/communism, with leaders hanging on to power by terrorising their own citizens and indulging in brutal military adventures abroad.
The second model is Social Democracy. It takes a lot longer to fail, but ends up with stagnation and in consequence, over time, national bankruptcy, as is currently being predicted to befall, for example, France.
The third model is the Free Market economy, still pursued in countries around the world, all of which show startling and continued levels of growth, bringing wealth, health, longevity to their citizens. The USA is still one, despite Obama’s and Biden’s efforts; the wealth of its citizens grows at an astonishingly greater pace than the average EU citizen, so that salaries and wealth further and further outstrip ours. Post war, Europe was at first successful, but bit by bit its countries moved from free markets structures to social democracy, where saying you care, but acting to damage, is the norm.
The ever-increasing welfare bill led to the ravages of QE, and 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 our wealth is built entirely on the fruits of rapacious colonialism; the promotion of diversity hires; the bizarre assertion – to take just one example – that the socialised NHS, one of the worst health systems globally, is a national treasure and the envy of the world.
Drain the swamp
Leaving the EU has made it possible for us to break away from the European social democratic model. But we haven’t capitalised on this opportunity.
Instead, every government since 2016 has doubled down on social democratic policies, with predictably catastrophic results. The only leader who tried to break free and create a dynamic economy was Liz Truss, before being immediately betrayed by her own side, who encouraged all to embrace the fairytale that a disturbance created by bad regulation (the rolling collateral calls on leveraged LDI funds), compounded by the Bank of England failing to support the LDI funds as they sorted themselves out, amounted to “Liz Truss crashed the economy“ (economic growth that quarter, it eventually turned out, was positive, refuting the ONS’s previous claims that it had shrunk).
With her own side aggressively pushing her to failure, the political opposition and left-wing commentators had little work to do to ensure Truss’s departure, to be replaced by their always-preferred candidate, Rishi Sunak.
His new government had no principles to guide it, beyond the desire to cling on to power – and it even seemed to lose interest in that, calling, unforgivably, a premature election that it was bound to lose.
The new Starmer government promised to reduce regulation in the building industry so that the economy can get a boost, but then after that good start a raft of growth-destroying measures have been introduced, such as giving massive pay rises to the public sector and abandoning all attempts to reduce the vastly excessive number of civil servants, if only back to pre-Covid levels.
It doesn’t have to be this way. In previous centuries, we led the world with a few basic principles, summed up in the phrase “laissez-faire” — just let entrepreneurs, business 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, like Switzerland and Singapore, are showing us there is no limit to the economic growth that a country can achieve if you rein in the state; in consequence, they deliver enormous benefits, of all kinds, to their people. There is absolutely no reason why we can’t do the same.
In addition to eliminating these three devils, there are of course many other things we have to do to get growth going; key among them are improving our state education system, which the wonderful Katharine Birbalsingh has shown us how to do – yet the new Labour government seems determined to do the opposite. We have to bust up the employee monopolies of the public sector and the semi-nationalised industries, banning strikes by state workers. We have to find a way, above all, to get immigration down so that economic growth per capita becomes possible. We have to do all this.
Without returning 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 sooner than later. We have to hope our Government is paying attention – although the chances are that Labour will follow its Conservative predecessors in sticking with more of the same, failed approach.
So in the meantime we have to wait, build the case, and keep pressing it: helping all to understand that growth will only come by reverting to the free market principles that transformed our country into the workshop of the world, thus eventually transforming the wealth of the whole world.