Winner of the New Statesman SPERI Prize in Political Economy 2016

Tuesday 25 July 2023

Labour Tax and Spend is a question of when, not if


It’s the second leg of a cup tie. Your team you support lost badly in the first leg, but in this match their opponents made a series of huge defensive errors, resulting in a number of goals for your side. Your team has turned the tables, and are two up on aggregate. With thirty minutes to go, what tactics should they adopt? Should they continue to attack, hoping for more errors from their opponents or a moment of attacking brilliance? Or should they close the game down, removing any chance of their opponents scoring a goal that could open the tie up again?

Well before Starmer announced that he would not pledge to end the two child limit for Universal Credit it was clear Labour were trying to close the game down by avoiding any commitments to spend more than the government beyond those few already made. The Conservatives and their press will run with ‘Labour’s tax bombshell’ whatever Labour do, but if those claims lack any credibility in the broadcast media they will have limited traction. As Labour ends up trying to hold the ball by their opponent's corner flag, the disappointment of those watching is clear, but fans know above all else they want their side to win. [1]

I have no idea whether this is a good or bad political tactic in terms of winning the next election. The experience of 2019 shows the dangers of a campaign with a lot of spending commitments, but the success of the 2017 campaign suggests a few well chosen spending increases can attract otherwise apathetic voters. However, in defending Labour’s current tactic it is never a good idea to parrot falsehoods, even if you are only ‘coining a phrase’.

What should be clear to anyone looking at the current state of the public services is that the government’s current spending plans are just not credible, and so the next government will have to increase day to day public spending. Unless the economy is in recession or there is a significant risk this may happen, that extra current spending needs to be matched by additional taxes. (This is not the case for public investment, which should be matched by additional borrowing rather than higher taxes.)

The reason why current public spending has to increase compared to current plans can be demonstrated in two ways. The first is just to note each area where public services are failing badly through lack of funding, rather than lack of ‘reform’ (whatever that is). The second is to look at international comparisons. As the former is much more common than the latter, I will look at international comparisons here, drawing on some earlier analysis.

But before doing this, it is worth repeating that a third, frequently used way is largely meaningless. This is to look at historical trends in UK taxes and public spending as a share of GDP, and note that both are at historic highs. It is a meaningless because the share of health spending as a percentage of GDP has been rising in nearly every country over the last few decades, so the tax to GDP ratio will have to rise with it in any country where health services are publicly funded.

International comparisons based on public spending or tax levels are useful, but they too can be misleading because they take no account of the division of tasks between the state and the private sector in different countries. In the United States, for example, much more health provision comes from the private sector than in most European countries. In France the public sector provides more of the pensions people receive than in the UK. A much better way of doing international comparisons is to add up all spending on certain categories, whether that spending is funded through taxation or through the private sector, and look at their share in total GDP.

The OECD does this for what they call ‘social spending’, which is essentially welfare spending (including pensions) and health spending, but excludes education and some other areas of public spending. Of the G7 countries, in 2019 the UK had the lowest share of social spending in GDP. (2019 is the latest data we have, but when we get it data for 2020-2 will be heavily distorted by the pandemic.) The two countries with far higher share of social spending than the UK were not in Scandinavia but France and the United States. This shows how international comparisons of public spending and tax can be misleading. The US in 2020 was the only country with a lower tax rate than the UK because it doesn’t have an NHS, but social spending as a share of GDP is much higher. There is nothing inevitable about the UK having the lowest welfare and health spending share among the G7: in 2010 we were ranked third, not last. Labour should aim to completely reverse that 14 year decline.

These international comparisons show there is plenty of scope to raise public spending and taxes. So the only question for the next Labour government is when this happens. Does it follow what happened in 1997 and stick to Conservative tax and spending plans until they become intolerable towards the middle of their first five years, or does Rachel Reeves raise taxes and spending in her first budget?

1997 is an obvious template, and Reeves may well want to follow in the footsteps of our most successful and influential Chancellor in living memory. [2] Labour are rightly committed to substantial green investment (albeit phased in over a few years), and she may feel that delivering this without frightening the markets is a necessary precondition to getting the growth that will bring in higher taxes that will allow higher spending. This suggests following Brown in sticking to Tory spending plans over the first two years, and hoping that some combination of higher growth and enhanced credibility will allow higher public spending nearer the election.

However, as I have noted before, 1997 was different to the situation Labour will find itself in as a new government sometime during 2024. Public service provision was poor then, but it is at critical levels today, and in the NHS at least poor public provision is hurting the economy In addition, relative public sector pay has been cut substantially, and that is unsustainable. The fiscal plans that Hunt has given the OBR, which imply further austerity, cannot be delivered by any government. A Labour government that tried would tear itself apart.

The danger in trying to stick closely to Conservative spending plans, even for two or three years, is that inaction on public service provision and pay will mix public disappointment with damaging internal wrangling. When taxes and spending do eventually increase, Reeves will be seen as having been forced to do this by her party, rather than being in control. In addition it may be too late to see the benefits of higher spending before the next election. It is not impossible that, to protect Starmer’s own position, Reeves could lose her job.

There is therefore a strong case for Rachel Reeves to raise spending and taxes in her first budget. Even Gordon Brown introduced a windfall tax in 1997! It will take time for the benefits of higher public spending to be seen in lower waiting times and better staff retention, so the sooner Labour starts the better. There are also strong political arguments for starting boldly rather than gradually.

There are some obvious tax increases that can be made that will impact mainly on the well off, like a higher top rate, aligning capital gains taxes with income taxes, and windfall taxes on Banks while interest rates remain high. But I think there is a strong political argument for going beyond these, and to raise taxes that are paid by much larger numbers of people. An obvious candidate from a political point of view is to implement the increase in national insurance contribution rates (along with some adjustment in who pays) that Sunak initially proposed, then Truss reversed but Hunt did not reinstate.

How does Labour do that without seeming to contradict everything they are saying now? Once upon a time oppositions once elected could claim the ‘books’ were in a much worse state than they had imagined, but that is less credible now we have the OBR. Equally it is hard for Labour to claim that the public services are in a worse state than they had thought when you just need to look at published data to see how bad things are. (If you prefer first hand accounts, read this.) But whatever excuses they use, the need for them is another reason why making them once at the beginning of their term, rather than as a steady stream throughout it, makes political sense.

From both an economic and political point of view, announcing large tax and public spending increases in the first Labour budget makes a lot of sense, and is preferable to any alternative. We can only hope that Labour can switch quickly from focusing on winning power to being an effective government once they return to power.

[1] This also means that if the government pledges to reduce or even eliminate inheritance tax, Labour will probably match that pledge, as inheritance tax is an unpopular tax (because most people do notunderstand how few pay it). But, as this post makes clear, there is zero chance that Labour once in power would reduce inheritance tax.

[2] In retrospect Brown’s first budgets were way too tough, with public sector net debt falling from 37% to under 30% in just three years. A lot of that was due to unexpectedly high tax receipts, but public spending also fell as a share of GDP. There is no evidence that any of this was necessary to win some kind of iron Chancellor credibility test.

Tuesday 18 July 2023

Why nationalisation can be a gift to a future Conservative government


Polling suggests most voters think utilities should be publicly rather than privately owned, as here for example. (See also this YouGov poll.) You get similar answers if you ask about renationalisation (see this YouGov poll for example). 

Not only is renationalisation popular, but there are strong economic arguments that industries that are natural monopolies should be state owned. (Natural meaning it’s virtually impossible to introduce competition.) But this post is not about the relative merits of nationalised or privately run but publicly regulated utilities. Instead I will presume there are good arguments for renationalisation, but instead suggest a political economy reason why renationalisation is unlikely to happen.

It would be interesting to run these polls with a question that explicitly mentioned the 'cost' of renationalisation, to see if this influenced the results.  I suspect many Labour politicians think that while voters like the idea of a publicly owned water industry, for example, they would not like the headlines about the ‘cost’ of that renationalisation that would undoubtedly accompany it. In reality the capital cost of renationalisation is offset by the benefit of obtaining an asset (assuming a fair price is paid) but this is not how its usually portrayed. This post is about the corollary of thinking renationalisation involves a cost, which is that privatisation yields a one-off benefit.

Renationalisation may not happen, even though it is popular and makes economic sense, in a democracy where one of the two likely parties of government can be sure to reprivatise. I believe the UK is an example of this. In a recent post I argued that there were strong forces ensuring that the Conservative party would remain a pretty right wing party in economic terms, hoping to win power by appealing to social conservatives. Not only is reprivatisation ideological attractive to that party, but it also brings political advantages that the other main party (Labour) might not wish to give their opponents.

If the water industry, to take the most topical example, was renationalised by a Labour government that came into power next year, the Conservatives would want to reprivatise it whenever they regained power for a number of reasons. The most fundamental is that privatisation would fit with the party’s ideology and the wishes of their financial and newspaper backers. However privatisation is also attractive to a Conservative government for another reason. Because most voters do not see privatisation as a reduction in their wealth, they see the money privatisation generates for the government as a net benefit. It is seen as a benefit rather than a loss of wealth for exactly the same reason that many voters are scared about the ‘cost’ of the renationalisation, rather than seeing it as issuing debt to obtain an asset.

This is a problem of perception, which phrases like ‘selling the family silver’ to describe privatisation try to get over. Publicly owned companies (the silver) are a form of public (the family) wealth, and that means that the public (members of the family) hold that wealth indirectly through the government. The government, if you like, is the asset manager in charge of the family’s wealth.

The idea that privatisation produces a cash gain without an equivalent loss in assets may not just be about misperception, but may also be about redistribution. Suppose the water industry is privatised, and the proceeds are passed on to the public in the form of temporary income tax cuts. Those that most obviously lose out from this are people who pay little or no income tax, which implies those who pay substantial amounts of tax gain, even if they viewed the nationalised industry as part of their wealth. These financial gains will be increased still further if shares are sold to the public at a discount which they can subsequently cash in. In this case those receiving shares gain at the expense of those who would otherwise have got the proceeds from the sale.

All this means that privatisation represents a considerable resource for any government undertaking it, a resource which - to put it crudely - can be used to bribe whichever voter group the government wants to gain favour with. So in the UK a new Conservative government is unlikely to worry that the idea of privatisation was unpopular with many voters (as perhaps it was even in the 1980s), because the side benefits of selling the asset are popular, and the government can use those benefits strategically. Just as some voters in favour of public ownership may worry about what the media calls its cost, the same voters will enjoy what the same media will call the proceeds of privatisation.

It is in this sense that any renationalisation by an incoming Labour government will be a gift to the next Conservative government. Given the transition costs in changing ownership, together with uncertainty about how long it will be in office, this problem may be sufficient to deter a Labour government from renationalisation, however popular such a policy may appear to be.

Is there any way of dealing with this problem? The short answer is not much, but I think it’s worth exploring this in more detail. The problem essentially arises because voters fail to see nationalised industries as part of their wealth. Governments can always use fiscal policy to direct income to particular voter groups, but if that income comes through increasing the taxes of others, or cutting public spending, then the losers can easily be aware of what is going on. When a public company is privatised it is the lack of awareness of a loss in wealth that is at the heart of the problem.

We could all hope for a better media that stopped talking about the capital ‘cost’ of nationalisation, or instead talked about the ‘loss’ of assets involved in privatisation. But headlines like ‘£X billion cost bombshell’ are always going to be more attractive to the media than ‘£X billion asset transaction’, and headlines like ‘privatisation could mean 2p off income tax’ will always win against ‘privatisation: public loses with one hand what it gains with the other’. In other words education of the media has its limits, even if you ignore that much of it is owned by those pushing privatisation,

What a Labour government could do is increase transparency. This brings me to one of my specialist subjects: fiscal rules. I have for some time argued that governments should stop looking at the government debt to GDP ratio, and start looking at the public sector net worth to GDP ratio. Privatisation or nationalisation is a very good example of why. Privatisation that is used not to cut taxes but pay back public debt will reduce the debt to GDP ratio, but this asset swap does nothing to improve the public finances. I first wrote about this nearly ten years ago. The public sector has reduced debt but it has also lost an asset which produced an income stream. Debt to GDP gives the wrong message, whereas the right message is given by public sector net worth (which is largely unaffected by privatisation or nationalisation).

The battle to replace the ‘falling debt to GDP’ rule is not about economics. The intellectual case for looking at both sides of the balance sheet rather than just one side is overwhelming. In addition, judging by Labour’s fiscal rules, the Shadow Chancellor Rachel Reeves understands this. The problem is that the media still focuses on debt, and as a result Labour politicians of whatever flavour feel they have to respond to that. One thing Labour can certainly do in office is to talk much more about public sector net worth, and much less about public debt. Focusing on the latter rather than the former is not impartial (BBC please note), as the debt/GDP measure is biased against public investment and public ownership.

That is the long answer when the short answer is no. Undoing privatisation, perhaps like undoing Brexit, is something where the composition and goals of the Conservative party still matters even when they are in opposition. [1] For the foreseeable future the Conservatives are likely to reprivatise any industries that a Labour government nationalises, and get additional political capital as a result. This doesn’t mean that Labour shouldn’t nationalise at all, but the prospect of giving a gift to a future Conservative government is a much better argument against nationalisation than nonsense about prohibitive costs or nervous markets.

[1] Of course a Labour government can have an influence on a Conservative opposition. To take just one example, it could put a limit on how much any individual can give to any political party.  

Tuesday 11 July 2023

Inflation and pandemic recoveries in five major economies

My discussion about current inflation two weeks ago focused on the UK. Over a year ago I wrote a post called “Inflation and a potential recession in 4 major economies”, looking at the US, UK, France and Germany. I thought it was time to update that post for countries other than the UK, with the UK included for comparison and with Italy added for reasons that will become clear. I also want to discuss in general terms how central banks should deal with the problem of knowing when to stop raising interest rates, now that the Fed has paused its increases, at least for now.

How to set interest rates to control inflation

This section will be familiar to many and can be skipped.

If there were no lags between raising interest rates and their impact on inflation then inflation control would be just like driving a car, with two important exceptions. Changing interest rates is like changing the position of your foot on the accelerator (gas pedal), except that if the car’s speed is inflation then easing your foot off the pedal is like raising rates. So far so easy.

Exception number one is that, unlike nearly all drivers who have plenty of experience driving their car, the central banker is more like a novice who has only driven a car once or twice before. With inflation control, the lessons from the past are few and far between and are always approximate, and you cannot be sure the present is the same as the past. Exception number two is that the speedometer is faulty, and erratically wobbles around the correct speed. Inflation is always being hit by temporary factors, so it’s very difficult to know what the underlying trend is.

If driving was like this, the novice driver with a dodgy speedometer should drive very cautiously, and that is what central bankers do. Rapid and large increases in interest rates in response to increases in inflation might slow the economy uncomfortably quickly, and may turn out to be an inappropriate reaction to an erratic blip in inflation. So interest rate setters prefer to take things slowly by raising interest rates gradually. In this world with no lags our cautious central banker would steadily raise interest rates until inflation stopped increasing for a few quarters. Inflation would still be too high, so they might raise interest rates once or twice again to get inflation falling, and as it neared its target cut rates to get back to the interest rate that kept inflation steady. [1]

Lags make the whole exercise far more difficult. Imagine driving a car, where it took several minutes before moving your foot on the accelerator had a noticeable impact on the car’s speed. Furthermore when you did notice an impact, you had little idea whether that was the full impact or there was more to come from what you did several minutes ago. This is the problem faced by those who set interest rates. Not so easy.

With lags, together with little experience and erratic movements in inflation, just looking at inflation would be foolish. As interest rates largely influence inflation by influencing demand, an interest rate setter would want to look at what was happening to demand (for goods and labour). In addition, they would search for evidence that allowed them to distinguish between underlying and erratic movements in inflation, by looking at things like wage growth, commodity prices, mark-ups etc.

Understanding current inflation

There are essentially two stories you can tell about recent and current inflation in these countries, as Martin Sandbu notes. Both stories start with the commodity price inflation induced by both the pandemic recovery and, for Europe in particular, the war in Ukraine. In addition the recovery from the pandemic led to various supply shortages.

The first story notes that it was always wishful thinking that this initial burst of inflation would have no second round consequences. Most obviously, high energy prices would raise costs for most firms, and it would take time for this to feed through to prices. In addition nominal wages were bound to rise to some extent in an attempt to reduce the implied fall in real wages, and many firms were bound to take the opportunity presented by high inflation to raise their profit margins (copy cat inflation). But just as the commodity price inflation was temporary, so will be these second round effects. When headline inflation falls as commodity prices stabilise or fall, so will wage inflation and copy cat inflation. In this story, interest rate setters need to be patient.

The second story is rather different. For various (still uncertain) reasons, the pandemic recovery has created excess demand in the labour market, and perhaps also in the goods market. It is this, rather than or as well as higher energy and food prices, that is causing wage inflation and perhaps also higher profit margins. In this story underlying inflation will not come down as commodity prices stabilise or fall, but may go on increasing. Here interest rate setters need to keep raising rates until they are sure they have done enough to eliminate excess demand, and perhaps also to create a degree of excess supply to get inflation back down to target.

Of course reality could involve a combination of both stories. In last year’s post I put this collection of countries into two groups. The US and UK seemed to fit both the first and second story. The labour market was tight in the US because of a strong pandemic recovery helped by fiscal expansion, and in the UK because of a contraction in labour supply partly due to Brexit. In France and Germany the first story alone seemed more likely, because the pandemic recovery seemed fairly weak in terms of output (see below). 


In my post two weeks ago I included a chart of actual inflation in these five countries. Here is a measure of core inflation from the OECD that excludes all energy and food, but does not exclude the impact of (say) higher energy prices on other parts of the index because energy is an important cost.

Core inflation is clearly falling in the US (green), and rising in the UK (red). In Germany (light blue) core inflation having risen seems to have stabilised, and the same may be true in France and Italy very recently. The same measure for the EU as a whole (not shown) also seems to have stabilised.

If there were no lags (see above) this might suggest that in the US there is no need to raise interest rates further (as inflation is falling), in the UK interest rates do need to rise (as they did last month), while in the Eurozone there might be a case for modest further tightening. However, once you allow for lags, then the impact of the increases in rates already seen has yet to come through, so the case for keeping US rates stable is stronger, the case for raising UK rates less clear (the latest MPC vote was split, with 2 out of 7 wanting to keep rates unchanged) , and the case for raising rates in the EZ significantly weaker. (The case against raising US rates increases further because of the contribution of housing, and falling wage inflation.)

As we noted at the start, because of lags and temporary shocks to inflation it is important to look at other evidence. A standard measure of excess demand for the goods market is the output gap. According to the IMF, their estimate for the output gap in 2023 is about 1% for the US (positive implies excess demand, negative insufficient demand), zero for Italy, -0.5% for the UK (and the EU area as a whole), and -1% for Germany and France. In practice this output gap measure just tells you what has been happening to output relative to some measure of trend. Output compared to pre-pandemic levels is strong in the US, has been pretty strong in Italy, has been quite weak in France, even weaker in Germany and terrible in the UK (see below for more on this).

I must admit that a year ago this convinced me that interest rate increases were not required in the Eurozone. However if we look at the labour market today things are rather different. Ignoring the pandemic period, unemployment has been falling steadily since 2015 in both Italy and France, and for the Euro area as a whole it is lower than at any time since 2000. In Germany, the US and UK unemployment seems to have stabilised at historically low levels. This doesn’t suggest insufficient demand in the labour market in the EZ. Unemployment data is far from an ideal measure of excess demand in the labour market, so the chart below plots another: employment divided by population, taken from the latest IMF WEO (with 23/24 as forecasts).

Once again there is no suggestion of insufficient demand in any of these five countries. (The UK is the one exception, until you note how much the NHS crisis and Brexit have reduced the numbers available for work since the pandemic.)

This and other labour market data suggests our second inflation story outlined in the previous section may not just be true for the US and UK, but may apply more generally. It is why there is so much focus on wage inflation in trying to understand where inflation may be heading. Of course a tight labour market does not necessarily imply interest rates need to rise further. For example in the US both wage and price inflation seem to be falling despite a reasonably strong labour market, as our first inflation story suggested they might. The Eurozone is six months to a year behind the US in the behaviour of both price and wage inflation, but of course interest rates in the EZ have not risen by as much as they have in the US.

Good, bad and ugly pandemic recoveries

The chart below looks at GDP per capita in these five countries, using the latest IMF WEO for estimates for 2023.

Initially I will focus on the recovery since the pandemic, so I have normalised all series to 100 in that year. The US has had a good recovery, with GDP per capita in 2023 expected to be five percent above pre-pandemic levels. So too has Italy, which is forecast to do almost as well. This is particularly good news given that pre-pandemic levels of GDP per capita were below levels achieved 12 years earlier in Italy.

Germany and France have had poor recoveries, with GDP per capita in 2023 expected to be similar to 2019 levels. The UK is the ugly one of this group, with GDP per capita still well below pre-pandemic levels, something I noted in my post two weeks ago. Unlike a year ago, there is no reason to think these differences are largely caused by excess demand or supply, so it is the right time to raise the question of why there has been such a sharp difference in the extent of bounce back from Covid. To put the same point another way, why has technical progress apparently stopped in Germany, France and the UK since 2019.

Part of the answer may be that this reflects long standing differences between the US and Europe. Here is a table illustrating this.

Real GDP per capita growth, average annual rates




















United Kingdom





United States





Growth in GDP per capita in the US has been significantly above that in Germany, France or Italy since 1980. At least part of that is because Europeans have chosen to take more of the proceeds of growth in leisure. However this difference is nothing like the gap in growth that has opened up since 2019. (I make no apology in repeating that growth in the UK, unlike France or Germany, kept pace with the US until 2007, but something must have happened after that date to reverse that.)

I have no idea why growth in the US since 2019 has been so much stronger than France or Germany, but only a list of questions. Is the absence of a European type furlough scheme in the US significant? Italy suggests otherwise, but Italy may simply have been recovering from a terrible previous decade. Does the large increase in self-employment that occurred during the pandemic in the US have any relevance? [1] Or are these differences nothing to do with Covid, and instead do they just reflect the larger impact in Europe of higher energy prices and potential shortages due to the Ukraine war. If so, will falling energy prices reverse these differences?

[1] If wage and price setting was based on rational expectations the dynamics would be rather different.

[2] Before anti-lockdown nutters get too excited, the IMF expect GDP per capita in Sweden to be similar in 2023 to 2019.

Tuesday 4 July 2023

Why the Conservatives will always advocate economically damaging socially conservative policies


A constant theme of UK politics, and politics in many other countries, is how parties that are right wing on economic issues have attempted to win elections by appealing to social conservatives. Sometimes this is because party leaders are genuinely socially conservative, but sometimes it is simply a political tactic. We know, for example from this study by Tim Bale and others for UK in a Changing Europe that in 2019/20 Conservative MPs were more socially liberal than the average voter, and far more liberal than the average Conservative voter. But that liberalism was not reflected in the party’s agenda.

Not all social issues are equal in terms of being able to attract socially conservative voters. In the UK the right wing media may constantly obsess about woke attitudes, but most voters are not even sure what woke means, still less prepared to cast the vote on this basis. Two of the issues that are potent for social conservatives are nationalism (including sovereignty) and immigration. Yet, as recent experience in the UK has shown, mainstream Conservative parties or politicians that pursue either issue will find it can (and perhaps inevitably will) backfire, because in both cases any policies that significantly reduce immigration or increase national sovereignty will have negative economic consequences that enough voters will at some stage find intolerable.

In the case of sovereignty the obvious example is Brexit. It is now clear to many voters who voted Leave that ‘taking back control’ has an economic cost, despite promises made at the time that it wouldn’t. There is a very simple reason for this. Those who originally pooled sovereignty through the EU did so largely because it would result in economic benefits, the evidence suggests that it did and the logic of those decisions hasn’t changed over time.

Reducing immigration also has economic costs, which is a major reason why Cameron/Osborne were not serious about meeting their immigration targets. Yet their tactic of setting targets but not achieving them was disastrous (for them and the country) because if you tell people reducing immigration is really important and fail to do anything about it, people who voted for you to reduce immigration will start looking elsewhere for another party that will.

We also see the cost of reducing immigration with Brexit. Although headline levels of immigration have risen since Brexit, there has been a deliberate reduction in unskilled immigration (with exceptions for areas like health and social care or fruit picking). The subsequent labour shortages in specific areas made headlines, and the stories that immigrants would be quickly replaced by non-immigrants has shown to be false. A shortage of unskilled labour was one factor behind the UK’s high inflation rate. Indeed the public’s attitudes to immigration have become more favourable since Brexit, and this may partly be due to this experience.

One of the reasons immigration is currently so high is an increase in students from overseas, but again attempts to limit those numbers will have a direct economic cost. The money overseas students pay for their course is an export of services for the UK, which helps us import more of the overseas goods we want at a cheaper price. These economic costs of controlling immigration are why Theresa May had to resort to a ‘hostile environment’. But that has a cost too (although more hidden), if it deters immigrants who would benefit the UK economy. Nearly all economists view immigration as beneficial to the economy and innovation.

Most recently the government has attempted to replace general immigration with asylum seekers as a demonstration of their social conservatism. But here too the economic costs are there. For example researchers at the National Institute have recently calculated that the economy could gain £1.6 billion, and the government finances far more, by giving people seeking asylum the right to work.

With both national sovereignty and immigration, therefore, a trade-off exists between satisfying social conservatives and economic prosperity. The latter is important not just in itself, but because it enables another goal that seems central to Conservatives, which is lower taxes.

Initially the use of sovereignty and immigration as political weapons appeared to be a master stroke for the Conservative party. It eventually led to an emphatic General Election victory in 2019, when the ‘Red Wall’ of former Labour seats fell. But that political high soon led to current lows, as Brexit turned out to be the economic disaster anyone with any sense had predicted, so that when a cost of living crisis emerged polling suggested the Conservatives would lose the next election and a large number of their MPs.

If the Conservative party does become the official opposition after the next election, will the disaster created by pursuing an anti-immigration, pro-national sovereignty agenda lead to any second thoughts among MPs and leadership contenders? Will they recognise that their strategy, which really began in 1997, of trying to win elections by appealing to social conservatives as much as (or perhaps more than) those on the economic right contained the seeds of its own destruction?

One way to answer this question is to divide the party up into different factions, as Robert Shrimsley does here. It is certainly true that some Conservative MPs are very socially Conservative, and will want to increase national sovereignty and reduce immigration whatever the economic costs, but as we noted earlier most are not. Nearly all Conservative MPs are also Thatcherite, and want lower taxes as well as less regulation and less government generally (defence and law and order aside). Those who are naturally more socially liberal may begin to appreciate the conflict between more sovereignty/less immigration and the ability to cut taxes.

Yet there are fundamental interrelated reasons why the disaster of appealing to the anti-immigrant and national sovereignty voter is unlikely to deter Conservatives from repeating the tactic in opposition. The first reason is that the alternative, of just focusing on economically right wing voters, is not going to be enough to win unless the party moves to the economic centre, and this is unlikely given the typical Conservative MP is very right wing in economic terms. It is a refusal to move towards the economic centre ground that requires a focus on social conservatism.

The second reason is the influence of money, either directly through cash or indirectly when money is embodied in newspaper ownership. I have argued in the past that the party has become the representatives of the 0.01% who are the very rich. Money and newspaper backing is vitally important to potential party leaders to win the votes of party members, and also important in winning elections. Money will tend to flow to those who most serve the interests of the very rich, which is how very right wing economic views (as well as a lot of corruption) tends to thrive in the Conservative party. (Those who think the interests of the very rich are identical to the interests of corporations, and therefore neoliberalism, should read this.)

Third, there are many within the Conservative party (many members, and some MPs) who really are very socially conservative, and want the party to lead on these issues not because it’s a useful tactic, but because they believe in national sovereignty and ‘control of our borders’. Perhaps National Conservatism represents this group, just as Braverman certainly does if she really dreams of sending asylum seekers to Rwanda. This group, like the ERG before them, find it easy to make a lot of noise and, more importantly, are prepared to threaten to defect to Farage like parties should the Conservatives ever abandon their anti-immigration, pro-sovereignty agenda. It will take the most dire circumstances, like several election defeats in a row, to keep them quiet.

I used to think that the Conservative party could change into a party that was more centrist in economic terms, and less strident in its social conservatism, if it suffered a long enough succession of general election defeats. Cameron might appear to be the model for that (remember hugging a hoodie), but in fact he was not. First, he required a Global Financial Crisis to defeat Labour (and even then he also required a coalition with orange liberals). Second, he did not move to the economic centre ground. As I argued here, Cameron/Osborne had learnt nothing from the New Labour years, and instead tried to carry on where Thatcher left off, with disastrous results. Third, Cameron both retained lower immigration as a key pledge, and was happy to push national sovereignty when it suited him.

The real lesson of Cameron’s defeat of New Labour is that if you wait long enough, and flaunt what few socially liberal tendencies you have so that the media can pretend you are something you are not, then a party that promotes the extreme right wing interests of the very rich together with an anti-immigration, national sovereignty agenda can eventually gain power because voters either get bored with a Labour government, or a crisis engulfs that government, or both. For that reason, coupled with everything I set out earlier, it is difficult to see the Conservative party changing its current character. That in turn will mean that any future Conservative government, like the one that has ruled for the past 13 years, is bound to be a party that sacrifices living standards for socially conservative goals. [1]

[1] I would also argue that economic policies which tend to promote rent seeking (gaining money by taking it away from someone else) by the already wealthy ahead of promoting general prosperity and welfare (through innovation and investment) have a similar effect, but that is a different argument that I alluded to here. It is similar to the idea of inclusive and extractive institutions set out by Acemoglu and Robinson in “Why Nations Fail”. Governments that promote the interests of the already wealthy (a plutocracy) will focus on rent seeking: extracting wealth from society towards the wealthy. Governments that promote the interests of society as a whole will look to increase overall wealth, and so will tend to promote policies that increase overall welfare. Neoliberalism, that promotes the interests of corporations, falls somewhere in between (corporations can invest or pay dividends), but as I have argued here neoliberalism can easily degenerate into a form of plutocracy.