Fgood or bad, the modern British economy was forged in the 1980s. The deregulated labor market, the dominance of the City, the north-south divide, privatized public services, high levels of personal debt, the A chronic trade deficit and the key role played by the housing market are all legacies of Margaret Thatcher’s decade as Prime Minister.
So perhaps it was fitting that Jeremy Hunt paid homage to the 80s in his autumn statement by frequently checking the name of Nigel Lawson, Thatcher’s chancellor for six years after 1983.
Hunt has only been Chancellor for five minutes so it is too early to pass judgment on him, let alone whether he will match his predecessor in prominence. He will be relieved that the fall statement received a better reception from the financial markets than the Kwasi Kwarteng mini-budget (a low bar to cross, admittedly) and Hunt can claim some credit for having sequenced his measures for limit damage to the economy when it is particularly weak.
Much has been focused on the cumulative 7% decline in living standards in fiscal years 2022-23 and 2023-24 predicted by the Office for Budget Responsibility, and rightly so. If the predictions are correct, there will be nothing comparable since modern records began.
However, the recessions of the early 1980s and 1990s were arguably more brutal, as today everyone is suffering from their purchasing power whereas in previous recessions the pain was concentrated among those who lost their jobs. Unemployment is expected to rise over the next 18 months, but far from the double-digit levels seen for most of the 1980s and again in the early 1990s. Britain still bears the scars of mass unemployment from that period .
But while Hunt had a short-term plan — shutting down the markets, postponing most austerity until after the next election — it’s not immediately obvious that he and Rishi Sunak have a long-term plan, yet. less a vision for the kind of Britain they want to see. Sunak and Hunt have a plan to reduce the deficit, but it goes no further than that. A senior Labor MP summed up the state of government well when he said Britain currently has two Chancellors but no Prime Minister.
An example of this is the decision to extend vehicle excise duties to owners of electric cars in 2025. Incentives are significant, and one of the incentives to switch from petrol or diesel cars is not having to pay road tax. Demand for electric vehicles – given squeezed household budgets – is unlikely to be particularly strong over the next year, but people could start thinking about making the switch as the economy begins to recover. recover in 2024 and 2025.
Certainly the loss of the fuel tax when all cars are electric is a big headache for the Treasury, which stands to lose £30billion in revenue a year by 2040 according to some estimates. But the long-term solution is road pricing, not cash grabs that will slow down a necessary transition to cleaner vehicles.
Many charges could be leveled against Thatcher and Lawson, but the lack of a plan is not one of them. Their strategy was to deregulate and let market forces operate freely. This involved reducing the power of unions and selling off state-owned industries. Lawson was keen not only to cut taxes, but to simplify the tax system.
Ultimately, he blew up the economy with an extraordinary boom-bust that led to a prolonged period of 15% interest rates, record home foreclosures and 3 million people out of work. But as John Muellbauer and David Soskice note in a new essay, the experience of the 1980s profoundly changed Britain. “The 1980s were a very important and divisive decade that changed the facts on the ground and altered the political economy of the country in ways that we still live with,” they say.
One of the characteristics of this period was the symbiotic relationship between housing policy and financial deregulation. Banks freed from their lending limits were only too willing to provide mortgages to those who wanted to buy their public housing at a discount under the right to buy legislation. The supply of new housing fell sharply as the stock of social housing was not replenished. Rising property prices in more prosperous parts of the country have limited labor mobility. Britain had a new economic model, but it was inherently unstable, inherently unproductive and inherently unfair.
As Muellbauer and Soskice point out, it was in the 1980s that the idea took root in the culture of the British middle class that housing wealth, increased through high levels of borrowing, could act as a machine slot.
It’s more than a history lesson. There are similarities between the current crisis and the state of Britain when Thatcher arrived in Downing Street in 1979: high inflation caused by repeated supply-side shocks and a sense of pessimism about resolution long-standing economic weaknesses.
The model created by Thatcher collapsed during the global financial crisis of 2008-2009 and nothing took its place. Since 2010, Conservative governments have talked about their mission to green the economy and move upmarket, but they have promised far more than they have delivered.
Only twice since the Second World War – the government led by Clement Attlee in 1945 and Thatcher in 1979 – has an administration come to power in Britain with a plan for fundamental change and stuck to it. For the rest of the time, the tendency has been to get by and hope for the best. Hunt and Sunak seem to be an integral part of this tradition.
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