By Lord Hannan - Director General of the Institute of Economic Affairs
Britain has just dispatched its sixth prime minister in a decade and is about to get its seventh. The country that used to be held up as a model of grown-up political stability is suddenly looking rather Mediterranean.
The Economist started it in 2022, when Liz Truss was ousted, with its “Welcome to Britaly” front cover. With the fall of Sir Keir Starmer, Italian newspapers are making the same point. Il Sole 24 Ore, not untypically, speaks of “L’italianizzazione del Regno Unito”. Giorgia Meloni, Italian commentators gleefully point out, will soon be on her fourth British PM – though she still has some way to go before she matches Margaret Thatcher’s record of outlasting nine Italians.
What is going on? In Italy, the cause was easily identified: a proportional system that created lots of small parties, each ready to bring down a coalition when it did not get its way. Britain’s political institutions, though, would be recognizable to Queen Victoria. The problem is not structural.
European pundits, including Italians, have a simple explanation. Britain, they say, has become ungovernable because of Brexit. It is true that Brexit played a part in the downfall of two prime ministers. David Cameron resigned after losing the 2016 referendum, and Theresa May, who succeeded him, was ousted for being so dim and indecisive that she alienated all sides on the issue. That, though, does not explain the fate of their successors.
No, the real problem is something that happened immediately after Brexit took effect, namely the lockdown, which was stricter and more expensive in Britain than in other countries. In the UK, as elsewhere, there was a massive surge in state spending as people took up furlough payments, business subsidies and other handouts. Unlike in other countries, though, the spending did not fall back when restrictions were lifted. Millions of people who had never before claimed money from the government evidently decided that they were happy to take a drop in income in return for not having to return to work.
Why did this happen in Britain more than elsewhere? Was it simply that our furlough scheme was more generous? Did it have to do with longer average commuting times? No one really knows. By 2024, the Conservative Government had realised that the bounce-back was not happening and was looking at various schemes to cut welfare and incentivise work. Then Sir Keir Starmer got in, dropped all those plans, began giving pay rises to various public sector workers and increased benefits.
It did not help him. While giving people money in the short term wins you some support, the long-term consequences – higher taxes, slower growth – more than cancel it out. The constant pursuit of short-term popularity leads, paradoxically, to longer-term unpopularity. Always taking the line of least resistance means, in the end, running out of line.
Which brings us to the real problem, namely the rise in government spending from 34 per cent of GDP at the start of the century to 45 per cent now. It is the difference between two men carrying a third, and one man carrying a second.
Excessive spending is the root cause of all the other problems: unaffordable houses, rising taxes, the cost-of-living crisis, declining public services, unproductive civil servants, rising debt. But no one wants to level with voters about it.
Politicians pretend that Britain’s fiscal crisis can somehow be solved painlessly through, for example, cutting foreign aid, scrapping DEI programs, or taxing the top one per cent. No one wants to admit that the growth is mainly coming in the healthcare and social security budgets which, between them, take up around two thirds of all government spending.
And so the cycle continues. Politicians get elected promising growth, shy away from doing the only thing that would deliver growth, namely cutting spending, and become as unpopular as all their predecessors. Not that I blame only the politicians. Voters say they want growth but will not back candidates who offer the short-term pain necessary to secure it.
British people want growth – but not if it means raising the pension age, scrapping the minimum wage, cutting child benefit, admitting skilled immigrants, building houses near them or introducing market mechanisms into Our Precious NHS. In other words, they don’t really want growth at all. Admitting to yourself that you are asking for incompatible things, however, is not an easy thing. More congenial is to tell yourself that all politicians are self-serving shysters.
Hence the doom-loop. The voters are not ready to admit that the country is living beyond its means, the politicians are too cowardly to challenge their prejudices, and so the merry-go-round continues.
Originally published in the Washington Examiner
What we’re reading:
Closing time. A survey by UKHospitality, the British Beer and Pub Association, the British Institute of Innkeeping and Hospitality Ulster found that 23 per cent of hospitality businesses in Britain are losing money, up from 15 per cent three months ago. British pubs and restaurants face some of Europe’s highest taxation levels. While Andy Burnham has previously suggested he backs a VAT cut for the sector, Britain’s hospitality sector has no greater champion than our own Christopher Snowdon.
Monetary manoeuvres. Over at CityAM, Helen Thomas, the CEO and Founder of Blonde Money, speculated about whether Kevin Warsh, the new chair of the Federal Reserve, is set to oversee one of the biggest shifts in monetary policy since the financial crisis. Warsh believes that the Fed should no longer offer forward guidance as to where the bank expects rates to go in future, arguing that they quickly become shackles around a central bank’s neck. Instead, he wants markets to lead the process.
Droning on. Can battlefield drones make ethnical decisions? That’s what David Omand examines for Engelsberg Ideas. In a piece adapted from remarks provided by Omand at the Cheltenham Science Festival, the security and intelligence lecturer, who previously directed GCHQ between 1996 and 1997, argues that while recent AI breakthroughs may make it possible to train autonomous weapons systems to act with a moral compass during conflicts, a human touch will always be needed for balance.
It’s econ-ming home. England are playing the Congo tonight as the World Cup’s Round of 32 continues. Legions of IEA summer interns will have enjoyed his lecture on the economics of football – one of the most fascinating subjects your author has ever enjoyed hearing about – so why not revisit it here, or read about it here in the context of the proposed European Super League five years ago? Alternatively, here’s Deutsche Bank’s take on why the tournament is one big economics lesson.
Havana good time. Under pressure from Donald Trump’s tightened embargo, Cuba has announced 176 measures to deregulate its state-run economy. The plan is to allow more private businesses, unfettered exports with an end to the state monopoly on trade, the enabling of private banks and investment, and even to allow fast-food restaurants in the communist nation. While this is good news for hard-pressed Cubans, it is a shame economic reality took six decades and crisis to take hold.