The short-term pressures on Rishi Sunak have continued to grow in tandem with the cost of energy and everyday essentials. Conservative MPs are increasingly panicked about being saddled with a label of being “high tax Tories”. But underlying all of this is a much more worrying phenomenon.
Since the financial crisis of the late 2000s, economic growth has slowed. This is not just in the UK but across the West as a whole.
Low economic growth means government receipts from taxes will slow to a trickle. At the same time, the clamour from electorates for more public spending gets louder.
By 2010 Britain’s economy had returned to the level it was prior to the financial crisis. From then until 2019, the year before the pandemic, economic growth averaged 2 per cent a year. A perfectly reasonable rate, one might think. But during the same length of time, in the run up to the financial crisis, the average was 2.6 per cent.
If a similar rate had persisted throughout the 2010s, national income and output would have been 8.4 per cent higher than it actually was. In money terms, this translates into a sum of around £180bn. In turn this would have generated an additional £70bn or so in tax receipts.
Putting this into context, total annual government receipts from income tax and employee and self-employed national insurance are just over £350bn. So the Chancellor would have had free rein to make his mark with substantial tax cuts.
The slow-down in growth has been even worse in the nineteen countries of the Eurozone. Between 1998 and 2007, average GDP growth was 2.3 per cent. And 2010-2019 it was just 1.3 per cent, a rate well below that of the UK.
When modern welfare states were first founded after the Second World War, the presumption was that economic growth would be sufficiently strong to generate the tax base required to satisfy the demands of electorates.
A 10-year average shows us an accurate picture of the sustainable level of growth, smoothing out the normal year-to-year fluctuations.
This “trend” level of growth in the UK was in the range of three to four per cent a year right up until the mid-1970s. Plenty of cash was generated to pay for health, education, and other public services, and at the same time the level of taxation could be kept within reasonable bounds. Take-home pay grew steadily.
This was the basis of the famous statement by Harold Macmillan, the then Conservative Prime Minister, in the 1959 election campaign: “You’ve never had it so good”.
The recessions of the mid-1970s and, in particular, the sharp one of the early 1980s led to a drop in the 10 year average growth rate. But by the mid-1980s, in the 2.5 to 3 per cent range. There it remained up until the financial crisis of 2008.
True, this was below the rates seen in the 1950s and 1960s, but still ample to satisfy spending demands. Our understanding of sluggish growth is imperfect.
There is a wide range of hypotheses, but none of them are well established, making it difficult for policymakers to solve the problem. Their answer, thus far, has been to hope for the best.
Western electorates have not yet woken up to the implications of this fall in trend growth. Their expectations are taking far too long to adjust to the new reality and remain stuck in the past.