Friday 13 March 2020 4:30 am

Spending like a drunken sailor does not create a thriving entrepreneurial economy

Matthew Lesh is head of research at the Adam Smith Institute

“If I announced that Budget, the Tories would be jumping up and down,” shadow  chancellor John McDonnell said with a smirk yesterday morning. 

Indeed, Wednesday’s Budget is the biggest giveaway of taxpayer money since 1992. Borrowing will increase by £125bn. Debt will reach a record high at £2 trillion.

There was some good news for taxpayers from the chancellor, like increasing the national insurance contribution threshold and fuel and alcohol duty freezes. But — except for the necessary and temporary response to Covid-19 — we should be concerned about the big-spending, big-taxing the direction of this apparently Conservative government.

The Tories are caring less and less about fiscal responsibility. They are instead looking for a magic money forest. The government will review the fiscal framework to consider whether taxpayer spending should “play a more active role in stabilising the economy”. Rolling Keynesian-style stimulus could be back.

If all the spending weren’t enough, this Budget reveals an even deeper malaise at the heart of the Conservative party.

In the not-too-distant past, Conservatives sought to unleash Britain’s entrepreneurial spirit by reducing debt, keeping taxes low, and cutting red tape.

But this government has a different idea. It wants to, by “driving technological change”, “create the high quality, highly paid jobs of the future”. It is apparently now the state, not entrepreneurs, that creates prosperity.

The proven method of driving prosperity over the last few centuries — leaving people as free as possible to innovate — is being rejected. This will have dire consequences. Bureaucrats will now insert their sticky hands even further into the economy. The government will spend billions picking winners — from subsidies to favoured companies to high-cost, low-benefit vanity projects like HS2.

On R&D alone, the government will spend £22bn per year by 2024–25. At the heart of this is £800m for a “blue-skies funding agency” modelled on Arpa, America’s Advanced Research Projects Agency. 

The myth of Arpa, spread by left-wing economists, is that it is responsible for many of the key innovations of the twentieth century, from the internet to personal computers. This is built on a fundamental historical misunderstanding. The real breakthroughs came after Arpa was prevented from doing pure research in 1973 and limited to defence (hence why it is now known as “Darpa”). 

In response, its redundant staff decamped to a private company, Xerox PARC in Palo Alto, where they invented world-famous products like the computer mouse and the graphical user interface. It was not the creation of Arpa, but rather the abolition of it, that spurred the technological revolution.

This speaks to a deeper truth: the world is too complex, and bureaucrats too lacking in knowledge or understanding, to drive innovation and prosperity. Politicians should instead focus on creating an innovation-friendly environment and removing unnecessary barriers, like limitations on biotechnology. 

Spending like a drunken sailor and distracting top scientists with state-directed projects does not create a thriving entrepreneurial economy.

Main image credit: Getty

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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