Economic Theory

The four huge economic challenges that will define the coming years

I once asked one of Margaret Thatcher’s senior advisers whether her governments had been “too obsessed with economics”. “Economics,” he replied, “is not the most important thing in life, or in public policy. But it is something that governments can really mess up”.

Recent events have made me reflect on that sentiment. When David Cameron became Tory leader in 2005, he wanted the party to talk less about economics and more about social issues. The financial crisis and its subsequent impact slapped this complacency out of him. Now, he finds himself having won an election primarily on the basis of economic competence and repairing the damage. Yet ‘2005 Cameron’ will continue to be disappointed. The next five years will again be dominated by economic issues, as Britain faces four huge challenges in the coming Parliament. Each provides Cameron with a significant opportunity to really enhance economic freedom and prosperity, but with significant risks too.

The most important challenge is attempting to reverse the UK’s poor productivity performance. Land-use planning reform is the most obvious low-hanging fruit here. Making a swift decision on airport expansion; broadening tax bases and lowering marginal rates; a shift to a market-led energy policy; and student finance reform to give universities skin in the game for graduates’ success would help too. While there is little evidence that governments significantly affect innovation, this approach would try to unpick some of the most obvious blockages, particularly in terms of regulation.

Challenge two is achieving deficit reduction and getting debt-to-GDP ratios back on a downward path. Much evidence backs up the view that the best way to do this is by cutting day-to-day government spending, rather than by raising taxes. But with the scale of cuts still required, salami slicing unprotected departments would be arbitrary and could result in bad outcomes. Instead, the opportunity should be taken to reassess the necessity and desirability of various government activities, and to reform areas such as health and pensioner welfare – the long-term drivers of high public spending.

The third challenge is the EU renegotiation. This is difficult; but Cameron’s clear mandate and the noises coming out of the EU suggest some accommodation for the UK’s desires may be made. A best-case renegotiation would significantly deepen the single market in services, stop automatic rights to benefits but maintain free movement of labour, slash red tape, cut the EU budget and, in turn, repatriate many powers back to our Parliament.

Finally, we face the challenge of devolving power – not just to Scotland, but for English cities and regions. All agree the UK is too centralised, but devolved spending power must come with responsibility for raising tax revenues. Cameron should offer the Scots full fiscal autonomy, and ensure that regions are held to account for any devolved powers.

Unfortunately, it’s easy to envisage worst-case approaches to these challenges. Politicians could once again think they can ‘plan’ their way to productivity improvements through industrial strategies. Devolution could see the establishment of non-symmetric new power centres, with local politicians spending other people’s money without any tax-raising accountability. The EU renegotiation could descend into a discussion primarily about migration – with new restrictions imposed on movement, following a messy exit after a referendum. Deficit reduction through salami slicing could lose public support as some services worsen, resulting in pressure for a future government to significantly raise taxes and borrowing. Cameron’s legacy will be defined by how successful he is at dealing with these challenges. Let’s hope he’s willing to be obsessed by economics for the next five years.

This article first appeared in City AM

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

1 thought on “The four huge economic challenges that will define the coming years”

  1. Posted 19/05/2015 at 20:41 | Permalink

    “Cameron should offer the Scots full fiscal autonomy”.

    We all know what happens in a currency union where the members have full fiscal autonomy and there is no mechanism for fiscal transfers – we have seen this in the Eurozone. Even the SNP have stopped demanding that – preferring what they now call “full fiscal RESPONSIBILITY” by which they mean something rather different (i.e. they want to control all Scottish taxation and spending but still keep the fiscal transfers).

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