Our public services will keep falling apart as long as our economy continues to stagnate

History is full of examples of the right set of policies being introduced at the wrong time. A dramatic example is the case of Lavrenty Beria, who was the head of the Soviet secret police from the late 1930s. Immediately on Stalin’s death in March 1953 he took control of the government machine, only to be executed later that same year.

He was not shot because his Politburo colleagues feared he would liquidate them first. It was because he realised that the whole Soviet system was a complete basket case, which, of course, it was. But he moved far too quickly.

Beria understood that the labour camps were a massive drain on the Soviet economy and the political prisoners were entirely innocent. So he abolished both torture and capital punishment.

He grasped that the Soviet Union could barely feed its own domestic population let alone the massive Red Army which occupied Eastern Europe. His proposal that it withdraw from East Germany was the final straw, and he was arrested in June 1953.

Of course, the political events in Britain pale in comparison. But the principle of too much, too far remains.

The major issue in the UK and other European nations is a lack of economic growth. Liz Truss was correct to focus on a tonic for this, even if her plan fell flat.

The recent growth performance of the UK is not as bad as some have led us to believe. Nor is Brexit the perpetrator of it.

As Graham Gudgin and Julian Jessop pointed out last week, since the referendum in June 2016 and up until the end of the second quarter of 2022, OECD data shows that the cumulative growth rate of real GDP in Italy was 4 per cent, in Germany 5.5 per cent, in the UK 6.8 per cent and in France it was 7.6 per cent.

In annual terms, British growth has been just over 1 per cent a year.  There was of course the huge negative shock of the pandemic. But over the two decades prior to the pandemic, growth averaged only 1.7 per cent a year.  

This growth rate is almost exactly that which was achieved between 1870 and the start of the Second World War. It was sufficient to provide a significant increase in living standards.

Of course, there is a marked contrast between the two periods. The state played a much smaller role in the economy then than it does now. There was a state education system, but most people left school at 14. The NHS and the welfare state did not exist.  Funding pensions was not really an issue because most people died either before they received the pension or a couple of years later.

To be absolutely clear, this is not an argument to revert to those conditions. The key point is that what we expect from public services is dramatically different, so the growth rate needed to fund those must be too.

The Truss plan is now dead in the water, after her new Chancellor took a black marker to her mini-budget and far from cutting taxes, signalled he was willing to consider hiking them and slashing spending in order to “reassure the markets”.

But the imperative to raise growth by some means or other remains. Either that or we are in for a hard reality.

As published in City AM Wednesday 19th October 2022
Image: Pxhere
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