The end of cakeism?

Britain's economic policy faces some tough choices.

British politics is going through a febrile phase. According to the odds at Betfair, Boris Johnson is now more likely than not to have been ousted as Prime Minister by the time of the Conservative Party Conference this Autumn. Given his plummeting approval ratings those odds seem reasonable. And given that a new Prime Minster could well mean a shift in economic policy, the excited Westminster debates about ‘who went to which parties when’ matters to the British macro-outlook.

I’m not sure even the current Prime Minister’s biggest fans would say he possessed a coherent economic ideology, but he certainly has views. He is instinctively a higher spender than many of his colleagues and has always appeared more relaxed about deficits and debt levels than most figures on the modern British centre-right. He is especially keen on infrastructure projects and the grander, the better. Who else would have commissioned a feasibility study on a bridge over the Irish Sea? The defining feature of Johnson’s politics, on fiscal policy as much as anything else, has always been his “cakeism”, the desire to avoid tricky choices and have two good things at once. It’s no surprise that the Boris Johnson who believed the UK could enjoy all the benefits of a close trading relationship with the EU without any loss of sovereignty would also think he could preside over large increases in NHS and capital spending whilst simultaneously cutting taxes. For him to govern is not to choose.

In 2020, the economic response to the pandemic aligned perfectly well with these instincts. Taxes were cut and spending increased. But as the immediate economic emergency has receded, decisions that had been delayed are reappearing. There was always going to be a tension between Johnson’s appetite for higher spending and his party’s desire for lower taxes and lower deficits.  When he was the man who had “got Brexit done” and won a thumping majority in a general election, then Boris Johnson – the electoral asset to his party – could get his way. But as his political capital depleted over 2021, the Treasury began to reassert some control over fiscal policy. September’s package of NHS and social care spending was funded by increases in national insurance contributions. And it seemed unlikely, even before the Xmas party issue exploded, that more money would be forthcoming for the headline agenda of “levelling up”.  

Both of Boris Johnson’s most likely successors – Rishi Sunak and Liz Truss – are much more in keeping with recent Conservative tradition. Both are professed deficit hawks, both are suspicious of government spending and both favour lower taxes. It is hard to avoid the conclusion that either of them, as PM, would preside over tighter fiscal policy than Johnson. The era of economic cakeism is drawing to a close.

Whoever is the leader of the Conservative Party by this autumn will face some nasty headwinds.

Writing a book on the last two hundred or so years of Britain’s political economy forced me to engage in a great deal of thinking about the, sometimes tedious, debate between the role of structure and agency in explanations of change. In other words, the extent to which policy and outcomes are determined by the choices of individuals vs the role of longer-term social, political and economic factors. I say the debate is sometimes tedious because clearly both matter. Social scientists writing about the past often tend to overemphasise structures. Take, for example, Britain’s embrace of free trade when the Corn Laws were repealed in 1846. It’s easy enough to cast this as the inevitable result of the industrialisation process and the shift in economic power away from the old landed, agricultural aristocracy and towards the new urban middle classes. The nature of the economy changed, the new balance of economic power led to a new balance of political power and that led to a change in policy.  Hindsight is useful and can certainly be illuminating but it can also be blinding. What seems obvious 175 odd years later was not obvious at the time. Robert Peel had agency. He made choices. While a move to some form of freer trade was likely, a different Prime Minister could have made different choices. The pace and nature of the shift could have been different.

But if social scientists looking at the past sometimes overemphasise structure, political journalists looking at the present usually overemphasise agency. Boris Johnson, or whoever succeeds him, will certainly have to make plenty of choices but those choices will be made under constraints imposed by wider structural factors.

This year Britain faces a deep squeeze on household incomes. The hike in taxes due in April looks set to go ahead. While the government is likely to try and find a way to smooth the impact of rising domestic energy bills, it will not be enough to make a material difference for most households. Indeed, the government will probably find itself in the uncomfortable political position of both spending a great of money to sooth the blow to households whilst those same households still, in aggregate, take a large hit. Much of the public will not have time for the argument ‘be thankful your bill has only gone up by £300 a year when it could have gone up by £600.’

A painful blow to real incomes coupled with rising NHS waiting lists will make for an uncomfortable time in office for the government in 2022. But 2023 may not offer much relief.

As this newsletter has noted before, the pandemic has knocked the political and economic cycles out of alignment. The fiscal largesse usually reserved for the back half of a Parliament came just months after the election.

In 2019 the Conservatives pledged more spending for some voters coupled with lower taxes for others. That could just about be managed by loosening the fiscal targets Johnson had inherited. The impact of the pandemic on the public finances has closed that opportunity for cakeism. The choice faced by the next Conservative leader will be about which bit of their 2019 electoral coalition they want to disappoint.

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