Boris, Biden and the era of big government

13 March 2021

4:22 AM

13 March 2021

4:22 AM

Bill Clinton’s declaration that ‘the era of big government is over’ summed up the late 1990s political zeitgeist. Centre-left political parties could win if they accepted the small state model bequeathed by the Thatcher-Reagan consensus.

Now things feel very different, as I say in the Times today. The stimulus Joe Biden signed into law is huge, $1.9 trillion (£1.4 trillion): three times larger than the financial hole created by Covid. Here there has been nothing as dramatic. But it is still telling that Boris Johnson is insistent that the public finances won’t be brought back into order by ‘austerity cuts’. Big government appears to be back.

This isn’t just about Covid ether. Public weariness with spending cuts combined with the new Tory electoral coalition and the demands of an ageing population all point in the direction of higher spending. One Thatcherite former cabinet minister concedes:

‘We’re going to have to get used to spending more money and if you’re going to be halfway fiscally responsible then that is going to have to mean more tax.’

The danger is that more tax just makes the UK economy less competitive. It is clear that what you need is growth to increase revenues without raising taxes.

At the moment , the Bank of England believes the economy can, in normal times, only grow at 1.1 per cent without causing inflation, compared with two per cent or more a decade ago. This might be a tad pessimistic; others think 1.5 per cent is the UK economy’s natural rate.

But even if that higher number is right, politics is still going to become very scratchy. Why? Because growth at this pace won’t generate enough extra revenue for social care and the like, meaning further tax rises and a diminution of Britain’s competitive position. The only way out of this economic hole is growth and that requires boosting productivity.

This government, like others before it, is doing various things to try and boost productivity. These measures have to work, because if the government can’t succeed at boosting the growth rate, it will fail at everything else.

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