History suggests that when the state expands in a crisis, it doesn’t go back to its pre-crisis level once the emergency is over. After the first world war, the Lloyd George government extended unemployment insurance to most of the workforce, fixed wages for farm workers and introduced rent controls. The second world war led to Attlee’s nationalisations, along with the creation of the NHS and the modern welfare state. In the magazine this week I ask if Covid will lead to a permanently bigger state.
Last year, state spending exceeded 50 per cent of GDP for the first time since the end of the war. The question for the Conservatives is how quickly that should be reduced, and how active government should be. This philosophical question is what lies behind the row in government over what to do about rising energy prices. The Business Department, supported by No. 10, wants state support for the industries hit hardest by the rise in gas prices. The logic is that the huge price increase is making otherwise viable businesses unsustainable, so the sensible thing for the state to do is to intervene, like it did last year. The Treasury, however, is nervous about the precedent that sets.
There are significant differences between the energy price increase and the pandemic. Firstly, there is good reason to think that gas prices are going to remain high. As countries move away from coal, demand for gas increases. China is connecting 15 million homes a year to the gas grid, which creates a knock-on effect for supply worldwide. Europe’s own supplies have fallen by nearly a third in the past decade. If the state steps in now, it may find itself supporting these companies for the foreseeable future.
There is another danger in all this intervention: can the country afford it? The UK is on course for its highest ever sustained level of taxation. The country’s ageing population will mean demand for increased spending on health and social care. The state will grow ever larger unless there is a concerted effort to control spending and boost growth. Without that, the UK will drift towards an era of higher taxes, but lower growth. The longer the Covid mindset lingers, the harder it will be to stop that drift.<//>
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