There was a time, back in the late Seventies, when the case for capitalism was fresh and exciting. Pro-market tracts were like Samizdat pamphlets, passed quietly around small groups of young people who were sick and tired of their elders’ dreary, declinist mindset. Margaret Thatcher would carry in her handbag a copy of the Constitution of Liberty, a seminal call to arms by F A Hayek, a great economist who refused to describe himself as a conservative. She eventually engineered a progressive revolution that empowered ordinary people and unleashed an astonishing economic revival.
This Government’s great tragedy is that it is run by a group of youngish, privileged men who have never known what it is like to be truly excited by economic and political ideas. David Cameron and George Osborne are creatures of the establishment, prisoners of the received wisdom, too interested in power for power’s sake. That is why they don’t have a clue what to do about the intensifying recession, other than print yet more funny money. They may be Thatcher’s children, but their hero is the post-ideological Tony Blair, who squandered her legacy. They want to tweak the status quo, not smash it, and that is the fundamental reason why the economy has shrunk for three consecutive quarters now, including by a catastrophic 0.7 per cent in the second quarter.
It still isn’t too late for a change of heart. This Government could still reinvigorate Britain and jolt the country out of its stupor. But that would require a much more ambitious programme and making the case for change based not upon negative and technocratic arguments but on a positive vision for a dynamic Britain.
The Prime Minister may still be the man to deliver this. But he needs to spend the summer acquainting himself with some of the fire and passion of previous reformers, and return in September raring to go. Above all else, Cameron needs to stop sounding so defensive about cuts. For all of the “austerity”, the Government is still spending an unsustainably high 49 per cent of Britain’s national income, according to the OECD. Outside of London and southern England, the proportion is even higher, with Soviet-style levels of public spending in Northern Ireland and the North. Reducing the size of the state should not be presented merely as a necessary evil to stave off national bankruptcy. Tilting the balance back towards the little platoons and expanding the private sphere ought to be goals in their own right.
A new, long-term spending review is urgently required: the ultimate aim must be for the state to spend one pound out of every three generated by the economy, down from one out of two today. That means rooting out waste – but also rethinking sacred cows. Subsidies need to be axed. The middle classes should pay less tax but receive fewer benefits. There needs to be greater private provision of health and pensions, inspired by reforms pioneered in the Netherlands, Germany and Singapore.
There is plenty of academic research that shows that large states are bad for growth. The only reason Sweden has done better recently is that it has drastically downsized its government. The model for the UK ought to be Australia and Switzerland. Both boast governments that spend just one third of their national incomes and yet provide an excellent quality of life.
If Britain’s overbearing state is cut back to size, the Chancellor would be able to lower our indefensibly high tax burden. There is no sorrier sight than Tory ministers desperately trying to squeeze out every last penny from taxpayers, hiking every conceivable kind of levy, engaging in moral blackmail and adding thousands more pages to our broken tax code. Yet far from shrinking, the gigantic black hole at the heart of our public finances is growing again. Income tax receipts have been falling for the past few months. There is only so much money the state can extract from its citizens without sapping their energy.
Britain’s current tax system is no longer fit for purpose. It is hideously punitive and extraordinarily complex, inviting abuse. The entire rotten edifice needs to be swept away over the next few years and replaced by a simpler, proportional tax system. The 2020 Tax Commission, which I chaired, recommended moving towards a single, flat tax of 30 per cent on all income from labour and capital above a generous personal allowance. This would replace employee and employer national insurance, corporation tax and a swathe of other obsolete and destructive taxes. With transitory arrangements for pensioners, virtually everybody would pay less. Such a system would transform incentives, reward work and capital accumulation, reduce avoidance and trigger an explosion in growth and jobs, delivering opportunities to the poor and unemployed.
The Government must also allow companies to create, hire and expand without fear of being sued or having to grovel to bureaucratic busybodies. We need to rediscover some of the Victorian can-do spirit that allowed 19th-century entrepreneurs to build the world’s greatest railways and cities. There needs to be a bonfire of regulations. At the same time, the state should stop subsidising big business, including banks – where misguided government guarantees caused havoc; the Bank of England should focus on maintaining sound money, rather than inflating credit bubbles.
There should be no bail-outs and no handouts, no more dodgy schemes to nationalise risk, no sweetheart deals with favoured industries and a return to real competition. Good firms should be allowed to prosper; bad ones to go bust. Consumers need to be kings once more. Education in particular is ripe for reform. The Government needs to build on Michael Gove’s excellent reforms to allow for-profit firms to set up chains of free schools. We need a market revolution in education to empower parents and give all children, especially the poorest, a world-class schooling.
Last but not least, it is time to reconsider Britain’s European misadventure. When Lady Thatcher tore down barriers to free enterprise, she only had to battle domestic socialists. Today’s reformers need to contend with the European Union and its suffocating patchwork of directives and restrictions, all of which make real change almost impossible. Time and again, ministers who propose eliminating an egregious piece of red tape are told that it would either contravene European law or be deemed an assault on human rights.
The EU embodies the undemocratic, transnational corporatism that has done so much to pervert and corrupt capitalism. The Human Rights Act is another problem. Britain must recover most of the powers it has ceded to Brussels, allowing us to start trading freely with the world again. A new British Bill of Rights would protect individual liberty while allowing sensible reforms, such as tackling the excesses of militant trade unions.
Ronald Reagan, a great optimist, once said that there are no limits to growth because there are no limits to human intelligence, imagination and wonder. He was right. Decline is not inevitable. The solution is to allow entrepreneurs to follow their dreams, build empires and make fortunes, creating jobs for the rest of us. We shall soon find out whether David Cameron has the gumption to make the case for capitalism exciting again – and most importantly, whether he has the courage to truly unleash Britain’s animal spirits.