The text of John Major’s speech at the annual Bow Group lecture, made on 23rd February 2005. The speech was entitled – The Conservative Economic Inheritance – An Examination of Reality.
The economy is central to politics: now is a good time to look beyond the soundbites and separate fact from fiction.
First, some background.
By the late 1970s, our economy was a basket case. Inflation and industrial unrest had dragged us down. We were “The sick man of Europe”.
In the 1980s, market reforms turned us once again into a competitive nation.
In the 1990s, inflation was – finally – tamed.
The 1970s were Labour years.
The 1980s and 1990s were Conservative years during which the Labour contribution was to oppose the Government’s policy.
There is a tendency to take the present Chancellor of the Exchequer at his word. A small vignette suggests this can be a mistake.
On his first weekend as Chancellor, Gordon Brown was given a presentation on the economy. “The figures are fantastic”, he was told by officials at the Treasury, “much better than predicted”.
“What am I supposed to do”, asked the Chancellor, “write a thank you letter?”. I use the neutral word “asked”: yet, in his biography of the Chancellor, Tom Bower’s use of “snarled” gives a more vivid picture of the exchange.
That same weekend, the Chancellor’s spin doctor was despatched to brief the media that “errors” and “black holes” had been discovered, all of which “threatened a nightmare”.
The spinner of this little fib was Charlie Whelan, the Chancellor’s “Man in the Red Lion Pub”, whom you may recall as Alastair Campbell without the charm.
It was – of course – untrue. He knew it to be untrue. We all now know that it was untrue: none of these “nightmares” emerged. It was pure scene setting. Brown’s intention was to create a climate in which he – and he alone – could claim credit for the economic conditions he had inherited. It also had the secondary purpose of laying the groundwork for future tax rises to be blamed on his predecessors.
So – what do the figures tell us?
They are very clear.
The economy began growing in the First Quarter of 1992.
By 1997, there had been five years of progressive growth every Quarter.
During that five year period:
– interest rates were more than halved – to 6%;
– inflation fell to 2.6%;
– unemployment had been falling monthly since 1993;
– fiscal deficit was narrowing and moving towards surplus.
Moreover, despite the outcry over alleged punitive Tory tax rises between 1990/97, the facts are striking.
In 1990/91, tax as a percentage of GDP – the accepted measure – was 35.9%.
In 1997/8, it was 36%. The net increase over 7 years was 0.1%.
As Treasury officials had told the incoming Chancellor – the figures were “fantastic” and better than those left by any previous Government.
Indeed – as corroborative evidence – even as the new Chancellor denounced the Conservatives, he offered tacit admission of our legacy by sticking rigidly to our own expenditure plans – an unprecedented act of homage.
Economic conditions unwind over a long period. Neither good nor bad policy reveals itself immediately – only in slower time can it be judged.
When Gordon Brown boasts of the record length of continual growth he is right – he just fails to mention it began in 1992 and that the first half was during the years of Conservative Government. He offers no glimpse that it was created by those Conservatives who tamed the late 1980s boom, bore the pain of squeezing inflation out of the system, and who instigated inflation targeting. Norman Lamont and Ken Clarke should take a bow but the Chancellor writes them out of his script.
What Gordon Brown writes into his script is the charge that the Conservatives were responsible for “boom and bust”. This is one of those fibs, repeated ad nauseum, until it is so fixed in the public mind it becomes the accepted truth. It is a rewriting of history. In fact, before 1990, all Parties could have had that charge levelled at them: “stop-go” had bedevilled our economy for decades. But, in the early 1990s, it was a Conservative Government that put an end to boom and bust: and it has not returned since.
But not everything has rolled on unchanged.
Since 1997, the economy has continued to grow, but taxes have grown far faster. Using the same measure for calculating tax rises as in the Conservative years – the ratio of taxes to GDP – we see taxes have risen from 36% of GDP to 37.1%. This is eleven times as fast. Moreover, Treasury estimates suggest a yet faster rate of increase of taxes in the next Parliament. The IFS, IMF, NIESR, CBI, BCC, and the OECD all concur that taxes must rise because this time, Charlie Whelan’s fictional “black hole” in the current account is real.
Income tax rates have not risen – they are too visible, too politically sensitive.
But the facts are as follows:
– 7½ million taxpayers have been dragged into a higher marginal rate of
tax by under-indexing thresholds;
– National Insurance has gone up for Employers, Employees and the Self-employed; the earnings limit has also been abolished, despite the Prime Minister’s categorical assurance it would not do so;
– Tax allowances – such as those for married couples, have been abolished.
– Stamp duty tax on house purchases rise – again and again and again;
– Mortgage Interest tax relief has been abolished;
– The Council Tax payer has seen bills soar – far beyond inflation.
– Fuel tax and Vehicle Excise Duty rise repeatedly.
New and imaginative taxes have been invented, including a tax of £5 billion every year on Pensions creating a crisis that is continuing. The sum total lost to Pensions now exceeds £40 billion. As a result, many pensioners may have to retire later or live on less than they had anticipated.
The Chancellor was given specific warnings about this – from many quarters: even the Prime Minister knew it was foolish but allowed himself to be overruled by the Chancellor. This folly – which will affect pensioners way beyond this Government’s term in Office – was wholly avoidable.
Thus far, the cumulative total of tax rises is 66 – despite a growing economy yielding more revenue for the Exchequer without any additional rises whatsoever. Gordon Brown has out-taxed all his predecessors – and every commentator predicts more to come if Labour win the next election.
Perhaps a more vivid indication of the scale of those rises is this: if they had all gone on to the standard rate of tax, rather than to every nook and cranny of our lives, the basic rate of tax would have risen to 39p in the Pound.
The market reforms of the 1980s and the death of inflation in the 1990s created the robust and growing economy Gordon Brown inherited.
But, although there may be a time-lag, tax rises on this scale are bound to have an effect:
(i) The growth in our productivity has collapsed by one-third since 1997. There is still growth, but far less than in 1997.
(ii) Private (non-residential) Investment has fallen to 1.1% per annum over recent years – one-tenth of the 11.2% in the mid-90s.
(iii) We now have the largest Trade Deficit for over 300 years. The Chancellor hopes export growth will correct this but all the signs are that it is set to widen further as our share of world exports is falling.
(iv) As a competitive Nation, we have dropped from 4th in 1998 to 12th in 2001, and 15th in 2003.
(v) Household debt is soaring and savings are falling. Under Gordon Brown, the savings ratio has never been above 6.7%; between 1991/7 it was never below 9.3%. This is not a semantic statistic: it means people are becoming very vulnerable to unexpected economic shocks. Live today – and pay tomorrow – is a risky notion if taken too far.
I could go on – but the central point is simple: slowly, the strong economic position that Labour inherited in 1997 is deteriorating.
It has not gone – yet. But it is getting worse.
We will hear none of this from the Chancellor.
He will talk of success – not tax rises.
He will talk of growth – not loss of productivity and competitiveness.
He will talk of enterprise – not the regulatory mountain that now engulfs business and costs them £30 billion.
So – when we hear exaggerated claims from the Chancellor – a little caution in accepting them would be well justified.