THE CONSERVATIVE REVOLUTION: KEEPING UP THE MOMENTUM

THE CONSERVATIVE REVOLUTION:

KEEPING UP THE MOMENTUM DAVID HOWELL*

“MAY it not be that high public spending policies are beginning to turn sour and that reverse political pressures on public spending could begin to develop? Could it not be, quite apart from the question of growth of state power, that high spending policies are now failing to secure the major objectives which the propo- nents of this approach have set themselves over the years? And may it not also follow from this that as policies of massive public expenditure, channelled through vast and centralised administrative machinery, increasingly fail to meet public aspirations, the search will be on for other channels through which to secure a steady enlargement of economic freedoms?”

These were some of the questions 1 posed in an article in THE POLITICAL QUARTERLY over seven years ago. If the answer was a tentative “yes” then to all of them, it would be an emphatic and unqualified “yes” in victorious Conservative circles today, as the party sets out on its second term of office and as Labour’s intellectual foundations split and crumble. Of course, what I had to say then was not solely concerned with the negative side of the picture, the need to curb public spending. Hand in hand with this I hoped would go measures for bringing “more power and wealth to working people on a scale and in a manner which the orthodox state socialist approach cannot manage”. I argued that these measures would “create an interest in worker capitalism which no democratic government would dare to challenge”.

The question now is not so much about the analysis, which seems to have been broadly correct, but about the progress the Conservatives have made in government towards realising the whole rounded vision-which is in fact a re-expression of the long-standing Conservative ideal of the property-owning and capital-owning democracy.

It is not an easy question to answer. That attitudes have changed dramatically cannot be questioned. That inflation is at its lowest for 15 years, that more people than ever want to buy their own homes-these are incontrovertible facts. But it is also an awkward reality, sitting like a huge vulture on the Chancellor of the Exchequer’s chairback, that public expenditure still claims almost as large a share of national resources as ever (46.5 per cent.: which is fractionally below the 1974-76 peaks, but far higher than the 1960s), creating appallingly complex and virtually unmanageable problems of public finance. Operating at these mountain-

* The author, The Rt. Hon. David Howell is Conservative M.P. for Guildford.

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ous levels of public spending the Government finds that almost every move it makes to ease the pressures immediately sets up counterforces from new directions. The room for manoeuvre is minimal, indeed non- existent.

Hemmed in by seemingly uncuttable major spending programmes, the Government policy-makers find that expansionary policies which would favour new business growth immediately arouse the suspicions of financial markets, push up interest rates and effectively negate the process before it even starts. Attempts to cut a way out through the public expenditure jungle all too often lead to cuts in capital programmes, with immediate and damaging effects on private sector supplies and on cor- porate profits, with upward pressure on bank borrowing and the monetary aggregates which the cuts were intended to reduce. Nor have attempts to influence the “growth” climate through pulling Britain away from its long-established levels of formidably high taxation had much more success.

Here again Catch 22 prevails. No adequate expansion and opening up of new business opportunities without substantial reductions in high personal tax levels: no such tax reductions possible without appearing to be budgeting for a bigger deficit; no enlarged deficits without financial market worries, higher interest rates and/or lower exchange rate, leading to lower investment, more inflation and declining confidence; therefore no steps possible to cut taxes. In practice a Conservative Government has been able to snip away at the margin, easing substantially some of the more oppressive tax burdens on capital accumulation and business investment. The tax conditions for new business growth are undoubtedly much less unattractive than they were.

The Burden of Tax

But none of this can overcome the fact that at the bottom end of the income scale taxation bites at a lower point than in any other OECD country (under one-third of average earnings), and when it does so, the marginal rate is higher than anywhere else in the West. National insurance contributions, while putting the marginal rate much higher (39 per cent. on the first vulnerable pound earned), slightly alter the relative position uis-u-vis other countries. But nothing can disguise the fact that from the point of view of the individual earner we remain a nation of very high taxation and very low incentive. This is not the material from which the property-owning democracy and the new era of business vitality are going to be born.

There is a further sense in which policy appears to be “stuck”. The essence of the ideal of the property-owning democracy is that it should provide a much more favourable climate for the small man, for new business entrants and for the much less centralised, more diffuse pattern

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of ownership and enterprise which an alert and flexible economy demands.

The Service Economy Not the least of the motives for denationalising state industries and bringing more competition to the nationalised sector (not always the same thing) has been the wish to open up to private enterprise and smaller business huge areas of the expanding service economy which have been more or less forbidden territory for 30 years past. In everything from coal extraction and train services down to computing, cleaning, catering, property management, architectural services or laundry the intention has rightly been to break down the pervasive “in-house” or direct-labour mentality which has kept new enterprise out and union-management cosiness in-a pattern similar of course to that prevailing throughout local government until Conservative councils began to change it in the early eighties, to the fury of the local government unions.

But quite aside from the point that denationalisation has on the whole been disappointingly slow (except perhaps in the transport field), there is another serious deficiency in the whole approach which remains untack- led. What is sauce for the state goose should also be sauce for the private sector gander. Monopoly and fossilising concentrations of control and ownership are just as hostile to the democracy of widespread property ownership, whether they are found in state or private hands. A policy which seeks to break up public monopolies but which leaves the private industrial, commercial and general business establishment with a high protective fence round it against invasion by new entrants is not a whole policy in any sense.

Nowhere is the deficiency more vividly illustrated than in the vast agricultural industry. Here we have a pattern under which the small man sees the whole trend against him and in favour of the largest enterprises, where to gain entry to the industry has been made impossible by virtue of the enormous initial capital requirements and where official policy re- inforces these trends to concentration of holdings at every turn. The Conservative revolution, if it is to have any meaning on the land, will require a very different policy approach from that of the past.

The domination of the British economy by the large financial institutions (pension funds and insurance companies)-not least in agricul- ture-is another feature of the old pattern which seems overdue for attention. A dramatic lowering of income tax rates would of course help to erode some of the tax privileges which the institutions enjoy. But there can be no doubt that a more vigorous approach is needed and pressure on the Government to make pensions more portable is a wholly welcome part of this. Government procurement provides another example of an area in which policy seems to continue favouring “the big boys” and to be out of tune with professions of interest in creating a much expanded small business sector in the British economy.

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There is a real danger that the Conservative Party, having spent much effort in establishing its claim to the common, bourgeois ground of society, on which all classes are now gathering as foreseen, could still slip back into being again a grandees’ party by the back door. If the Conserva- tives were again to lose the common touch in this way then they would find themselves up against a formidable SDP who would be, and already to some extent are, the alternative beneficiaries of the Labour exodus.

The Unemployed

The fourth area where policy has so far faltered is in seeking to fit the unwelcome fact of three-and-a-quarter million registered unemployed into the vision of the property-owning democracy. In Opposition in the seventies, as we drew our plans together, we had no preparations for this level of unemployment, even though there were some warning voices that unemployment “in the low millions” could come, and stay. But now that this ugly development is with us, we really cannot leave it to be met with assurances that all will be well once recovery based on sound money gets under way. Patently there will be no return to the “normal” employment patterns of the past. The micro-chip has seen to that. Any ideals and visions which are to command credibility and respect in politics will have to say something more positive and specific about future work patterns than the apostles of sound money alone have been able to offer.

In fact, the ideal of the property-owning democracy has much to offer on the unemployment question, providing the connection is made. If the Conservative revolution has hn infantry it is the self-employed. Yet their numbers in Britain compare very feebly indeed, at only 9 per cent. of the workforce, with those in the other social market economies. It is in the growth of self-employment, spreading out to small family businesses, that the job opportunities of the future are going to come. The nature of the work will be different, with more people following a variety of occupations, not all necessarily fully remunerated, more part-time work, more sharing of work between husband and wife.

This is not the kind of work which demand reflation would bring. It requires painstaking specific measures to remove detailed and complex obstacles to its emergence, not generalised “macro” remedies. In particu- lar it requires lower personal taxation, a further drive against restrictive practices, tougher competition laws, less frustrating employment laws. It also requires a rather different approach to tax-levying from the Inland Revenue, for whom the proper need to check tax evasion amongst the self-employed has become mutated over the years into a tidy-minded and obsessive crusade.

The Invisible Economy

Public policy has to recognise more fully than it appears to have done so far that an increasing proportion of work will lie-already lies-outside

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the formal and visible economy and production system. This more informal and less regulated area of occupations is not the same as the black economy, although that is large and will undoubtedly grow larger unless tax policies and employment policies change. We are talking here about the kind of work, and it is very hard work indeed, that goes on in and around every household, that goes on amongst neighbours and that is carried out in every community on a voluntary or sometimes partly paid basis.

It is ironic that the huge welfare state machine, which is more than anything to blame for sky-high taxes on incomes and therefore for dis- couraging the “legal” informal economy and driving activity under- ground, would scarcely operate if it were not for the enormous voluntary input, or the contribution of wives or husbands ready to work part-time at low rates, which prevents the machinery seizing up.

The key connecting thought in all this is that people with property owned (not mortgaged or rented) and with some income from capital, however small, are able to enter the informal or partly-remunerated sector more freely. All kinds of occupations are available in our society, some of them crying out for volunteers. The more that people are released from the need to earn to maintain home and income, and the wider the spread of genuine ownership, the more this kind of work can be taken on and the less hopeless the unemployment phenomenon begins to look.

Thus the spread of property and capital ownership, the extension of personal estates from the minority to the majority of families, becomes an imperative goal of post-socialist policy. Turning people into home- owners is a move in the right direction, but it is not enough if it leaves the “owner” no freer from the wage or salary requirement to pay the mort- gage. A far greater effort to promote and diffuse business and stock ownership is also essential. Again a start has been made and employee share ownership, for example, is on the increase-from minuscule levels. But the momentum must not slacken.

The Public Sector The fifth area in which the Conservative “vision” seems still to lack focus is the public services. It was perhaps inevitable that the much-needed assault on the vastly inflated and bureaucratised public sector and administration which the Conservatives inherited, would overshoot, so great was the force with which it needed to be mounted. But it is now a high test of balanced Conservative government, which will result in much political peril if failed, to bring more precision and selectivity into its efforts to cut back public expenditure-generating activities-in other words to hit the right targets. By the “right” targets I mean the “big four” ballooning current spending generators which work ceaselessly in the health, welfare, defence and education areas. Together with agricultural

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support these are the big eaters of public funds and the areas where policy objectives (what are we really getting for it all?) have been least systematically and rigorously questioned.

By the wrong targets I mean primarily the tradition of public service itself, which is ancient and honourable, but which has been attacked and denigrated by much ignorance and prejudice. Bureaucracy is of course the great enemy of the good public servant and always has been. When, therefore, he or she reads or hears, day after day, that all public sector activity is parasitical, that all civil and public servants are tea-swilling wastrels, the winners are waste and inefficiency, in the act of fighting which the public service finds itself undermined. We do not need to make the public service worker a hero. The good one is the first to shun that. But nor need he or she be so constantly stereotyped as a villain. The public services are too vital and basic a part of the modern free enterprise economy to permit that kind of two-dimensional approach-as is clearly shown in all the Asian miracle economies where high-quality dedicated public administration and provision of infrastructure have provided the essential foundations upon which free enterprise has been able to expand.

The other “wrong” target is indeed the economic infrastructure itself. Why have we had to live with a shrinking proportion of government spending going into fixed capital (it is rising fractionally in the current year but from an abysmally low level) when one might have expected the whole thrust of Conservative policy to be pushing the other way? The orthodox answer is that if capital projects cannot be financed privately, as with roads (although there are possibilities even there), then they have to take their luck along with all other government spending within the totals available (i.e. the limits imposed by taxation and borrowing policies). Until and unless current spending growth is constrained it is capital which catches the cuts, regrettable though that is, etc.

We can go with this up to a point. The borrowing requirement does influence the monetary aggregates, although not nearly as directly and mechanically as Whitehall and the financial markets have talked themselves into imagining. And this in due course does have some effect on either inflation, through letting money supply become too accommodat- ing, or interest rates. What is so odd is that almost no attempt has been made to distinguish between kinds of borrowing-ie. as between capital and current needs. If it had been, it seems clear that additional funds could have been raised without increasing monetary pressures, or the same funds acquired at lower pressures. I remain convinced that with different funding policies some of the worst capital cuts, at the very bottom of the recession, could be avoided, despite the evident and persisting failure to get to grips with current public spending.

The political, as well as economic, penalties of this scatter-shot approach to public economy are very high. The cut into capital programmes sours both public and administrative support for the increasingly vital assault on current spending which has yet to come. The brunt,

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of course, falls on private industry, notably construction, with minus effects on tax revenues that substantially reduce the budgetary gains supposed to flow from the cuts in the first place. And in political terms people who understand full well the need to curb the voracious demands of welfare programmes, or industrial or agricultural support, or even of the defence establishment, are rightly puzzled that public works are postponed. As well as sitting in their own gardens of their own homes the new society likes listening to the band in the park and driving on decent roads.

Looking out from the perspective of the past 15 years of government in Britain, we are now just embarking on the third phase of the battle to reduce the relative size of public expenditure and give the Government the “room for manoeuvre” and scope for big tax cuts it has so far been denied. I call this “the third assault”, and it is one that must succeed.

The first phase began before, and continued into, the 1970-74 period with the intensifying of efforts to question and control swelling programmes by better management of government. That was “the New Style of Government” period. It disappointed because it was like one blade of a pair of scissors-essential but not much use without the other, which should have been far tighter overall cash control. Phase two began after 1976 but was fully developed after 1979 and put cash control at the centre. The shoe of tight monetary control was meant to put an iron clamp on state and local government appetites for cash and not only curb their growth, but get the overall claims of public spending substantially down.

The outcome has indeed been to reduce government deficits and therefore borrowing needs and therefore pressure on the monetary aggregates, in so far as they can be defined and measured (and the learning curve of discovery of the obvious point that this is a rough art and not a precise science has been painfully slow). But this has been done not by securing big reductions in the Government’s current spending appetites. It has been done, has had to be done, by maintaining tax revenues at record high rates which in turn has been done not by drawing revenues off an expanding tax base, but by keeping (and in some cases increasing) the existing sky-high tax rates.

As I have indicated, I believe the third phase, or assault, will have to employ less crude, unselective and mechanically rigid methods against public spending if it is to succeed where earlier attempts have failed. This will mean recognising:

(a) That the links between public spending and borrowing and the monetary aggregates and inflation are a good deal less direct and more flexible and capable of manipulation than has been accepted so far.

(b) That the links on the other side of the budgetary equation between tax rates imposed and actual revenues raised are not as mathematical and predictable as hitherto held. In other words, sustained high tax rates can cut overall revenues and thus enlarge, not reduce, deficits.

(c) That in curbing spending programmes both blades of the scissors

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are needed. Across-the-board cuts have a habit of being eroded. The cash and manpower broad-brush squeezes have to go hand-in-hand with the systematic questioning of functions and objectives which was initiated in 1970, but which lost momentum during the decade.

(d) That if objectives are to be questioned and functionscut out, so that the percentage of GDP taken by public spending can fall, on the narrow- est definitions, down from the astronomical mid-40 per cent. range to something in the 30-40 per cent. bracket, deep issues of policy will have to be re-opened and areas hitherto sacred and untouchable tackled.

If these points are acknowledged, then there is a good chance that the crucial “room for manoeuvre” will emerge and the positive aspects of what the Conservative Government is trying to achieve will be under- stood. What would be a thousand pities would be to see the Government hurl itself against a public expenditure brick wall, in a welter of ineffec- tive cuts and with sustained high tax burdens. The Charge of the Light Brigade made excellent copy, but it was not war. The rhetoric of “savage cuts” and the awe-inspiring simplicity of “mechanical” monetarist theory can pave the way for action, but the qualities required to win the war, to carry people along with what is being done and to permit the onward march of the property-owning democracy and the truly motivated and competing economy are different and a bit more subtle. If the Conserva- tive revolution is not to stall, it is the paths outlined here which will now need to be followed.

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THE CONSERVATIVE REVOLUTION: KEEPING UP THE MOMENTUM