The Tories must keep a tight grip on unprecedented spending – or risk a return to the miserable days of the 1970s
THE most extraordinary chapter in the story of modern Britain is drawing to a welcome close.
Yet while lockdown eases, businesses re-open and millions bask on our sunny beaches, the skies are darkening in the distance.
⚠️ Read our coronavirus live blog for the latest news & updates
This gathering storm is not a potential second spike in infections - rather, it is an economic catastrophe.
In the coming months, hard times could descend on Britain, fuelled by soaring unemployment and business failures.
The Bank of England has already warned that we could be facing the worst slump for three centuries.
In the current quarter, the economy could shrink by an incredible 25 per cent, as entire sectors like the hospitality trade and the travel business are devastated.
Unthinkable reality
“The unthinkable is now very much the reality,” says Stephen Phipson of the industrial body Make UK, whose latest survey found that 25 per cent of manufacturing firms are planning to lay off workers in the next six months.
More than 30,000 bars and restaurants could remain permanently closed even when the lockdown is fully lifted, while car sales in April were down 97 per cent compared to the same period last year.
Under the energetic Rishi Sunak, the Government’s response has been to splash the cash in a determined - and understandable - attempt to keep the economy going.
Until recently the enemies of socialism, the Conservatives have now become converts to Government action
No less than £15billion so far has been spent on the furlough job protection scheme, which pays 80 per cent of the wages of 8.4million employees.
Another £6.8billion has gone on a similar scheme for 2.3million self-employed people.
And a further £18.6billion has been swallowed up by business “bounce back” loans, half of which are unlikely to be repaid.
Altogether coronavirus staff support could have cost the taxpayer over £100billion by October, when furlough is due to end.
Rolling out the frontiers of the state
But, far from phasing out state aid, the Government is likely to expand its scope over the coming months.
The Treasury is now working on a plan called Project Birch, under which the Government will bail out a number of strategically important firms, either by providing large loans or by taking a stake in them.
“Where a viable company has exhausted all options and its failure would disproportionately harm the economy, we may consider support on a last resort basis,” said a Treasury spokesman this week.
Aerospace, manufacturing, steel production and car making are likely to be targeted.
This policy would represent a huge change from the previous economic approach.
Since Margaret Thatcher’s time, British governments have tried to avoid direct backing for companies, not least because such intervention is generally against European Union competition law.
All this has to be paid for — and the bills cannot be met simply by printing more money.
Leo McKinstry
But the coronavirus has dramatically changed everything. Conventional wisdom about sound money and financial prudence has disappeared.
Until recently the enemies of socialism, the Conservatives have now become converts to government action.
Mrs Thatcher famously talked about “rolling back the frontiers of the state.”
Now, in the wake of the Covid crisis, they have come sweeping forward once more.
Economy in state custody
In the process, the public finances have taken a battering.
In April the Government borrowed over £60billion, a larger sum than for the whole of 2019.
The fiscal deficit is now projected to reach no less than £300billion, perhaps even £520billion in the worst case scenario.
At the same time, more than 16million people — more than half the entire national workforce — are effectively on the state payroll.
Even as lockdown eases, much of the economy has now been taken into the custody of the state.
All this has to be paid for — and the bills cannot be met simply by printing more money.
That is the route to a debased currency, soaring interest rates and hyperinflation.
The reality is that massive state intervention is simply not sustainable except in an emergency.
If printing money were the recipe for prosperity, then Zimbabwe would be the richest country on earth rather than mired in poverty.
That is the lesson of history.
If the Government carries on spending and intervening on a level that would have even made Jeremy Corbyn blush, then our country will be in real danger of sliding back to the dark days of the 1970s.
The sick man of Europe
Gripped by industrial unrest and economic decline, Britain then was known as the “sick man of Europe”.
Because of extravagant spending, the public finances were in a desperate state. In 1975 inflation reached 25 per cent.
The following year, Britain’s deficit was so enormous that the Government humiliatingly had to ask for a £2.3billion handout from the IMF.
With the economy limping from one crisis to another, taxes soared, with the top rate on “unearned income” reaching 98 per cent.
At the peak of the 1970s disruption, bodies were left unburied and rubbish piled high in the street
Some of the revenue was swallowed up in bailouts of troubled companies.
In 1971 the engine and car maker Rolls-Royce was rescued, followed by the Upper Clyde shipbuilders in 1972 and volume motor manufacturer British Leyland in 1975.
Indeed, this was an era of institutionalised bullying by the strike-happy trade unions, who held the Government and the nation to ransom by flexing their industrial muscle.
When Sir Horace Cutler, the Tory leader of the Greater London Council in the late 1970s, was asked how many people work for London Transport, he replied, “about half of them.”
In 1979, which saw the Winter of Discontent, no fewer than 29million working days were lost to stoppages.
At the peak of the disruption, bodies were left unburied and rubbish piled high in the street.
Madness in the air
The very fabric of society appeared to be falling part.
“There is madness in the air,” recorded Bernard Donoghue, an aide to the Prime Minister Jim Callaghan.
It was precisely the public’s revulsion at failed socialism and trade union irresponsibility that brought Margaret Thatcher to power in 1979 on a platform of reviving the economy.
She achieved it by taming the unions, reinvigorating enterprise, restoring the work ethic and shrinking the Government.
Resist 'culture of dependency'
We need the same again today. All the good work of the last four decades will be undone if we slide back into the dependency culture, headed by a sprawling, sclerotic state machine.
The only sure foundation on which to build a lasting recovery is by the wealth creation of the private sector.
The best support that the Government can provide is not bailouts and bureaucracy, but a dynamic business environment
In practice that means the Government’s priority must be to encourage commerce and competition, not to dish out subsidies.
So businesses should be urged to re-open as soon as possible, backed up by reductions in corporation tax and rates.
Barriers to growth, like the strict social distancing limits, should be lifted.
At the same time, the Government should drop its plans to impose heavy-handed rules on quarantine for all travellers to Britain.
It is a policy that will do nothing to protect public health but will cause huge damage to the economy, especially the travel industry.
Similarly, Britain’s highly flexible labour market — the engine of the job creation miracle since 2010 — must be maintained in the face of demands for more regulations.
The best support that the Government can provide is not bailouts and bureaucracy, but a dynamic business environment along with a strong civic infrastructure, including modernised transport links and improved broadband.
MORE IN NEWS
Soon after he became Prime Minister in 1976, Jim Callaghan said: “We used to think we could spend our way out of recession. I tell you in all candour, that option no longer exists.”
Under siege from inflation and the unions, his government was unable to abide by those sensible words.
But as we come out of lockdown, their truth is more important than ever.