What does the Conservative leadership race mean for economic policy?

By Andrew Smith, Director

Like most recent political debates, the Conservative leadership race has found that Brexit is like a black hole sucking up much of the oxygen, with much time and effort given to analysing each candidate’s way through the impasse. But over the last few days we’ve seen some pretty bold economic pitches too.

Given that the pledges made during the contest will inevitably shape the future economic policy of the Government, they too deserve some attention.

Under Theresa May, the Government had shifted to a position which was more sceptical of business, more supportive of public spending and Government intervention in the economy.

Since the leadership contest has got going there has been a plethora of announcements on economic policy from the leading contenders, including tax cuts and spending pledges. The question is what is this likely to mean for UK economic policy. 

There are nearly six weeks of the campaign left to go and more policy ideas will emerge as candidates seek to keep up the momentum. As we have already seen, ideas can also be floated and then rowed back on.

From what we have seen so far it is likely that the trend toward higher public spending and more Government intervention we saw under Theresa May is likely to continue. 

The one area of significant change is that the Government is likely to take a much looser approach to fiscal policy.  As Chancellor, Philip Hammond was resistant to unfunded tax cuts and spending pledges.  From the pledges made so far, the next PM is likely to want a Chancellor who is more willing to accept higher borrowing and higher spending.

This is an overview of the key economic themes which have emerged in the race so far.

1. Austerity is over and public expenditure is set to increase

Most of the leadership contenders have made statements in favour of increased public expenditure.

Jeremy Hunt, Sajid Javid, Matt Hancock and Esther McVey have lent their support to a new report from the Onward think tank, Firing on all cylinders. The report calls for a significantly looser fiscal policy, abandoning the current fiscal rule that the Government should be seeking to lower the national debt, with a new rule that would simply commit the Government to reduce debt as a share of GDP. 

Current front runner Boris Johnson has spoken about delivering significant investment in education and the health service, ideas which have been echoed by Dominic Raab. Hancock has gone further by pledging £3billion of extra funding for education.

McVey, who on Brexit and a range of other issues has positioned herself on the traditional right of the Conservative Party, has chosen to present probably the most economically left-wing proposals of all the candidates.  This has included pay rises for most public sector workers and extra investment in the police and NHS.

We have heard less of previous Conservative warnings about the need to deliver reform in public services, rather than just more spending. Hancock has talked about the amount of NHS activity which is tendered to the private sector.  Only Dominic Raab, who has talked about finding more money to invest in frontline services by procurement reform, has touched on this area.

Possibly the most expensive idea which has been set out by a contender as been the suggestion from Hunt that the UK delivers a decisive boost in defence spending in excess of the current commitment to spend 2% of GDP.

2. We are likely to see the trend towards more regulation and Government intervention continuing

The May Government marked a move away from the traditional Conservative focus on reducing the size of the state and the burden of regulation on business.  In her first Conference speech, Theresa May talked about the “the good Government can do” as a deliberate attempt to reposition the Conservative Party away from an ideological focus on reducing the role of Government.

This trend is likely to continue. None of the leadership contenders have spoken about deregulation, apart from promises by Raab to remove barriers in the planning system to house building.

Liz Truss who has been one of the few Conservatives to talk about traditional Conservative themes about how free markets provide choice and better services, decided not to run for the leadership but could emerge as a key influence in a Johnson-led Government.  Johnson has said very little about regulation but has sought to highlight his commitment to the environment and disavowing comments he made in the past which suggested a scepticism of climate change.

Raab has in the past called for the radical deregulation of the economy and the labour market. In his launch video he focused much more on the need for regulation to protect consumers rather than freeing business from the burden of red tape.  

Gove is highlighting his record as environment secretary, in which he has championed new regulation on single use plastics and air quality. Javid has talked about the need for the Government to tackle the threat of climate change with the same intensity as it tackles terrorism. 

Andrea Leadsom whose support is from the right of the party, has highlighted action on climate change as her main priority after delivering Brexit.

3. Tax cuts are back on the agenda

One traditional Conservative theme which has emerged in the contest has been the call for lower taxes. Johnson has suggested a £10 billion tax cut by increasing the higher rate threshold to £80,000.  Jeremy Hunt and Michael Gove have proposed significant cuts in corporation tax.  Gove has promised a new lower sales tax to replace VAT.  Javid has talked about reducing the additional 45% income tax rate. Raab, Johnson and Javid have also spoken about the need to raise stamp duty thresholds.

A divide has emerged however about where tax cuts should be targeted. Raab has talked about reducing the basic rate of income tax and Gove has emphasised the need to reduce tax on small business rather than the already wealthy.

Only Matt Hancock and Rory Stewart – trailing at sixth and seventh place respectively in the race for endorsements – have talked about the traditional Conservative focus on fiscal discipline and the dangers of promising unfunded tax cuts.

4. Regional policy, devolution and infrastructure investment in the North are likely to get a boost

One area which is likely to get a boost from the new Prime Minister is devolution and regional policy and plans to invest in infrastructure in the North of England.

Last year, Johnson called for a radical acceleration in devolution which should include giving councils more control over receipts from stamp duty, council tax, and business rates.  He has called for spending on rail links in the North rather than delivering investment in HS2.

Sajid Javid has talked about borrowing £100bn to deliver investment for projects such as Northern Powerhouse Rail and he has strongly backed the Power Up the North campaign being led by regional newspapers in the North of England, calling for more devolution and investment to address the North-South divide.

Finally, the future of HS2 and the role that it could play in boosting economies in the North and the Midlands has become a dividing line between the candidates. Johnson has pledged to scrap it, Hunt has backed the project, as have Javid and Hancock. Gove and Raab have pledged to review it to ensure that it offers value for money.

Despite suggestions that the Conservative Party is moving to the right, the economic ideas set out by the leadership candidates suggests that the new Government will continue with the trend we have seen under May of more public spending and Government engagement in the economy.

It is only in the calls for tax cuts that we have seen a more traditional Conservative agenda emerging, but with significant divisions about where they should be targeted.

Despite the flurry of economic policy ideas, it is clear that Brexit will be the dominant focus of the new Prime Minister.  With the possibility of a no deal Brexit and the possibility of a general election the scope to deliver any changes in economic policy might be quite limited.   

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