UK Economy: Growth, Inflation and Productivity

Lord Hannan of Kingsclere Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Hannan of Kingsclere (Con)]

My Lords, when the Government announced a windfall tax on energy companies, the Treasury said it would bring in £42 billion. That sounded great. In March this year, the OBR revised that figure down to £26 billion, and now the first independent study, by Wood Mackenzie, says it will be £16 billion. These are not small figures, but it is a small example of what I think is going wrong with our economy. There is a repeated readiness to do something that is popular in the short term rather than something that is in the interests of our long-term prosperity.

To some degree, this is, if you like, the institutional view of a lot of our economic bodies. I have spoken many times here about the reluctance of the Treasury to take into account the secondary or dynamic effects of tax: in other words, how cutting tax rates can generate more economic activity. We saw it with the 45p rate and with corporation tax. One reads that the plan the Chancellor has for a big bang 2.0 in the City is being held up by the Financial Conduct Authority, which is now against reversing the EU ban on short selling and all the rest of it. One reads that proposed tax cuts would fall short of the OBR, although I have a feeling that if the Government change at the next election, the OBR will suddenly have no problem at all with borrowing the £28 billion for green investment. We will see whether that comes about; but that, of course, is under a different sort of moral category.

The real point is that we are reluctant to do things that challenge people’s intuitions and this leads us into bad policy decisions. People are always in favour of windfall taxes because they think that somebody else is going to pay. They do not really understand that, as Ronald Reagan said, businesses cannot pay taxes; they can only collect them. In other words, all taxes are passed on to consumers, customers, shareholders and so on. They are always a popular idea, in the same way that a wealth tax is: people think somebody else will pay it. The idea that the wealthy will not sit around waiting to pay tax but may move jurisdictions or retire earlier is a counter-intuitive and difficult one.

The real problem of our modern economy is the failure to take on some of the false intuitions caused by our maladaptations. Brian Caplan of George Mason University did a survey in which he looked at stuff that is consensual among all economists, left and right, and at how that diverges from the general view of things. He found that there were three particular areas of widespread public bias, the first of which is a general reluctance to understand how prices and competition work. Most people intuitively think that prices go up because of what the seller feels like charging. The noble Lord, Lord Whitty, just referred to that as greedflation, but of course, that is not the reality of how markets work. I am struck that the people who blame inflation on excess profits never make the converse argument: that when prices fall it is presumably, by their own logic, because of the generosity of these big corporations. That is a huge rift between how things work and how most people see them working.

The second area is what Caplan calls the make-work fallacy. Most people insist on seeing jobs as a benefit rather than a cost, or rather, they do not understand that jobs are a means to an end, the end being greater prosperity, hence the constant pressure on Governments to create jobs, as though that is a good thing in itself. We could create jobs if we banned mechanical diggers and had hundreds of men with shovels taking their places. That would create jobs in one sense but it would make everybody poor. It is a very difficult argument to get across that if we are able to exploit technology, we should be able to work shorter hours while living better, and that that is not a bad thing.

Then there is what Caplan calls the anti-foreign bias. People are irrationally suspicious of imports and always tempted into the argument that security depends on producing everything yourself, when of course real security depends on sourcing from as wide a variety of producers as possible, so that you are not subject to a local shock which might as easily happen on your own territory as anywhere else. All these things are counterintuitive and have to be learned. That is why economists are ahead of the people who have not looked at them.

One of the oddities in this whole debate is people talking about free-market dogma. Free markets are the least dogmatic thing because they run up against all these intuitions. It seems completely plausible that a planned economy would work much better than one where things are left higgledy-piggledy to arrange themselves, or that if you have two factories doing the same thing, a wise and disinterested committee of government experts would say, “Why don’t you carry on with factory A, but factory B can be reclassified to something else?” All these things sound plausible. It is just that they lead to absolutely catastrophic outcomes.

The understanding of how markets work is the opposite of a dogma; it is a pragma—an application of observed experience against intuitions. But most people will stick with their gut and then reason backwards, which is why rent, price and wage controls and all the rest of it are perennially popular. The challenge for a Government in the age of instant media is to be able to have the patience to look beyond the immediate headline and do what is right in the long run. My noble friend Lord Griffiths quoted all those old Chancellors—Barber, Healey, Howe and so on—but none of them was in an age of Twitter. They were able to think in terms of an electoral cycle and say, “Judge us at the end of four or five years on the overall package”. Every one of Margaret Thatcher’s privatisations was unpopular when it happened. Even the lifting of exchange controls was unpopular when it was polled in advance. However, she understood that the important thing was to look not at the popularity of a policy when polled in isolation, but rather at its overall effect.

I hope that, if indeed there is a change of Government, there may be some longer-term thinking. The Labour Party could get away with things where it would be a little more trusted than this Government—on NHS reform, building more houses, and maybe on allowing the pension age to rise in line with longevity—but only if it is prepared to look beyond the immediate headlines. Is that possible in this day and age? Well, as the poet said:

“An’ forward, tho’ I cannot see,


I guess an’ fear!”