Liz Truss is right (as were Ted Heath and Margaret Thatcher)

“We want...personal ownership, greater freedom of opportunity, greater freedom of choice, greater freedom from government regulation and interference." 1970 Conservative Manifesto

Liz Truss was right. 

No, I’m not saying this because I’m an obsessive contrarian or even because I’ve read her book. Rather I’m saying this because, in two really important respects, Liz Truss really was right.

The first of these is that regulation really matters and too much of it stifles, to the point of destroying, economic growth. Britain is, partly but not entirely as a result of 40 years in the European Union, really good at regulations. Our government even boasts that our regulations are “world-leading”. But Truss was right, would we rather be world leading at bureaucracy or world-leading at making people rich?

Truss’s second, and related, argument is that our government is far too big. Not merely because that results in higher taxes, more debt and more regulation but because the sheer scale of government squeezes out other economic activity, acting as a drag on creativity, innovation, investment and growth. It is true that some other economies have even bigger governments (France, for example) but they also suffer from the same lack of dynamism and the resulting slow economic growth. No fast growing economy in the world has the scale of government regulation, state entitlements and debt as do modern European mixed economies. We are all really good at bureaucracy but lousy at economic growth.

I think this analysis is pretty much on the money. Our government is too big and our business and industry is over-regulated (and getting more so now the government, desperate for votes, plans to hobble our successful and profitable football industry with a brand new, unnecessary regulator). But if we are to change this over-mighty regulatory state so as to get a better chance of economic growth, where should we start? It was in getting the answer to this question wrong where Liz Truss faltered. You can’t go from a high tax, highly regulated economy where the government spends one in every two pounds, to a flexible, intelligently regulated, growth-focused economy without some sort of plan.

To begin with we need to ask why the government is so big. This starts with understanding that the biggest driver of rising government spending is not waste, not how much the chief executive of Leeds Council gets paid, and not spending on the things - defence, policing, the justice system, foreign affairs, emptying the bins -  we think government really has to do, but what the Americans call ‘relative uncontrollable spending’. We variously call this spending, ‘the welfare state’, ‘entitlements’, and ‘benefits’ but its main feature is that the amount we spend is difficult to predict (‘relatively uncontrollable’). Related to this is that the existence of entitlements, what we might call ‘free stuff’, creates an incentive for people to find themselves in a position to claim those entitlements. Not only is the spending ‘relatively uncontrollable’ but the nature of the system means that the budgets under-estimate how much is needed. The uncontrolled spending is always upwards.

To give one example of how this works. A middle income couple have a child that they take to school in their own car. That child, following assessment, receives a statement of special educational needs meaning that the local education authority has a duty to provide (or rather, the child is entitled to) free transport to and from school. So the council books a taxi despite the only change to that child’s circumstances being the statement of need. Some parents may, of course, opt to continue providing the school run service but plenty won’t. The existence of an entitlement will always incentivise people to claim it even when there is no financial or circumstantial imperative.

So if we want to reduce the size of government we need to change the basis on which people are entitled to support from the government. And this means looking at universal benefits including the old age pension and child benefit as well as asking some tough questions about why the numbers of chronically sick people has climbed so rapidly. Up to 2021 the numbers of working-age people starting to receive disability benefits (Personal Independence Payment, PIP) ran at around 15,000 per month. By July 2022 the numbers of new recipients had doubled to 30,000 per month. The IFS (Institute for Fiscal Studies) reviewed this change and concluded that we’d somehow become sicker as a society. But the speed of the change suggests that some other incentive is at play here but, whatever the reason, the number of people receiving sickness benefits has doubled. If we want to reduce the scale of government then we need to resolve these issues preferably without simply shouting ‘scrounger’ or ‘waster’ even if sometimes we suspect there are a few such people.

If we want to reduce the cost of the old age pension, child benefit and sickness benefit we need to ask a different question - why is it that people can’t provide for their own old age, support their own children, and stay healthy enough to work without needing benefits? And the answers to these questions don’t lie with the benefits system but with how we regulate pensions, the housing market, and the health system. To get control over how much we spend on benefit entitlements the places to start are with financial regulation, the planning system and the NHS.

We could return to a pension system more akin to that Britain had prior to 1997 when Gordon Brown decided to sneak through a raid on pension funds by removing tax relief on dividend payments. This would, inevitably, be presented as a tax cut for the rich (despite most members of pension funds being anything but rich). Similarly we could argue that most recipients of public sector pensions are subsidised by the state and should forgo the old age pension. But this would be accompanied by tearful stories of hard-working nurses and stressed teachers. Resolving the UK’s pension system should be a priority given the positive impact on the wider benefits system but even marginal changes such as the age of entitlement have resulted in political discomfort and a bonanza for lawyers.

The same applies with housing and planning. There is little prospect, despite all the rhetoric around housing, of a comprehensive reform to the UK’s planning system. Yet every review of Britain’s sclerotic economy, ever-climbing rents and sky-high house prices tells us that the planning system is a big factor driving these problems. Instead the government focuses on adding to an already over-regulated development market with new rules on demolition costs, staircases and the size of windows. If we were to get average market rents and mortgage costs back to the level we saw in the 1960s (between 5% and 10% of earnings) not only would we see a huge boost to the whole economy but also the spending on housing benefit would fall, there would be less economic imperative to fund childcare, and supporting mothers would become more ‘nice-to-do’ and less an essential part of household budgets. Some would argue that genuinely cheaper housing (rent controls are not cheaper housing, they simply move the costs somewhere else meaning the rent is still, in economic terms, the same) is the single best way to transform the economy but maybe we also need to do something about our health system?

The UK isn’t the biggest spender on health in the developed world but about 12% of everything we spend as a nation goes on the health system with 95% of that spending being through the National Health Service (NHS). Britain, despite similar levels of spending on health to other countries, has worse health outcomes. We can, of course, note that avoidable mortality rates aren’t entirely about the health system and include such things as road accidents, suicide, homicide and drug abuse. But the UK, according to health think-tank King’s Fund, has “...below-average survival rates for many major cancers (including cancer of the breast, cervix, colon, rectum, lung and stomach), and poorer outcomes from heart attacks and strokes.” These are directly connected to the health system. Indeed, aside from higher levels of obesity, the UK does well in areas such as road accidents, homicides, suicides, smoking rates and drug deaths.

Careful observers will have noticed that the Labour health spokesman, Wes Streeting, has hinted at a bigger role for the private sector in dealing with rising waiting lists for operations and, indeed, has talked (albeit in vague terms) about more substantial reforms. But, just as with Labour’s housing policy, this rhetoric is not matched by substantive reform proposals. Indeed the approach appears to focus on efficiency (not necessarily a bad thing) rather than system change. It may be that such an approach reduces the ongoing financial pressures on the health system (driven by the hard-to-predict levels of demand for services) but it is unlikely to resolve the broader and long-standing problem of Britain’s poor health outcomes compared to neighbours. At one time the UK could argue that, because it spent significantly less per capita than France or Germany, our health outcomes stood up well. But this differential is now largely gone (and the main difference is down to the size of the private sector in these countries) meaning that the NHS is running out of excuses for its poor performance.

Despite this, and the rhetoric of some politicians, there is no plan for any significant reform in how we deliver healthcare in the UK. Even parts of the care system outside the NHS remain unreformed with plans to get the funding of domiciliary care and residential care for the old and disabled bogged down in the narrow mindset that the only fix is for the government to spend more money (and central government absolutely loathes the idea of giving more money to local councils). For the main NHS service, we have convinced ourselves that, even more than planning, pensions and benefits, the predict-and-provide central plan approach to health is the only acceptable method of managing a health service. Instead the focus is on nannying (to the point of bans, controls and coertion) people into lifestyle changes in the crazy belief that this will reduce demand for the NHS.

Liz Truss was right in her diagnosis of the problem: too much government, too little real control of what government does, and a system of tax, planning and regulation largely designed to prevent new building, new business and entrepreneurship. Where Truss was wrong was in believing that these problems can be fixed in short order, that there are a simple set of taxes, incentives and reforms that will result in the basis of government changing. It was less the carefully curated outcry at Kwasi Kwarteng’s mini-budget that is at fault , and more that the problems are so embedded into our systems of government, taxation and regulation. It is, as the Football Regulator shows, really easy to add new regulatory interventions but we are incapable of imagining a polity without Ofsted, Ofwat, Ofcom, Electoral Commission, Heritage England and the Arts Council. Or indeed the hundreds of other regulatory agencies that plague the governance of England.

Changing this is a long-term project that begins with identifying the principal drivers of sclerosis (the planning system, an interventionist Supreme Court, and the programme of ‘Net Zero’ would be my targets for substantial change) along with the disincentives embedded in tax, tariff and duty regimes. With each of these targets three things are necessary: 1) to protect the poorest in society, so far as is possible, from negative outcomes; 2) a clear, non-technical explanation of the social and economic benefits from reform; and 3) recognising that vested interests, not least the well-connected and well-paid leaderships of the targets for change, will aggressively defend their systems. Above all, a government seeking to drive this sort of change will not have the capacity to change all the things needing change in the timescale of a single parliament. We can cry “Afuera!” but in the end change takes time.

In 1970 the leadership of the Conservative Party met at Selsdon Park Hotel in South Croydon. The result was the manifesto for the forthcoming general election. This manifesto was radical and innovative, pulling the Party decisively away from the ‘Butskillism’ of the previous decade. Although Heath’s leadership u-turned on the central economic ideas in the manifesto (he told me and others more than once that this was because he couldn’t tolerate the rise in unemployment), the ambition of 1970 is, I believe, still the only ambition that any centre-right party can hold:

“We want people to achieve the security and independence of personal ownership, greater freedom of opportunity, greater freedom of choice, greater freedom from government regulation and interference. A responsible democracy based on honest government and respect for the law.”

In a nation where progress has been, for too long, away from this ideal, and where many people nest comfortably in a system of regulation and planning, making a substantial change isn’t a project that can be achieved in a few weeks. This was Liz Truss’s error and, even though she is right that her downfall was not entirely of her own making, we need if we are to fix Britain’s problems, plans for real change. Not in some explosive 100 days programme of law-making but in a programme across five to ten years underpinned by an updated version of that 1970 manifesto (and yes I know joining the EEC was in there). It was titled: “A Better Tomorrow” and we need one. Free market capitalism is the route to that better tomorrow, a smaller state, less regulation and an instinct to trust people to do the right thing. Hoc age!