"BACK TO THE FUTURE" IMPERILS BRITAIN / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

‘Back to the future’ imperils Britain

By Martin Wolf

Published: March 25 2010 22:40

Since the election of May 1979, just under 31 years ago, the UK has had one change of power, in 1997, and two dominant politicians: Margaret Thatcher, prime minister from 1979 to 1990, and Tony Blair, prime minister from 1997 to 2007. The era that these charismatic politicians defined is now over. That is the biggest lesson to draw from the Budget delivered by Alistair Darling, chancellor of the exchequer.

What lies ahead is an era of harsh choices. Is there a politician to create something uplifting out of this disappointment? Mr Darling is not that man; nor is Gordon Brown, prime minister; nor, as far as I can see, is David Cameron, his Tory challenger. What stretches ahead is an epoch of diminished expectations.

Mrs (now Baroness) Thatcher started from her conviction that she had to stop the UK’s relative decline. She broke the power of the unions, curbed inflation, shrank the state, privatised public enterprises and increased reliance on markets. Mr Blair accepted this legacy and, after his first term, lavished the proceeds of growth on public services.

The financial and economic crisis has inflicted huge damage on the legacies of both of these leaders. In response, politics is going backwards. It must go forwards, instead.

Thatcherism’s economic legacy was striking. According to the Budget , between 1997 and 2006, business services generated 40 per cent of the growth of the economy and financial intermediation about 13 per cent. The contribution of production was close to zero. That was the outcome of the market. The UK economy expanded faster than those of other big European countries. Thus growth seemed satisfactory and sustainable. Now, after the crisis in finance – the heart of the market system – that confidence in markets has vanished from the public, the government and Tory frontbenches. Symptomatic of the market’s failure is the “debt hangover” brilliantly analysed by the Bank of England’s Andrew Haldane.

If the crisis has struck at the foundations of Thatcherism, it has struck as hard at those of Blairism. The assumption that the economy would automatically generate the revenue needed to expand the public sector has proved as false as the assumption that the market would automatically generate stable and sustainable prosperity. Indeed, these are, in essence, the same underlying assumption about the economy.

So what are the narratives that the big political parties now offer?

The shared answer is clear: since you, the voters, do not want to hear the truth, we will not force you to do so. In addition, says Labour!, we shall load taxes we need to replace the lost revenue on to people who do not vote for us. Put as much as possible of the unexpected losses – four years of vanished growth of gross domestic product, plus the collapse in revenue buoyancy – on opponents. That is at least politically rational. Beyond that, Labour has become far more openly and confidently interventionist, with a long list of small schemes. It is, if not “Old” Labour, not “New” either.

Yet, however much Labour may wish to hide the fact, if it wins the election it will take a torch to public spending. As Robert Chote, director of the Institute for Fiscal Studies, stated on Thursday: “The government expects public spending in total to be broadly flat in real terms over the four years beyond 2010-11. Making plausible assumptions ... Whitehall spending on public services and administration would need to fall by an average of 3.1 per cent a year over those four years, a cumulative decline of 11.9 per cent or £46bn in real terms by 2014-15. This implies cuts averaging between 5.3 per cent a year and 7.1 per cent in the areas that the government is not planning to ‘protect’ in 2011-12 and 2012-13.” This would be Labour versus the public sector – a political bloodbath. If Labour were to win, it would be in a battle as big as that between the government and public sector unions between 1976 and 1979.

Yet the Conservatives, now shorn of Thatcherite verities, are in no more comfortable position. They pretend their fiscal policies would be quite different from Labour’s. But, according to the IFS, the differential tightening might be as little as 0.6 per cent of GDP by 2015-16. In the context of the calamity, this is much ado about nothing. Apart from that, the Conservative big ideas seem to be “time for a change” and “born to rule”. This, too, takes the UK back to the pre-Thatcher political era.

The crisis marks the end of an epoch, economically and politically. The big parties are at a loss over how to respond. But – apart from recognising and reacting to the crisis, which could, under plausible assumptions about future economic growth, require still more radical decisions on the public finances than anybody wants to contemplate – their leaders have to find something more inspiring than an offer of years of austerity and disillusion.

The party that deserves to win must craft a narrative and policy that creates opportunity out of disappointment. Competence is required, as is toughness. But the UK needs more than these qualities. It needs the “vision thing”, as well. I plan to discuss these challenges as this pivotal election draws nearer.

Copyright The Financial Times Limited 2010.