We risk being the sick man of Europe again

It must have happened at least ten years ago, but it was one of those conversations which keep coming back to haunt you.

I was discussing economic policy (what else?) with a rather senior political scientist. At one point, I suspect when I felt I was losing the argument, I said that it was all very well to argue for a radical new economic policy, but we British have a longstanding way of doing things. We are, I claimed, firmly anchored mid-Atlantic. We don’t believe in the state intervention common in much of continental Europe. The British way is more free market and more liberal.

He looked at me with the withering contempt I so richly deserved and proceeded to remind me of a bit of British history. It is not so long since large swathes of the economy were in public ownership. Marginal tax rates reached 98 per cent. Fixed exchange rates, import controls, and prices and incomes policies were the order of the day. The economic orthodoxy of the 1970s could scarcely have been further removed from that of the 2000s.

I don’t even have the excuse that I’m too young to remember the 1970s. I certainly recall the election of 1979 and the controversies of the 1980s as industries were privatised and income tax was slashed. Yet I found it all too easy to assume that, for good or ill, the present was normal and would last for ever.

In one form or another that is a common delusion. When David Cameron spoke earlier this year of the peace that western Europe has enjoyed for 70 years, he was not saying that leaving the EU would lead to war. He was simply reminding us that it wasn’t ever thus, that it is naive to believe that we don’t have to keep working to ensure we maintain peace, prosperity and democracy.

In economics we were wrong to assume that just because for decades incomes had always risen, they would continue to do so. The 2008 crisis brought that seemingly natural way of being to an end. The young have fallen further and further behind the old in terms of income. Increasingly we are a nation of renters, not of homeowners. Things change. Our understanding and responses can change rather more slowly. We have experienced an unprecedented change in economic circumstances since 2008. The response from the Bank of England has been dramatic. The response from government has been much less so. There has been no fundamental change in economic direction since the 1980s.

If we didn’t reassess after 2008, we have little choice but to do so after 2016. We will have to make choices about our future economic and trading relationship with the EU. But actually we have bigger choices than that to make. Choices that will determine how we see ourselves for decades to come. And mostly they are choices over whether we will act for the long-term prosperity of all, or make policy to benefit and placate a few vested interests.

Gradually, with setbacks and mistakes, the last few decades have seen us move away from protecting particular interest groups at the expense of the rest. We no longer run nationalised industries for the good of their workers. We insist that competition operates even when it means that less efficient firms close. Educational opportunities have been massively expanded.

But there is still a long, long way to go. Whether it be bankers in the City of London or homeowners protesting against more house building, lobby groups will always try to bend policy to their own interests and against the long-term interest of the nation. And single-issue pressure groups will by their nature be better organised, more visible, and with more to win or lose than the rest of us. The gains from competition, from more airports, from more houses, from better infrastructure, from more effective regulation are long term and hard to put your finger on. The losers are clear and vocal.

And the thing about taking back control after the Brexit vote is that we now have more freedom to get things right or wrong. We are facing the most significant fork in the road since 1979.

One early test of our seriousness in taking the right course is how we replace the EU’s state aid rules, which prevent old-fashioned bailouts of failing industries. The prime minister has promised us a new industrial strategy and it should stick as closely as possible to those rules to ensure future governments cannot support particular companies on a whim. Lobbying can be intense and the short-term gains from rescuing companies are attractive, but the long-term costs are ruinous, as the 1970s showed. This is not a choice we have had for decades. We must get it right.

And beyond Brexit we need a government that will tackle social and economic problems such as growing intergenerational inequality. Public policy has completely failed to respond to this extraordinary shift in income and wealth from the young to the old. If we don’t respond we risk entrenching privilege, lowering social mobility and harming the welfare of future generations.

The choices we make in the next few years will be the basis on which we are judged by our children 20 years hence. Will they be saying it is still the British way to be open to the world, to be at the forefront of the free market, to be socially mobile? Or will Britain have given in to short-termism and become once more the sick man of Europe?

Paul Johnson is director of the Institute for Fiscal Studies, follow him on twitter @PJTheEconomist.

This article was first published by The Times and is reproduced here in full with permission.