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Beyond Thatcher – a new conservative economic policy

Covid-19 gives us the chance to examine deeper questions about the nature and direction of economic policy, the second seismic economic event in 12 years.  In June, I published a report called Unlock Britain, which set out ten ways in which we can help our economy recover.  But these were practical policy measures rather than a broad philosophical framework.  Quite simply, I believe it is time to have a re-think of our economic philosophy as a Conservative Party, and rediscover some fundamental Conservative principles – which are, and always have been, much broader than support for market economics.  We need to embrace an active Enterprising State, reformed and reforming, that can help drive an Enterprise Nation forward. And one with strong environmental credentials, which can deliver an Everlasting Environment.    

We are currently still in an economic era that began in the early 1980’s, led by Reagan and Thatcher (though copied by most Western countries), and progressed with a high degree of apparent success until the financial crisis of 2008/9, and which has been stumbling on since then.  Some things have been nagging at me for a long time.  If our current model works well, then why have the growth rates in the West been significantly lower over the last 30 years then they were for the previous 30?  Why is wealth inequality growing despite huge investments in education and social mobility programmes over recent generations?  Covid-19 is the second time in the last 12 years when the Government has had to make significant interventions into the market economy in order to ameliorate the potential for and consequences of widespread economic collapse.  The Government has been paying the wages, directly, for millions of people.  It has effectively nationalised the railways.  It has delivered the deepest government intervention in the economy for generations.  How is this sustainable with an economic philosophy where free markets are seen as a good in itself and state action is regarded as inherently unwelcome, and where a balanced budget is the goal for any Conservative Chancellor?  

Much of current Conservative economic thinking was set in the Thatcherite revolution, succinctly described by Nigel Lawson in 1984 as “increasing freedom for markets to work within a framework of firm monetary and fiscal discipline”.  I agree with that and believe that articulates a simple truth at the heart of macroeconomics which is still true.  However, in the Queen’s Speech debate in 1979 after her famous election victory, Margaret Thatcher declared that she had won a “watershed election” in which the public had voted “for the individual and against government”.  I think that the country was very fortunate to have the Thatcher Government elected in 1979, and the years that followed transformed the health of the British economy.  Today I believe that we need to be more ambitious for high growth, achieved by high innovation, than we have been for a very long time.  But I doubt today if the right way to achieve that is to be “against Government”.  Indeed, as John Micklethwait and Adrian Wooldridge explain in their timely new book, The Wake Up Call, Thatcher “did more to change the debate about the state than she changed the state itself”. 

The greatness of Thatcher was not ideological.  It was because she was radical in reaching solutions for the economic problems of that time.  She did not look to the Churchill, Eden and Macmillan governments and regard any change from their policies as un-Conservative.  She looked at the situation anew, and adapted Conservative principles of freedom, opportunity, self – reliance and prosperity on the basis of hard work, to the problems of her time.  We need to do the same today.  We need an active Enterprising State, to help power an Enterprise Nation.  

Conservative thinking on economic policy has become muddled in recent years.  We profess to believe in a balanced budget, but we do not want to reduce government spending.  We often talk about reducing bureaucracy and regulations – yet our tax code continues to become more complicated and the quangocracy goes from strength to strength.  The call for government to “get out of the way” is a common one on the Tory benches, but we call for government action to deal with any problem that arises anywhere across the country.  We believe in devolution, yet the Treasury keeps its iron grip on infrastructure decisions.  We need to be clear what and who we are for and show how timeless Conservative principles also apply to our new age.  

The economy should benefit the person with ideas rather than inheritance – the fundamental Conservative message of equality of opportunity.  It should support families and communities rather than allowing multinationals to rip them apart in the name of free markets – the fundamental Conservative belief in the importance of family and small communities as the bedrock of society.  It should help the British business grow and scale here at home – being true to our historic Conservative commitment to the small business.  Finally, as climate change worsens, we should aim to make the UK the cleanest economy in the world, truly a Conservative act, conserving our green and pleasant land for our descendants.   

The major economic problems

I believe that there are five principal, significant, long term economic problems in the UK, and that Conservative economic thinking needs to provide a sensible response to them.

Investment and productivity

Over the past decade or so, interest rates have been cut to practically zero, corporation tax has been cut to its lowest levels ever, and profits of companies (and their cash piles) are at record highs.  According to traditional liberal economic thinking, this is what should be done in order to significantly increase economic growth, create a flourishing economy and enable animal spirits to take charge.  So why is private investment and productivity growth so low?  

There is little doubt that we are in the new technological age, the Fourth Industrial Revolution.  The economic future of our country will, in large part, depend on how we harness our advantages and skills in this area.  Andy Haldane, the Chief Economist at the Bank of England, set out his thinking on this question in a speech given in June 2018.  His conclusion is that our productivity problem is not that the UK lacks for innovative, high productivity companies.  The issue is that “the productivity gap between the top- and bottom-performing companies is materially larger in the UK than in France, Germany or the US.  In the services sector, the gap between the top- and bottom-performing 10% of companies is 80% larger in the UK than in our international competitors”.  The UK’s international productivity gap is, to a large degree, a long tail problem. 

Despite ranking consistently in the top 5 for innovation, the UK ranks only 38th globally for knowledge diffusion.  Haldane’s thesis is that one of the principal ways for the UK to finally conquer the productivity issue is to significantly improve the diffusion of technological knowledge and understanding within sectors and regions in the UK – to reach the long tail of firms which are technologically behind their peers in the UK and around the world.  Levelling up needs to happen within the private sector, across all regions and sectors of the economy.  Unless we do this, our economic performance will continue to lag our competitors.   

Too much debt and not enough equity

The government’s response to the coronavirus crisis was stellar.  As a constituency MP I know the relief of literally hundreds of business owners in my constituency who still appreciate the financial assistance made available to them.  However, debt – however cheaply provided – has to be paid back at some point.  Corporate debt was extremely high even before the coronavirus crisis, and has risen sharply as a result of the government’s loan schemes.  City UK and EY, working with others across the financial sector in what is known as the Recapitalisation Group, estimate that c.£100 billion could arise in unsustainable debt by March 2021.  A third of that debt was incurred as a result of the government’s Covid lending schemes, and SMEs incur roughly half of the total unsustainable debt.  Regions outside of London could be particularly hard hit, given that c.75% of unsustainable debt is held outside London.

Why does this matter?  It matters because this unsustainable debt challenge poses a real threat to UK jobs.  It is estimated that a third of the 2.3 million businesses who will have a CBILS or bounceback loan by March 2021 will struggle to repay their debt back.  Even within the 2/3 of businesses that will be able to pay the debt back, their growth – over the long term – will be significantly impaired by their need to do so, and consequently the ability of the UK to recover quickly will be severely curtailed.

It is important for people to know that this is a long term problem.  Excessive debt and not enough equity are huge problems for our SMEs.  The volume of SME equity finance has long been very low by European standard, about £10 billion per annum.  In addition, this small amount of equity is heavily skewed towards London, with c.75% of SME equity investment being made in London.  The lack of equity investment stops UK SMEs reaching their potential, encourages them often to sell their companies earlier than they might otherwise, and that is a significant problem for our economy.

Fiscal challenge

You will rarely find a Conservative politician, including myself, who does not argue for lower taxes.  We know that high taxes inhibit freedom, limit economic growth, and in a moral and philosophical sense they offend us as Conservatives – high taxes mean that you take home less from what you have generated through your own hard work and effort.  Yet we also believe in sensible government finances.  Either taxes or borrowing pay for things that government spends money on.  And we know that excessive borrowing is just deferred taxation for future generations.  Coupled with these points is the fact that the long term fiscal outlook for the UK is terrifying – like that for most developed economies.  We have a rapidly ageing population – by 2066 26% of the population is projected to be aged 65 and over, compared to 18% in 2016 (and 12% in 1966).   A recent IFS report states that official projections imply that if all of the demographic and other pressures were accommodated through increasing public spending, health and pensions would increase as a share of non-debt interest spending from nearly a third in 2015–16 to 45% by 2066–67 (with non-debt interest spending increasing from 38.0% to 43.8% of national income).  I make this point simply to show clearly that the demands on the public purse are going to grow significantly in the coming decades.  And in these numbers I have not included any of the debt specifically taken on to deal with the Covid – 19 fallout, which I believe should be separated on the government’s balance sheet and paid off separately over an extremely long time horizon.  

We are going to need a great increase in economic dynamism, which leads to economic growth.  This is the only way to materially improve our prosperity as a society.   However, in order to retain international confidence, we will need to set out a credible medium term fiscal strategy which ensures that the UK government still believes in fiscal discipline, especially as the demands on government spending continue to increase.  That will mean that some taxes will be cut in order to stimulate growth and activity, which mean those tax cuts can generate extra revenue.  But this is not an absolute rule, and other taxes, at some point, will have to rise, and this will have to be done in a way that does not damage entrepreneurship, innovation or international investment into the UK.    

Growth matters, but that growth needs to reach everywhere

In Peter Hennessy’s recent book “Winds of Change”, he publishes an extract from a Cabinet paper written by Harold Macmillan to his Cabinet on 3 December 1962, entitled the “Modernisation of Britain”.  Macmillan wrote that there were two fundamental things that needed doing.  The first was that Britain needed to “increase our productivity”, and the second was to “rectify the imbalance between the north and south”.  Ladies and gentlemen, the problems of the British economy are not new.  

Regional imbalance has been a long running structural problem for our economy and society.  Despite the launch of at least 40 geographic policy initiatives over the last five decades, the UK remains one of the most regionally unbalanced developed economies.  In a recent EY report, they state that between 1997 and 2019, the share of the UK economy accounted for by the four most southerly regions increased from 60% to 63% in this period.  We need to ask ourselves, is the way out of our problems to continue with our highly centralised mode of decision making?  Or is it to enable regions and cities to use more local levers to thrive?    

Dealing with climate change is not a choice, it is a necessity

Regardless or not whether you are interested in climate change, if you are on this planet climate change is interested in you.  The economic impact of achieving our net zero target by 2050 is large.  The Committee on Climate Change thinks that the cost will be £50 billion per year, and BEIS puts the cost at £70 billion per year.  It will require wholesale changes in industry, transport, farming, heating, building, and many more.  This is a colossal task.

Climate change would merit a speech all by itself, but I will say this.  The only way that we have a chance of cutting carbon emissions sufficiently quickly, without harming the fabric of our society, is to decarbonise extremely quickly.  Electrify practically everything that can be electrified, as soon as possible, and invest in a colossal amount of renewable energy.  Principally the impact will be felt in industry, energy generation and transport, but it will affect every sector.  To do this will need immense amounts of private sector ingenuity, but the private sector will not be able to make the transition fast enough without a lot of assistance, both financial and legislative, from the British government.

What shall we do about it?

I have briefly set out the economic problems of the 2020’s – (i) Poor investment and productivity growth; (ii) too much SME debt and too little equity; (iii) long term fiscal problem; (iv) unbalanced growth – the need to level up if you will; and (v) climate change.  To deal with these we should continue to bear in mind Lawson’s dictum – “increasing freedom for markets to work within a framework of firm monetary and fiscal discipline”.  But we need to go further than that.  And do so in a coherent way so the country, and the Conservative Party, knows where we are going.  We need an Enterprising State and an Enterprise Nation.  

An Enterprising State

Central government needs to be a macro – enabler.  It needs to use its clout, and broad strategic oversight, to enable the private sector and other, devolved parts of the public sector, to do transformative things.  First of all, there is no future for the UK without greater and more effective investment in skills.  Skills from cradle to grave.  The government should continue to find ways to continue improving our record in that respect, like the idea of lifelong loan accounts, proposed by this thinktank, Bright Blue.

The Government has set out its clear intention to build and deliver much more and better infrastructure.  As somebody who has moaned about this for years, I completely support that objective.  Yet the way for us to achieve it cannot be for the Treasury to control every single infrastructure decision of any consequence, because of their lock on the money.  We need much more private investment in infrastructure, and there are many ideas of how to do this – my colleague Gareth Davies MP has done a lot of good thinking in this area for example.  We need to allow many more development corporations to be set up for the purpose of delivering infrastructure, using innovative financing models that allow money to be raised locally – and that do not depend on the approval of HM Treasury.  This will also allow experimentation which will benefit the country as a whole as different areas see new ways of doing things.  And they will do so whilst having the power to raise revenue locally in order to do so; this will make them accountable for their decisions at a very local level.

My brilliant colleague John Penrose MP has long been arguing for a UK Sovereign Wealth Fund.  I strongly endorse the idea.  

It would create a pot of savings that could pay for state pensions and benefits. Building slowly over time, the Fund would provide an intergenerationally fair solution that would take some of the burden of these costs from being shouldered by future generations.  It would create an ‘anchor investor’ for British entrepreneurs and start-ups, making it easier for innovators to transform their ideas into strong businesses, and would create a source of funding for long-term investment capital.  New cutting-edge technologies can be funded so they can easily scale up without moving abroad, keeping jobs and wealth in the UK.  

It could also help provide equity to UK SMEs who have too much debt in order to grow, helping them to power forward our economy, an idea which was in my Unlock Britain paper in June, and has been supported by figures like Jim O’Neill and the Recapitalisation Group led by Sir Adrian Montague.  This equity would help underpin the Union, with UK Sovereign Wealth Fund equity being offered to businesses from all across Scotland, Northern Ireland, Wales and all the different regions of England.  

How would the Sovereign Wealth Fund be seeded?  There are several ‘investment acorns’ which need to be planted in order to grow the Fund.  Firstly, the Fund should be made the legal owner of existing and future state-owned commercial investment funds, like those held in the British Business Bank.  The Fund should also be made the legal owner of state-owned land and property, managing and investing the profits from leases on behalf of taxpayers.  In addition, like with other countries with Sovereign Wealth Funds, this Fund should have the rights to all future mining and extraction, whether it’s of gravel for building, lithium in Cornwall or mineral deposits that haven’t yet been discovered.  The National Fund, which is currently worth just over £500m, should be used to start the Fund, in addition to a one off capital injection from the Treasury of at least £5 billion to help start the Recovery Fund.  Finally, lest the fund be at risk from the sticky fingers of politicians in the future by, it should be set up with a heavyweight board of Trustees like the Bank of England, to maintain its independence.

Underpinning all of this, an Enterprising State would need to improve the quality of our civil servants and our MPs and ministers.  As John Micklethwait and Adrian Wooldridge explain in their timely new book, The Wake Up Call, “serious debate about how to reform government in the West has ground to a halt” of late.  We need to change this.  As Michael Gove set out in his Ditchley Lecture this summer, “there are a limited number, even in the Senior Civil Service, who have qualifications or expertise in mathematical, statistical and probability questions – which are essential to public policy decisions.  That means we need to reform not just recruitment, but training”.  I agree.  I believe the Enterprising State needs to create a new National School of Administration, similar to the French ENA.  From its establishment, any entrant into the senior civil service would need to (i) pass through it, and (ii) spend at least two years working in local government or a devolved assembly.  This would give our senior civil servants a much better ability to deliver the sort of Enterprising State that we will need to flourish.  And all politicians would have to undergo a course at the school before commencing any new ministerial post.

However, regardless of the ability of the politicians and civil servants at central government, Enterprising State cannot be governed by command and control from Whitehall.  We need to give local areas and cities the ability to experiment with different ways of doing things, to learn from their own experiences and from each other.  The only way to achieve that in a sustainable fashion is a full devolution settlement throughout the whole UK.  This should have two aspects – both of which will have significant economic impact and will help spread growth and opportunity – to “level up”.  

The first is that all regions, not just metropolitan areas, need to have a greater degree of fiscal autonomy.  We should allow regions to (i) raise local income taxes, sales taxes and tourism taxes (all up to a limit); (ii) make more decisions on infrastructure autonomously to allow them to give private companies to ability to build and operate new pieces of infrastructure, and allow the private sector to recoup the costs directly; and (iii) give local public services much more freedom on procurement – to allow them to give local government contracts to more local businesses.

The second aspect is that the Enterprising State needs to remember that economic growth and success can often come from investment in non – economic things by local people themselves.  For example, investing in a village hall, local library, or local green spaces may not have an ostensible economic benefit, but improving the local environment of a village or small town can have incalculable improvements to the lives of those who live there, keep them there, and can attract new business and investment.  The Enterprising State needs to give freedom to local regions to invest in their own areas and their own communities – they know what they need to do.  My erudite and thoughtful colleague Danny Kruger in particular has championed this agenda, and I join him in doing so.  This freedom can only come if they are given genuine revenue raising powers.

Enterprise Nation

We Conservatives know that prosperity does not fundamentally come from government.  It comes from people willing to start and sustain a business.  High quality innovative businesses are not just always “there”; we need to nurture and encourage new entrepreneurs, to try and turn their idea into a business, so they can provide for themselves, their families and offer jobs to people in their community.  Too often the government seems to take the small businessman or woman for granted, trying to find ways to increase taxes and allow more and more regulations to make their lives difficult.  We need to make setting up and scaling a business easier, and provide more direct financial incentives for those who do so.  We should reduce NI for new hires, and keep taxes for the self – employed low (or indeed lower them further).  We should also maintain the difference between capital taxes and income taxes – capital taxes should be low because it reflects those who have taken risks, created opportunities and wealth, and they should be rewarded for that.  Coupled with measures to help UK entrepreneurs, the Government needs to strengthen our offer to international investors so that they can invest in Britain.  The Government’s new Office for Talent will be a fantastic innovation, which helps encourage more highly able and qualified people to move to the UK, and I would encourage the Government to strengthen that offer further by trying to encourage successful businesspeople from abroad to situate their business, or even part of their business, in the UK.

The progress of mankind is marked by the rise of new technologies and the human ingenuity they unlock.  The central government should work with the private sector to help the UK’s technological landscape.  Let me give you an example.

In distributed ledger technology, known by many as blockchain, we may be witnessing one of those potential explosions of creative potential that catalyse exceptional levels of innovation. We should follow the recommendations of the then Government Chief Scientific Officer Sir Mark Walport in 2016 and establish a Centre for Distributed Systems here in the UK.  The centre would be established and sponsored by government (it would cost about £10m in total to establish), but closely supported and co-invested by industry and would allow a lot of collaboration.  It would have two principal priorities – a utility trade platform and a SME data and finance hub.   

On trade, the platform would be an environment that anyone wishing to trade out of or into the UK could approach.  An entity wanting to trade would no longer have to establish trust in their data, physical supply, financial probity etc through a series of bilateral relationships with a number of different bodies.  Instead, all the data necessary for all those actors would be generated at the point the relevant contract is established.  This could be transformative in delivering more resilient, frictionless and efficient UK supply chains, and the UK tech sector is well positioned to provide logistics, financial and data technology services to the international market.  In time, it could make a significant contribution to this government’s priorities – improving the UK’s growth, productivity and international competitiveness. 

For the national SME data and finance hub, it could help in both the short term recovery period and address the more systemic issues of access to debt and equity capital.  By bringing together our world leading Fintech sector, encouraging competition in financial services and enabling better use of financial data, the Hub would enable automated access by lenders, equity providers and SMEs themselves for all relevant data points.  Easy access and much greater choice on funding options for SMEs would encourage competition between the Fintech and incumbent sector, and this would drop the cost of finance significantly for SMEs.  As the Hub would be so data – driven, there would be a facility for the behavioural profile of all participators to build up over time so that trust and creditworthiness can accumulate – leading to better and faster decisions by finance provider and SME alike. 


The most fundamental Conservative instinct is to look after the world for the next generation and build an Everlasting Environment.  Now we need an Enterprise Nation to take that impulse and turbocharge it into radical policy to deal with the looming spectre of climate change.  The ingenuity of the private sector is the only way to invent the technologies that will help us continue to become more prosperous and continue with our way of life.  However, in order to get the change we need, and make that change fast enough, we will need the Enterprising State to play its role.    

In essence the state’s role should be focused on two aspects.  First, the government needs to continue to issue binding targets for decarbonisation in key areas like electric vehicles, and give more targets across different areas of the economy.  The second aspect is for the public sector to provide, and to help corral the private sector to provide, the finance required for every aspect of decarbonisation.  This finance will be needed to help ensure that there are very few barriers for individuals, communities and businesses which prevent them transitioning into a low carbon future.  There would almost certainly need to be tax rises in certain areas to help both raise revenue and to change behaviours, but hopefully these would be short lived as the transition came into effect.  Lubricated by this finance, which will be facilitated by the best financial services industry in the world in the City of London, inventors and innovators will be able to take advantage of the UK’s position as the first major country to turbocharge our approach to net zero and export their technologies across the world.  This could be transformative for the UK, and the jobs created across all industries will be created all over the country, at different skill levels.  Levelling up to save the planet.  And Britain can lead the way.


There is a lot here.  Thank you for staying with me.  I know, despite the length of this speech, that there are many things that I have not discussed at length.  

What I have tried to do here is to sketch out a new economic vision for the Conservative Party.  To build on the achievements of the past 30 years, by addressing our modern weaknesses – weaknesses mostly shared by our international competitors.  We have every chance of leading in the world in a new type of Conservative economics just as we did in the 1980’s.  All to ensure a prosperous future for Britain.  An Enterprising State.  An Enterprise Nation. An Everlasting Environment. 

The keynote speech was followed by a Q&A session.

Bim Afolami is the Member of Parliament for Hitchin and Harpenden.