This is the moment to be bold. Governments do not need full coffers to embark on the kind of reforms Britain needs, but they do need ambition and courage. Britain is not broke in 2015, yet there has been little or no discussion about the broader economy during the campaign. Instead, the focus has been on which party will best fill the hole in the public finances. If ever there was a campaign to rebut the cliche “It’s the economy, stupid,” this was it.
But now that the election is over, the new government must face up to some of the economic challenges that have been sidelined over the past six weeks. There are big decisions to be made in at least five separate areas.
The first of these involves ensuring that the fetish for deficit reduction does not result in the economy stagnating, as it did in the two years that followed the last election. Conservative plans would involve £30bn of fiscal retrenchment, and this would be a risk to growth at a time when China and the US are struggling, and Greece may be on the point of leaving the euro. Labour could, according to the Institute for Fiscal Studies, hit its deficit reduction targets without any further cuts in social security or Whitehall departmental spending, but says it would make some anyway. Promises made during the election campaign could prove costly.
Infrastructure is the second area where challenges cannot be ducked. The new government will have to make a quick and tricky decision on whether to expand airport capacity – with all its implications for the global-warming agenda – at Heathrow or Gatwick, whether to press ahead with the second high-speed rail line linking the north and the Midlands to London, and whether to do something about one of the economic issues that did feature in the election campaign – the lowest level of housebuilding since the 1920s. With the government able to borrow at historically cheap rates, there has never been a better time to address the UK’s long-standing infrastructure gap.
Third, the need to rebalance the economy is as pressing now as it was when George Osborne made it a central theme of the Conservative programme in 2010. Britain has not one but three deficits that need addressing: a budget deficit, a balance of payments deficit and a productivity deficit. Plenty was said about the first during the recent election campaign, nothing about the other two. Such growth as there has been during the past five years has been dominated by the service sector and been strongest in London and the rest of the south-east. Rebalancing the economy means a helping hand for manufacturing; it also involves a geographical rebalancing.
The fourth set of economic challenges involves events beyond Britain’s shores. One of the first decisions facing the next chancellor will be how to use Britain’s aid budget to finance new sustainable development goals, which will be agreed by the United Nations in September. A gathering of even more significance takes place in Paris in December, when the UN will seek to get a legally binding agreement on cutting carbon emissions. Climate change featured rarely in the election, but progress is needed in Paris if there is to be any hope of preventing global temperatures rising by more than 2C above their pre-industrial levels.
This leads to a fifth and final category: the pressures of globalisation. Concerns about low wages, tax avoidance and immigration are linked to the fact that goods, people and money move freely around the globe. Meshing domestic politics with a global economy is a bigger challenge than cutting the deficit.
