It’s not just about spending more; this country needs every pound to be allocated with purpose

By Ruth Kelly, the secretary of state for education between 2004-06

“It’s the economy stupid!” The phrase belongs to James Carville, a strategist for Bill Clinton’s successful 1992 presidential bid, and became the rallying cry for the Clinton campaign. It succinctly summed up the fact that voters will always care deeply about their family finances, the price of goods and services, the state of the job market and the burden of taxation.

Thirty years later and a continent apart, our government would be wise to reflect on those words.

There are colossal economic challenges ahead. The facts are stark: soaring energy costs, rising inflation and impending tax rises are about to hit UK households, with the tax burden forecast to rise to the highest level since 1949 over the next five years. 

State spending was over 50 per cent of GDP last year. Some economists are predicting cuts to real incomes greater than those during the financial crisis.

As a former Labour MP for Bolton West – a Tory marginal situated among the “Red Wall” seats of Bury North, Bury South, Bolton North-East and Leigh – I cannot envisage a situation in which the voters of Bolton West or any of its neighbours choose to vote at the next election for a larger state and even higher taxes. 

They weren’t going to choose a [Jeremy] Corbyn and [John] McDonnell spending plan then, and they wouldn’t now. When I first stood for election, on the doorsteps teachers told me about placing buckets under leaking classroom roofs; patients told me of waiting interminable hours on trolleys in NHS hospitals; countless households had no one in work – and had not had for many years.

The state could not be the answer

While I was adamant then that the state had a role to play in funding public services properly, I knew the state could not be the full answer. In one newspaper article written shortly before the election, I asked how anyone could argue that “the remedy … is further direct taxation, when the people of this country have already seen the biggest tax rise in peacetime history?” 

Ever more taxation cannot be the solution to better public services. This is the progressive answer too. With the tax burden already high, Labour will not be able to strengthen services through further tax rises, as they will only serve to constrain growth.

As education secretary, I argued that the state should no longer be primarily a direct provider of services, but instead become a regulator and commissioner of services provided by the public, private and voluntary sectors. It wasn’t simply about spending more and more money – every new pound had a purpose.

That is why – at a moment of crisis in our public finances and with huge economic challenges ahead – I have chosen to join Policy Exchange, one of the UK’s most influential voices.

We will be arguing for an enabling state – one that allows civil society to grow, in which the dignity of all is respected and their potential allowed to develop, but which is not afraid of using fiscal flexibility, where we have it, to smooth the path and shield the most vulnerable. 

One that funds essential public services well, but only in return for reforms. One that is avowedly pro-business and pro-growth, recognising this as the only way we can tackle the cost-of-living crisis. One that when tackling the climate crisis, ensures every penny is spent wisely, taking care not to impose undue burdens on working families.

Desperate times call for a reform agenda

A reform agenda is now desperately needed. The UK has been bedevilled since the financial crisis with woeful levels of productivity growth, the second slowest in the G7. Just last month, an important OECD report projected that over the next 40 years the UK would perform near the back of the pack in per capita GDP growth.

As Andy Haldane, the former chief economist at the Bank of England, pointed out in a Policy Exchange seminar last year, while the United Kingdom has some of the most successful companies in the world, it also has a longer and wider tail of underperformance, a fact which largely explains these international differences. We must spread productivity and innovation better across companies and places.

The recent discourse of “levelling up” has merit, but only if it is more than a central government exercise. It needs to be an agenda driven from the bottom up rather than the top-down. We need to see real devolution of power, not just decentralisation of Government activity and relocation of Government jobs to the regions. 

Only local collaboration and leadership can actually deliver the sustainable and long-term growth that this country needs. For example, we should seriously consider amalgamating local funding pots and devolve some taxes, such as business rates, so that local communities have the resources and flexibility they need. We already have mayors firing on all cylinders, why not give them some real firepower?

Our economic challenges are great, but the United Kingdom has the tools, and the talent, to turn them into opportunities, so long as we have the courage to seize them.