Rishi Sunak has a photo of Nigel Lawson on his wall. But is he the heir to Lawson?

Rishi Sunak, in No11, with a photo of Nigel Lawson on the wall.

I worked in the Treasury when Nigel Lawson was Chancellor of the Exchequer, though I was too junior to spend a lot of time with him. Looking back, he heralded some big changes in the way we think about economic policy (perhaps unusually for a politician rather than a professional economist).

I associate Lawson with three important and durable ideas.

First, on the role of policy. Lawson reversed decades of economic policy by emphasizing the role of macroeconomic policy for stability and microeconomic policy for growth. This overturned the prevailing idea that the job of macro policy was to promote full employment, with price and wage controls used to control inflation. On Lawson’s view, long-run growth is driven by productivity, and productivity is shaped mainly by micro, not macro, policies. (Macro policy might affect growth in the short run, however). This was a huge shift in perception about the role of policy.

Second, on tax simplification. Lawson believed in simple, broad-based taxes with low rates. He tackled decades of accumulated exemptions and allowances, and so broadened the tax base, allowing for more revenue to be collected at lower rates. Lawson achieved the unusual combination of cutting tax rates while increasing tax revenues. This was not (as is sometimes claimed by Laffer-curve wingnuts) because cutting taxes increases revenues – it does not, at UK levels of tax. Lawson achieved increased tax revenues partly by cutting back tax allowances and exemptions, and partly by stimulating an unsustainable boom, based on over-optimistic projections of the trend rate of growth.

Third, on exports. Lawson argued that the current account deficit is the aggregate consequence of decisions made by firms and households to run a deficit or surplus, and that collectively, we have no interest in whether we are, in total, in deficit or surplus as a result of these individual decisions. This marked a sharp departure from the obsession with the balance of payments, grounded in mercantilism, that had shaped British policy for decades.

Though we think about all three of ideas in more nuanced ways today, they are now pretty mainstream and it is easy to forget that they were ever novel or controversial.

Recognising the importance of these ideas does not imply approval of Lawson’s stewardship of the Treasury. In many ways he was a catastrophic Chancellor. He ignored the distributional consequences of his policies, leading to huge increases in inequality and poverty. His supply side policies focused too much on deregulation and tax cutting, and not enough on public investment in people, infrastructure and institutions. He squandered the North Sea oil bonanza and privatisation proceeds on cutting taxes rather than investing in the nation. He promoted private ownership over competition, and regressive taxation over progressive taxation. And (like more or less every Chancellor before or since, with the possible exception of Roy Jenkins) he arrogantly convinced himself that cyclical upswings in the economy were permanent improvements in the underlying trend, leading to important policy mistakes.

Most of all, Lawson demonstrated little or no empathy for people at the bottom end of the income distribution, nor much understanding of their lives.

Where does Sunak fit in to Lawson’s legacy?

On the role of policy, Sunak flirts with microeconomic policies to control prices (e.g. cuts in petrol duty), the opposite of the view that Lawson set out in his 1984 Mais Lecture. It is important to recognise that Britain is being made poorer, in real terms, by the financial crisis, Brexit, coronavirus and the war in Ukraine, not by inflation. The rise in prices is merely the mechanism by which the reality of this reduction in real living standards is visited upon us – preventing price increases will simply mean that our lower standard of living will have to come about another way (such as mass unemployment and falls in nominal wages). Lawson thought microeconomic policies should focus on productivity, not prices. Sunak has adopted a much more ambiguous view of the role of macroeconomic and microeconomic policies. That said, Sunak’s own Mais Lecture represents a marked improvement on Lawson’s approach to increasing productivity, because it recognises that higher productivity requires active state investment, not just deregulation and tax cutting.

On tax simplifications, Sunak appears to be pursuing the opposite of Lawson’s approach. He is increasing national insurance (a bad tax, which is levied on labour income for people below pension age) and cutting income tax (a better tax, with a broader tax base including some income from capital). Sunak is thereby creating big tax advantages for the rentier class who earn their income from share dividends or property rather than work. He has increased tax allowances, paid for out of higher rates. An intellectual heir to Lawson would abolish national insurance, folding it in to income tax – so widening the tax base and allowing lower rates; and would tax all capital – including capital gains – at the same rate as income tax.

And on exports, the current Government appears to believe that economic success depends on exporting more (the opposite of Lawson’s view, which was that exports depended on economic success). To be fair, though, I’m not aware of Sunak indulging personally in this primitive mercantilism.

Sunak’s Spring Statement was notable for his decision not to do anything to protect out-of-work families dependent on Universal Credit from one of the sharpest contractions in living standards in modern times. The unanticipated increase in inflation will also result in substantial real terms cuts in public spending, with big consequences for people who depend on public services. Sunak has yet to demonstrate that he does not share Lawson’s disregard for the poorest and most disadvantaged members of our community.

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Owen Barder

Owen is CEO of Precision Agriculture for Development. He has worked in the office of the UK Prime Minister, the British Treasury, the Department for International Development; and at the Center for Global Development.

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