The sight of all three main political parties competing to offer tax cuts is nothing less than stunning. The economic crisis is turning the world on its head. What seemed unchallenged economic orthodoxy a few weeks ago is now dismissed as the thinking of a bygone era, while ideas thought to have been consigned to the dustbin of history are now presented as the answer to the world’s problems. Didn’t Gordon Brown build his entire career on his promise not to beggar the country with imprudent, unfunded tax cuts? Didn’t David Cameron say as recently as September that Brown’s borrowing was so out of control that taxes might have to go up? Yet now, just as public borrowing is set to hit once unimaginable levels, everyone agrees that we need huge, unfunded tax cuts. Desperate times call for desperate measures. Even so, it is alarming how quickly politicians can discard an idea that they had seemed to espouse as a matter of unshakeable conviction. What other pillars of modern economic thought might be next to go? Here are four ideas whose revival may seem far-fetched, but can no longer be ruled out.
Exchange controls
Free movement of capital is central to the modern global financial system. London is the world’s leading centre for foreign-exchange transactions and has attracted more than its fair share of global hot money into its booming capital markets. But Britain hasn’t always been so keen on free movement of capital. Until Margaret Thatcher abolished exchange controls in the early 1980s, restrictions on the sums that could be taken out of Britain were seen as vital to propping up sterling. Now that the global hot money is deserting Britain, gilt sales are falling and the pound has sunk to a 12-year low, it may not be long before the UK is forced to take drastic measures to shore up the currency. The orthodox answer would be to put up interest rates – but in the middle of a slump? Iceland and Ukraine have already introduced exchange controls; other emerging countries look likely to do so. The UK’s problems are similar to those of an emerging market, as the Governor of the Bank of England has acknowledged. How long before we follow suit?
Nationalisation
This is another 1970s relic assumed to have been banished for good by Thatcher – until the rescue of Northern Rock last year. Since then, the Government has also acquired Bradford & Bingley and controlling stakes in Royal Bank of Scotland, HBOS and Lloyds. What other industries will be deemed suitable for a “temporary period of public ownership”? The US has already nationalised insurer AIG, and Barack Obama supports a bail-out of the car industry that may yet end in public ownership. Here, there have been calls to nationalise the housebuilders. And come to think of it, our insurers aren’t looking too healthy either.
Protectionism
Free trade has been one of the great engines of global prosperity in the post-war world, but throughout that time, protectionist sentiment has never been far below the surface in many countries – particularly Europe. Will the economic crisis bring that protectionism out into the open? The signs aren’t good. Even before the financial crisis really began to bite, the world failed to secure a deal on the World Trade Organisation’s Doha round. Since then, Obama has won the US election spouting some suspiciously protectionist rhetoric – sufficiently worrying for Brown to use his first foreign policy speech since the US election to warn Obama not to turn his back on free trade.
At the extreme, the risk is that Obama offers support to particular US industries that prompts other countries to retaliate or offer support to their own favoured industries. But it does not require a reprise of the 1930s beggar-thy-neighbour playbook to do the same damage. The global trading system is already fragmenting. As finance becomes increasingly nationalised, funding for international trade is drying up, as the collapse in the Baltic Dry index shows.
Joining the euro
It’s been an article of faith in Britain over the last decade that we owe our economic success to our place outside the single currency. The combination of a free-floating exchange rate and independent control of interest rates allowed us to set policy to suit local conditions, so the argument goes. That argument had already started to look a bit hollow as it became clear that our independence gave us the biggest housing bubble of any major economy. Now we are starting to see the downside of a free floating exchange rate too, as global investors dump sterling as our economic problems mount. The Governor of the Danish central bank has already acknowledged that staying outside the euro may have been an error. Hungrary, Poland and the Baltic states are coming to a similar conclusion. Joining the euro is the last great taboo for many in Britain. But it may be one we are forced to confront before this crisis has played itself out.
• Simon Nixon is the author of Credit Crunch: How Safe is Your Money? Priced £5.99, www.pocketissue.com.