The Cake Equation
There is, whether we like it or not, a clear centre ground in British politics. Every general election in recent times has been won by a party offering a version of the following settlement to the electorate: spend more on some public services, particularly those that benefit older voters; keep tax increases to a minimum; take a moderately authoritarian line on immigration and crime; and take action to tackle climate change.
There are many important differences between how individual governments actually deliver once in office. The Labour Party has very different traditions and values to the Conservatives, while Boris Johnson’s government looked very different to David Cameron’s. But their respective pitches to the electorate were more similar than they would care to admit.
For all its electoral potency, however, I think this centre ground is illusory in today’s Britain. It works well as an electoral pitch — particularly under first past the post — but it is entirely undeliverable once a party enters government.
The reason is quite simple — it is basically a cakeist position, the one made famous by Boris Johnson himself. And whatever you tell the electorate about your enthusiasm for having cake and eating cake, governments are always bound by what I’m going to call the Cake Equation.
The Cake Equation looks simple on the surface. It is roughly: what you spend on public services and investment must match what you collect in taxes.
But of course there are many factors that can modify this equation, historically to the benefit of cakeist politicians.
First, there is productivity growth. A growing economy means more tax income, and more capacity to manage national debt. It also means rising living standards, which voters generally like. Second, immigration. Bringing more people of working age into the country generally increases your tax take and lets you provide more public services. Third, borrowing, which lets governments spend a bit more than they collect, and works especially well in conjunction with economic growth.
There are also some negative modifiers to the equation. The most important of these is demographics; an ageing population costs the state more, in health, care and pensions. Others, such as widespread ill health, can also help to take cake away.
The problem that British governments since the Covid-19 pandemic have faced is that all of the modifiers to the Cake Equation now point in the wrong direction.
Productivity growth is perhaps the most important thing that has changed in Britain since the late 2000s. From the post-war Atlee government to the end of Tony Blair’s premiership in 2007, British governments have been able to count on the magic of steadily rising living standards. This meant they could expand the state and provide better public services while eroding the huge national debt incurred during the second world war. It may not have felt like it at the time, but most of the governments from 1945 to 2007 — with perhaps an exception for the 1970s — were governing on easy mode.
When Britain’s productivity growth stalled abruptly with the 2008 financial crisis, there were two other factors that helped governments elide the Cake Equation. The first was immigration: by continuing to attract working age people from overseas, Britain could keep growing its economy and its tax base somewhat even as actual living standards stagnated. Immigration is not a perfect substitute for productivity growth, but it helps to keep the economy moving.
The second was borrowing. Despite George Osborne’s promises to get the UK’s fiscal deficit under control after 2010, in reality the UK increased its national debt from under 40% of GDP before the 2008 financial crisis (and 65% in 2010) to nearly 100% of GDP today. This was aided by a peculiar feature of the 2010s: ultra low interest rates, which meant government could keep borrowing cheaply, and indeed doing so helped the demand-deficient economy. Now that interest rates have risen to more historically normal levels, borrowing is a less reliable and more risky crutch for the state.
During this period, the British population continued to age. Spending on the NHS, protected relative to other aspects of public spending, grew significantly, while state pensions were increased from previously low levels (rightly in my view). Another problem thrown up by demographics, providing social care outside hospitals, was ignored (apart from by one ill-fated election campaign), and local government was annihilated instead.
Then the Covid pandemic came along, which increased ill health and seems to (though we’re not certain) have left more people unable to work. The dramatic rise in ill mental health, one of the great policy challenges of our time, may have had similar effects.
In short, all of the British government’s sources of extra cake have disappeared, and new demands for cake have emerged, many of which have not been met.
Some of these changes — like immigration — are directly in the control of politicians. British governments can and should embrace immigration more than ever, and they often end up doing so, but the illusory centre ground demands a tough line on immigration.
Some, like demographic change, are entirely outside the government’s control. Governments could choose to spend less on older people, but it would be both morally and politically wrong to do so.
Some, like productivity growth, seem like they’re within the control of governments but in practice are barely so. The productivity slowdown has happened in all advanced economies. Politicians tend to, as per Duncan Weldon’s classic line, underestimate their influence on growth in the long term. But in the short term, where elections are won and lost, they tend to overestimate what they can do (as does the media, it seems).
What that leaves for governments, ultimately, is a choice to either confront the Cake Equation or persistently fail to deliver. The choice is, bluntly, to raise taxes or to pare back the state so it does less. There is little left to salami slice.
You can try to reduce the number of people who need to see a doctor, who need support from the state. You can push for an AI-inspired productivity miracle, or for planning reforms to lead to a rapid rise in investment. These are good things to aim for, but bad things to rely on in the short term. But you can’t deny demographic change, and you shouldn’t ignore that economic growth has slowed down everywhere, not just in the UK.
What politicians need to stop doing, if they want voters to trust them, is pretending that they have a magic cake recipe. Until something changes, governing Britain means governing on hard mode. To govern is to choose, and mostly that choice is between having cake and eating it.
