Yes we are better off now, but there's been a price to pay

The Tories have embraced change. But they have not admitted that there are costs, including blatant unfairness
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The Independent Online
Whatever the result of the election, one of the puzzles for Conservative strategists to mull over will be why the economy was not more of a vote- winner. What did happen to the feelgood factor? Why did the deliberate echo of the slogan "You've never had it so good" not chime with the mood of the electorate when we have indeed never been better off? Why did studio audiences jeer Michael Heseltine and Kenneth Clarke when they tried to say so?

There are two types of answer to these questions, both instructive for whoever finds themselves running the economy from tomorrow. One is that voters have not been ready to give the ex-Government the credit for setting right its own mistakes. The Clarke successes of the past four years have not erased the memory of the Lamont failures of the previous three.

The inflation target, the Ken and Eddie show, the tax cuts in the two most recent Budgets have delivered a perfectly reasonable business cycle performance, subject to the criticism that Mr Clarke has primed the pump a bit too much ahead of the election. But nobody has forgotten the deep recession - one of the worst in the industrial world since the Second World War - the humiliating exit from the Exchange Rate Mechanism in 1992, the surge in borrowing and the tax hikes after the last election.

What's more, the economic policies of the past five years will not turn out to be the monuments of 18 years of Conservative government, if that era does end today. Looking back over the years to 1979, the most significant policies were all implemented in the first decade, not the second. If I had to single out one decision that had made a lasting and profound difference to Britain's economic prospects, it would be the privatisation of BT and deregulation of telecommunications.

This has put the UK alongside the US in the vanguard of new technology and growth prospects, and given us a better communications infrastructure and more vigorous multimedia industry than most other industrial nations. But other Thatcherite acts of deregulation and privatisation also made a contribution to halting Britain's relative economic decline.

Professor Nick Crafts, no Thatcherite, concluded in a recent pamphlet for the Social Market Foundation that the UK had probably stopped sliding down the world league. Recent Labour claims to the contrary exaggerate small changes in the UK's position due mainly to exchange rate changes.

Yet the Thatcher shake-up of the British economy also explains the second kind of reason why the Tories are now getting no credit for prosperity. For it created winners and losers in a way that conventional macroeconomic policy rarely does. Although inflation certainly penalises some groups - savers, people on fixed incomes, the low paid whose earnings never keep up - this is an invisible and undramatic redistribution. Labour market deregulation, the attempts to reshape public services, pension reform, privatisation, on the other hand, have dramatically increased inequality in the UK.

In a world where the embodiment of a big wave of technological change is turning industrial structure upside down, making old skills obsolete and destroying and creating markets, greater inequality is probably inevitable. Politicians have to choose whether they will embrace change and try to take advantage of it or resist it. The Conservatives have embraced it. But they have not admitted that there are costs, including blatant unfairness.

Inequality makes us all worse off, even the winners. The poorest group in the population are without any question materially better off than they were two decades ago. But crime and social dislocation have increased. The strain on the welfare state has become near-intolerable, and the resulting squeeze on spending has left us in the state of private affluence and public squalor identified by John Kenneth Galbraith.

This means that accountancy of the economic performance of the past 18 years is more complicated than just looking at the higher level of national income per head the Tories can point to. Thus the New Economics Foundation's index of sustainable economic welfare adjusts GDP for costs such as inequality, the depletion of natural resources, environmental degradation and ''defensive'' spending such as crime prevention. It has fallen by 17 per cent in per capita terms since 1979.

The lesson of this calculus for the next 18 years is that the sorts of economic developments that are monitored day to day by officials and the City and the newspapers do not reveal the big changes that are taking place in the economy. Of course it is important to keep inflation low and growth steady. But it is other policies that will make the biggest difference to our prosperity by 2015. So, despite the risks in futurology, here is one scenario for 21st Century Britain.

The pound will have been replaced by the euro, but local, electronic currencies will have developed in parallel in the big urban areas. We will be adept at paying in one when we cross through the tunnel or do our on-line shopping from the national store chains, and at paying in another for local services. But the tax authorities will have failed to keep up, so the government will face a serious revenue shortfall.

Some public services will have been all but privatised. In pensions and long-term care, in housing, and in some areas of health care, the state will pay for the bare minimum and we will top up privately. Public resources will be concentrated on insuring us against the truly unpredictable financial events like illness and mid-life unemployment.

Britain will be booming and will have started to move up the international economic league tables. It will be a world leader in rapidly growing information- related industries using new technologies. Just as Harold Wilson was able to enjoy the benefits of the white heat of technological revolution for a few years in the Sixties, whoever is prime minister in the first decade of the 21st Century will reap the benefits of the latest technological wave.