How Russia's war will help reshape Britain's economy

Tank 113, “Julian”, putting on a public show to promote government War Bonds, 1917. Source: Blackpool Gazette/Wikipedia

An interesting article by “Bagehot” in the Economist last week on “shrinkflation” of the British state:

SHRINKFLATION IS A bane of the British shopper. For years, producers have quietly cut product sizes rather than raise prices. A multipack of Frazzles, a moreish bacon crisp, used to cost £1 ($1.36) and contain eight bags. Now it contains six. Cadbury’s Creme Eggs used to come by the half-dozen; now they come in fives. Quality Street, a chocolate box, weighed 1.2kg in 2009; today, just 650g. A box of Jaffa Cakes once contained a dozen biscuits; now just ten.

The logic of shrinkflation is that consumers are less likely to notice it than its alternative: higher prices. For years, the government has worked on the same principle. Taxpayers paid roughly the same, but state services withered. Now an era of price hikes in the form of tax rises has begun. In a nasty combination of inflation and shrinkflation, voters will be expected to pay more for less.

Frazzles aside (though they are indeed moreish), there’s a fundamental point here – and one that is being brought sharply into focus by the Russian invasion of Ukraine and what it tells us about Britain’s role in the world. Austerity of the 2010s variety is unlikely to make a simple return but different pressures on state spending are emerging.

Why austerity?

To see this, we have to put the austerity programme in its broader context. Austerity in Britain was always about more than an ideologically-driven effort to shrink the size of the state relative to the size of the national economy. Of course, it mattered that assorted latter-day Thatcherites in the Tory Party were noisily committed to shrinking the state, completing the revolution she supposedly began. But the breadth of the consensus on how big that state should be points to something deeper. Lib Dems swung into supporting it as the price of entry into the 2010 Coalition government. The actual programme of attempted deficit carried out by that government then closely matched the programme implied by Labour’s 2010 manifesto. This was a striking degree of conensus across the Westminster party system that was reinforced by the unhealthy dominance of the Institute of Fiscal Studies in providing economic analysis for media consumption, and a media caste that