Miles BenningtonEditor, Chamber
After the gravity defying Boris Johnson and the reality denying Liz Truss, Rishi Sunak is beginning to bring the UK back to earth. His Chancellor, Jeremy Hunt, the fourth this year in case you thought things were going well, was tasked with breaking the news to the country yesterday at the Autumn Statement. It was grim.
The UK’s economic model since the financial crisis of 2008 has been underpinned by low interest rates, low inflation and low energy prices. Each of these base assumptions have been tested to destruction in 2022 causing the crisis that ended Liz Truss’s premiership.
High gas and food prices caused by Russia’s invasion of Ukraine and the sanctions levied by the West have led to inflation. This inflation combined with the money added to the economy during the pandemic, soaring government debt and former Chancellor Kwarteng’s terrifying unfunded tax cuts for the wealthy, has led to spikes in interest rates.
Together with an overleveraged housing market, where even small interest rate rises are a serious threat to the household budgets of many, this has run the economy into a recession.
The UK’s economic weakness come in both the short term and long term varieties. The most immediate problem is that our economy is very reliant on the market for natural gas which powers much of our electricity grid, much of our manufacturing industry, and heats many of our homes. A disruption in the European market for gas, such as the Russians turning off the taps, is a disaster for the UK.
The next most immediate weakness of the UK economy is taboo, but I’m going to say it anyway. Brexit. The increased friction in trade with the EU and the reduced access to the EU’s workforce, not to mention the relocation of significant sections of the financial industry from the City of London, have become and will remain a drag on UK economic growth for the foreseeable future. (Lamentably, this reversible self-inflicted wound is irreversible…)
Low growth economy
Even before Brexit the UK was suffering under a low-growth recovery from the 2008 financial crisis. Searching for the solution to this low growth puzzle is the cause of many of the ructions from this summer. Boris Johnson was hoping the answer lay in increased public investment in R&D and regional infrastructure, Liz Truss was convinced that lowering taxes on the wealthy would unleash the animal spirits. While we wait for the Labour Party to provide policies, those on the left looking for growth may like to investigate public service reform, muscular regulation of consolidated markets, or whether a stressed out, poorly-housed and impoverished citizenry is capable of delivering the growth required.
Since 2008 the treasury has gone into increasing amounts of debt, first due to the financial crisis, then due to low growth leading to missed income targets, then due to Covid. Much of this debt has accrued to cover the cost of public services we are unwilling to cut and unwilling to fund via taxation. Gordon Brown’s golden rule lies buried under a mountain of IOUs.
The least urgent but perhaps most important cause of the UK’s weakness is the aging population. As the number of workers declines relative to those dependent on them, many of our assumptions about how the economy works start to unravel.
Pensions feel like savings, like a squirrel stashing nuts for winter. They are not. They are investments, many in the UK economy, in the success of the future workforce. If that workforce is smaller or less productive when it comes time to cash the pension the workforce will fail to receive its expected income.
Successive governments have “protected” spending on the NHS as demands on the service increase. More elderly people mean more healthcare costs and a broken social care system mean expensive hospital beds are blocked by people who are healthy enough to return to a care home. There has been no move to systematically lower the care people can expect from the health service which sounds good until you realise that it comes at the cost of risking the stability of the whole system.
Long term economic plan
Liz Truss was right. The UK needs a revolution on the scale of Thatcher’s to get the economy growing again.
Thatcher’s Government by privatisation, deregulation, drafting, and joining the Common Market allowed capital to be employed more effectively and for work to be specialised. This led to increases in the amount of goods and services the economy produced and traded, otherwise known as economic growth.
A Government committed to growth will first stabilise interest rates by setting out credible plans for paying for public services. The raft of tax rises to be followed by spending cuts announced by Jeremy Hunt yesterday has begun that journey.
The next step is to show an understanding of where additional value could come from in the economy. Re-joining the single market would allow for specialisation, policies to increase and redevelop the UKs housing stock would add to a massive asset class, reforming public services to increase efficiency (so easily said) and policies to relieve people of the stress and struggle of living in our unequal society – unlocking their potential could all lead to growth.
All of these options are politically risky, expensive, or both. We need politics that makes this clear to the public, then supplies the leaders to carry it out.