Trying to write a concise article about UK Fiscal Policy in the middle of October 2022 is a bit like reporting the final score of an aggressively close Rugby Match at halftime.
I delayed writing as long as I could, giving Chancellor (n+1) Jeremy Hunt time to lay out his “emergency statement” unravelling absolutely everything Liz Truss has put in motion since her elevation to the premiership. But, in the wake of increasing political instability, I fear how many statements might yet follow...
The question we want answered is – what does it all mean for the UK economy? How are we going to drive growth and restore financial credibility?
The current economic debacle facing the UK is much more than just a polycrises of domestic leadership misjudgements, failing services, anaemic growth, tumbling productivity, sub-optimal investment, surging mortgage rates and consumer price misery. There is also the global angle whereby high-interest rates, high debt levels, and persistent inflation may be a feature for a decade. We don’t yet know just how destructive and destabilising the consequences may yet be. (Clue – horrible!)
It’s not worth repeating the cataclysm of failure and policy mistakes since Truss was appointed Prime Minister by a small number of rich, aged, white conservative men in her party. But, give Truss and Kwasi Kwarteng some credit: their objectives were good – recognising the UK needed new, disruptive approaches and policies to drive growth and improve productivity.
Their goal was to smash the orthodoxy and transform the UK’s lethargic low-growth, low-wage and low-productivity economy into a hi-energy hi-growth economic powerhouse. (Conveniently they skipped over how Conservative Party has been in power for the last 12 years, during which time the value of the UK economy has fallen from 90% of Germany’s to 70%. Brexit? Let’s not even go there!)
Then it got messy. Recognising the UK is a lethargic stifled economy was hardly a Sherlock Holmes moment for anyone remotely familiar with economic reality. But Truss and Kwarteng thought they’d uniquely stumbled on some great economic insight – and naively decided only they were qualified to propose solutions. It was dangerously destructive arrogance. What they did next may have condemned the UK to penury for a generation.
Their strategy and policy announcements were beyond shambolic – untested, regressive, ill-advised and downright pig-ignorant of any economic or market reality. There was no strategy, no grand plan, just desperate hopes expressed as irrefutable facts. The UK’s financial reputation took millennia to establish. It took Kwasi Kwarteng less than 30 minutes to demolish it.
The really upsetting thing is – prior to 23 September 2022 (the date of Kwarteng mass-suiciding the UK economy) it would have been entirely possible to have presented a cogent, credible and workable plan to bail out the UK energy crisis and promote growth via a series of specific taxes, borrowing and policies.
The morning before Hunt presented his plan, Tesco Chairman John Allan, a highly respected British business leader, told the BBC’s Laura Kuenssberg the Conservatives have no growth plan, but: “We have seen the beginnings, I think, of a quite plausible growth plan from Labour. At the moment their ideas are on the table, and many are actionable and attractive.” His views are generally shared across the City of London – where previously support for Labour was considered a capital offence.
We all know how it played out for Truss and Kwarteng. They have left the UK as a global financial laughing stock. By focusing the eyes of the world on our financial crisis, umpteen doors and policy options that could have offered effective ways for the UK to navigate its way through the multiple crises now upon us are now closed. They have made finding a solution so much more difficult.
Jeremy Hunt “courageously” stepped into the breach, playing his new chancellor “can’t be sacked” card to unwind the illiteracy of Trussonomics, but he can’t wipe away the indelible stain it's left on the economic outlook for the nation. He clearly upset Truss - No 10 started actively briefing against him almost from the start. The only Truss “policy” to survive was the removal of the banker bonus cap… Why? Did his scriptwriter miss it?
Hunt, and many traditional, orthodox Tories, believe Truss and Kwarteng failed because they didn’t balance the budget, thus upsetting the markets. That’s a massive mistake. Take your pick of the many reasons markets lost confidence in them:
- Markets sold off because the mini-budget was chaotic and dangerously ill-informed.
- Markets sold off because it was patently unfair and regressive.
- Markets sold off not just because there were unfunded spending plans, but because the proposed tax cuts blithely assumed “trickle-down” economics would up UK growth by 2% per annum.
- Markets sold off because there was no clarity or vision of the policies to drive growth.
The new problem is Hunt has ditched Truss’s growth plans and presented a new mini-statement committing the UK to financial conservatism – effectively switching policy from Growth to Austerity. Hunt and the rest of his party have hunkered down, convinced the only way to restore the financial stability of the UK is to address the £70 bn hole in the accounts (they created) is tax hikes and spending cuts.
Austerity is never a route to growth.
One of my chums is fellow Scotsman Professor Mark Blyth, Rhodes Professor of International Economics at Brown University. His 2013 book, Austerity: The History of a Dangerous Idea, picks apart the notion of austerity will boost growth by slashing debt. “In general, the deployment of austerity as an economic policy has been as effective in bringing us peace, prosperity, and crucially, a sustained reduction of debt, as the Mongol Golden Horde was in furthering the development of Olympic dressage.”
Blyth goes on to show how Austerity doesn’t work, it increases inequality, and it can’t work in a competitive global economy where prices and currencies are volatile. He asks: “Is everybody supposed to run current account surpluses? If so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression?”
I spoke to Mark following Hunt’s statement and his disbelief was palatable: “The UK’s growth model, such as it was, was built around asset protection for the south and nationalism for the north. When you can’t even do the asset protection right anymore, what’s the point? And if you think further cuts to a welfare state that is already one of the worst in the OECD will bring back growth I would ask you to look at what happened the last time you tried this with Osborne for a bit of a reality check. Benefit Street and ’strivers vs skivers’ makes for good tabloid headlines but does nothing for GVA (Gross Value Added).”
Yet cutting debt and services provided by Big Government is default libertarian conservatism and will appeal to all 81326 party members who voted for Truss as Prime Minister of the UK. They may be happy.
The rest of us are not. 12 years is a long, long time in politics. Time for a change.
Based on expected prices, this will save people £1,000 per annum, she told MPs. This is because, in October, the energy price cap was expected to increase from £1,971 to £3,549.
Businesses are also receiving a six-month support package, which will include “equivalent support”. Further support will be provided to vulnerable industries after the six-month period.
"This is the moment to be bold. We are facing a global energy crisis and there are no cost-free options," the new PM told the Commons.
In contrast to what many pundits predicted, the result was close, with Truss winning by 81,326 votes to 60,399. She’s vowed to press ahead with promises of tax cuts, economic growth and dealing with the growing energy crisis.
"I will deliver a bold plan to cut taxes and grow our economy," Liz Truss said once the result was announced. "I will deliver on the energy crisis, dealing with people's energy bills, but also dealing with the long-term issues we have on energy supply."
With the cost-of-living crisis, industrial unrest, a recession and the war in Ukraine, Truss is faced with a lot of immediate pressure but remains confident and promises that she would win a great victory for her party in the next elections in 2024.
Truss succeeds Boris Johnson after his resignation in July. Both will meet Queen Elizabeth in Balmoral in Scotland on Tuesday so Truss can officially be asked to form a new government by the monarch.
AD 69 was the year of Four Emperors in Rome – contenders for the Imperial Purple successively bidding the Praetorian Guard for the right to lead the Empire. The speed at which the Boris regime unravelled in July was shocking enough, but there was something redolent of Imperial back-stabbery in the way his potential successors immediately began bidding for the Dispatch Box with promises of tax cuts and balanced budgets to appeal to the 200,000 odd Conservative Party Members who notionally determine the next party leader and hence the next Prime Minister of the UK.
Much mud was slung between the contenders with accusations of every kind of chicanery – but amid the promises, threats and personal attacks, there has been precious little discussion of policy and plans to make the UK fit for purpose as a modern, stable, competitive, and fair economy. Instead, the choice boils down to a hard Brexiteer vs a we-simply-don’t-really-know Brexiteer – who will each try to appeal to the party vote on their anti-European credentials.
Determining how to put the UK on the right economic course is critical. We need a plan that addresses micro and macroeconomic issues – not political slogans; outlining the key objectives necessary for the UK to remain relevant in the modern Global Economy and how we get there.
There is absolutely no reason the UK should not succeed. Many of the key parts are in place. Our national finances were strained, but not irretrievably damaged by the pandemic. The economy is functional. There are wage inflation strains – that can be addressed. We remain a wealthy, diverse and demographically advantaged nation. The UK is strong in terms of global soft-power – and still punches above its weight in terms of military strength. The danger is that our increasingly factionalised and populist politics remain unfocused on the key economic issues to solve. These are essentially simple – and I’m sure the strategists in Treasury have already got the plans on file ready to hand out to whoever wins:
The issues to solve range across the micro and macroeconomic spectrum - policies to boost productivity, invention, and innovation, facilitating trade and export growth, optimising tax structures, securing micro and macro funding structures, determining and funding the changing role of state and maintaining the UK’s soft and hard geopolitical power in a constantly changing world. Simples. They are long-term objectives, and all of them could be done with enough political willpower.
Boris’ swift tumble from grace will become another footnote on how all political lives are doomed to failure – and the reasons will merit little more than a footnote in the history books.
Politics is the business of being elected and staying elected. Since Brexit, making the country actually work has been somewhat neglected. Populist politics and polarisation have dominated the agenda. Even though the Tories were left internally riven by the referendum, they had two key vote winners: i) Jeremy Corbyn, the left-wing leader of the Labour party horrified many natural Labour voters, and ii) a popular populist leader in Boris Johnson who exploited his personal popularity and Corbyn’s unsuitableness to win a landslide in 2019.
Boris’ swift tumble from grace will become another footnote on how all political lives are doomed to failure – and the reasons will merit little more than a footnote in the history books. But post-Boris, the brutal reality is there are no more excuses. Conservative Politics have to deliver. The problem for the UK is there are some topics which the Conservative Party simply can no longer address or even discuss without immediately self-immolating. It has become factionalised. Either the Conservatives sort their internal division, or we need a new government pronto.
The key issue is Brexit. Six years after the Leave vote, it is still impossible to answer the “Webster Question”: Name a single thing Brexit has made better? (Full disclosure – I voted to leave.) Brexiteers will cite the UK’s swift pandemic response and the AZ vaccine – but that’s a one-off highlighting just how good the UK can be when we put our minds to it! For all the talk of opportunities, new trade deals, and money flowing back into the economy from Brussels – the only real thing Brexit has delivered thus far is hardening antipathy with Europe. Not a single major trade deal outside Europe has been agreed upon. Terms of trade and travel with Europe have got increasingly worse.
The right economic response would be to find a compromise with Europe to solve trade issues and increase trade flows – mutually beneficial. In an era when global supply chains are in flux, inflation is rampant, where energy and food security are under threat, the UK needs access – not blocks. Yet, none of the Tory contenders will dare talk about “that which cannot be named”: the UK’s ongoing relationship with Europe. To even mention a Brexit rethink or a more constructive dialogue with Brussels – is Conservative suicide. Such talk would drive the European Reform Group into apoplexy. The Brexit Taliban’s idea of engagement with Europe is to immediately refuse it. No Tory contender can dare upset them.
The second issue is the NHS. It is Europe’s largest employer and consumes state resources at a furious rate. It is becoming the black hole at the core of government spending. The Tories know to mention reform plays into the hands of Labour to accuse them of wanting to privatise the much loved (but hopelessly mismanaged) national darling – so Tory policy is to simply feed it more cash and leave reform to the next government.
Reforming the NHS can no longer be put off. Government pensions – of which the NHS is the largest part – are going to cost more and more, fuelled by inflation. It has to be reformed, made fit for purpose, and that means a new solution that rewards staff and meets the needs of patients at an affordable cost. That’s the real business of politics – making tough and hard decisions.
Following Boris’ vaguely described promise of a “high-wage, high-skill, high-productivity” economy during his speech to the Tory Conference, the right-wing Adam Smith Institute called the plan “bombastic, vacuous and economically illiterate.” The CBI warned it’s a “fragile moment” and how empty ambitions and promises on wages and productivity could lead simply to higher prices.
Boris shrugged it off. He says all the necessary things for the Tory faithful: “I’m a staunch, low-tax Conservative who believes in an enterprise economy”, which is probably what Margaret Thatcher was thinking before she junked the UK’s ageing manufacturing base 40 years ago. A political lifetime is next week. Political consequences can take decades to emerge – Thatcher’s programme ignited the fire of Scottish nationalism and set the UK on course for a potential breakup.
Boris Johnson is a master of the soundbite moment. Now he’s telling the world the UK will be the “Qatar of Hydrogen” – yet I doubt he has any real familiarity with the enormous problems that will accompany the hydrogenisation of the Global Economy. Still, it sounds good ahead of COP26.
The City of London’s markets are concerned with immediate threats. They fear the multiple storms lurking on the horizon: inflation/stagflation, trade, recession, government debt, taxes, consumer confidence, and geopolitics. These are the normal ups and downs of markets that competent governments and functional economies take in their stride.
Boris Johnson is a master of the soundbite moment. Now he’s telling the world the UK will be the “Qatar of Hydrogen” – yet I doubt he has any real familiarity with the enormous problems that will accompany the hydrogenisation of the Global Economy.
These economic squalls only become truly dangerous storms when they trigger serious economic damage, or the ship of state is no longer fit to ride them out. And that’s what really worries markets deep down about the UK. It’s the absence of a discernible joined-up strategy to address the UK’s economic reality that scares the City. The government’s competency is increasingly being questioned.
The reality is the crises are already upon us: supply chain fractures, diminished opportunities and social mobility, Brexit, Europe, a dearth of innovation and entrepreneurship, rising real and relative poverty, insufficient wages in unattractive jobs, decaying infrastructure, crushing bureaucracy, a dysfunctional housing market, and ossified unfit-for-purpose public services.
They can be solved – but not separately. Addressing these issues holistically requires time, money and joined-up thinking. But, there is little joined-up thinking – just triage offering sticking plasters to be slapped on gaping economic wounds, or telling the victims it’s “transitory”. Not enough lorry drivers? Let’s bring in Europeans on three-month contracts! Energy bills unaffordable? Wrap up well then!
Rather than address these issues through policy, it feels like the UK’s economic future is being gambled away by Boris betting his political popularity will see him through. He’ll bluster past any problem hoping that it all sort-of-comes-together around the “hi-wage, hi-skill, hi-productivity” soundbite economy he promised us. If it doesn’t, he’ll wage the next election promising it’s coming – assuming he doesn’t jump ship into some high-paying private sector role.
Politics and Policy sit uneasily together. Yet, never has the UK required joined-up economic policies as much as today. The big question is – do the Tories have the political competency to deliver? There is – apparently – “tension” between Chancellor Rishi Sunak and Boris.
Which one is right?
Perversely, it might be Boris. The success of governments around the globe in raising and distributing billions in pandemic support spending packages without causing government debt markets to implode should have been a light bulb moment. Since the last economic crisis in 2009, we’ve proved devasting austerity is not an answer while other solutions, including printing money, are available and proving practical. Wake up to the possibilities of fiscal boost and new monetary policy.
Let’s be clear: there is no free Magical Monetary Tree of unlimited government spending – but the markets are open for smart, credible governments to sell more debt and create more money. The key word is credibility – and avoiding policy mistakes. The UK spending itself out of its current hole should be entirely feasible. Rather than hiking taxes and cutting the modest £20 a week targeted helicopter money of universal credit to the poorest 10% of the economy, the government could keep the economic wheels spinning through the current supply chain/recession/stagflation threat.
Rather than address these issues through policy, it feels like the UK’s economic future is being gambled away by Boris betting his political popularity will see him through.
Sunak’s plan to impose austerity and tax hikes as we enter a potential stagflationary environment could prove a recipe for a confidence breakdown. It looks a classic policy mistake.
What’s the alternative? Well, that’s difficult. Politically it’s impossible to tackle the ever-hungry spending behemoth the National Health Service has become. But it’s critical it’s done – refocusing it to deal better with the modern age and the diseases of the old and infirm. It’s now in long-term crisis as it scrabbles to refocus post-pandemic – costing billions. Staff are underpaid and demotivated – costing more billions. Yet the NHS was recently advertising 200 plus senior managerial roles paying more than the prime minister. Modern tech can help – fitness and diagnosis can digitise, but the government has a peculiar ineptitude with new systems. Unless the government addresses the growing burden of public sector pensions – the entire UK tax take will soon be directed to paying the retirement costs of state employees. But to even suggest it – would again be political suicide.
There are a host of other policy initiatives the government could consider, but sadly they are the kind of concepts Boris and his fellow Oxbridge PPE rejects don’t have the imagination or political bravery to explore. I reckon Sunak probably does – but he’s got to bide his time.
As a primer Boris needs to understand good and bad government spending – and integrate them into his political calculus. Creating economic growth through a fiscal boost to companies to create jobs, growth, and build infrastructure is good. Solving skills shortages by paying doctors, nurses, engineers and HGV drivers to train, rather than charging them, would work. Spending money on fast, small Nuclear energy solutions and tidal power – tick. Helicopter money has been shown to work in a crisis. Markets accept the QE money creation trick – it works.
Ask difficult questions: Why are we charging students for their education? Why aren’t we paying them to upskill? Why aren’t we spending more on the armed forces in a period of rising tension to generate greater security, but also multiplier effects across the economy? There are a million more to be posed…
There are positive signals beginning to emerge – but aside from lots of words, there seems to be very little strategic thinking going on in the party of government to actually deliver these hi-skill jobs and raised productivity.
Words are cheap. Action is difficult.
Bill Blain is Strategist at Shard Capital and author of the Morning Porridge markets blog: www.morningporridge.com
So, how will the 2019 general election affect business? We take a look at the predictions and what they could mean for commerce.
It’s an election that prime minister Boris Johnson had been chasing for weeks in an attempt to break the Brexit deadlock, but the vote has come sooner than expected for business leaders and the public.
Pundits are calling it a once-in-a-lifetime ‘Brexit election’ and, given those stakes, the impact on British business could be seismic.
Navigating major change from inside the C-suite is rarely a smooth ride. It means creating a backup plan for your backup plan, then running the numbers for each.
Fortunately, corporate speakers and expert journalists were on-hand to offer their insight just as the possibility of an election descended on the City of London at a night aptly called ‘Preparing for Unprecedented Change’.
At the event, former BBC business correspondent Declan Curry stressed that Brexit is just one of the big changes Britain could face in the fallout from the election.
The business and economics speaker said executive teams are also busy making plans for the possibility of a Corbyn-led Labour government.
“Businesses are hearing the commentary that we’ve had since 2017 – that polls indicate that he has absolutely no chance whatsoever of being the next prime minister,” he told the crowd of corporate guests in Barbican, central London.
“But then they remember the polls running up to the Brexit vote were wrong, the polls running up to the 2017 election were wrong, and in 2015 they weren’t exactly models of prediction either.
“And business leaders like to be prepared,” he adds. “So in most major companies there will be someone somewhere – an executive in an office with the door closed – drawing up the plans for ‘what if’.
“What if John McDonnell is the chancellor, what if the idea of having trade union representatives forcibly on boards is enacted? What if there are bans and restrictions on bonuses?”
As we speak, many businesses are preparing for this possibility just as they are preparing for Brexit. Declan added: “This is being mapped out as a theoretical enterprise.”
The event was organised by international speaker bureau Speakers Corner, whose 7500-strong portfolio of orators and experts have already been called on many times to help businesses navigate the uncertainty of Brexit.
In fact, Declan Curry revealed he himself takes professional guidance on the levels of Brexit fatigue in a given audience before taking to the stage.
He was also keen to point out change can bring opportunities as well as risk. Near the Irish border in Donegal, people are “excited for the return of the ancient art of smuggling,” he joked.
“Brexit will throw up opportunities, too,” said Declan, pointing to law firms currently profiting from all the uncertainty. The former On the Money radio show host said economies are suffering and pondered the idea that another financial crash could be looming – something that could magnify the risk to British business.
This speculation comes as both major parties enter a public spending bidding war that the Institute of Fiscal Studies has said may be undeliverable.
General elections often make markets unstable, but the combined uncertainty around Brexit and the UK’s economic direction is heightening the impact on shares – especially for companies like BT, which could even be partly nationalised under Labour plans.
Still, some business leaders see the vote as an imperfect path to preventing the damage of a hard Brexit. Sonia Sodha, chief leader writer at the Observer, also spoke at the Knowledge Guild event – and she is sympathetic to this view.
“You can see a path to a Labour-led coalition government with Lib Dem and SNP support if Boris Johnson loses a significant number of seats,” she said, but feels an election is not the best way to deal with the Brexit question.
Business owners and C-suite executives have expressed concerns about the risks of a chaotic Brexit since 2016 – and despite continued delays, the risk of no deal remains. The implications could include increased taxes on imports and exports, supply chain delays and staffing supply problems.
“We are going to be talking about Brexit for years to come, whichever outcome,” Sonia told the crowd of central London executives.
For executives concerned with risk management, the turbulence runs in many directions. The only certainty is the election result will spark significant change – whatever the result.