Don’t give up on growth and tamely give in to recession
THERE is a scene in the film The Madness Of King George in which the monarch’s physicians argue about what treatments may cure his ailment of the mind – one advocates blistering his skin, another tying him to a restraining chair.
In modern times, medical knowledge has progressed and we can be confident that doctors know just the thing to cure most ills. But the same, alas, cannot be said for economics. This is not entirely the fault of economists, but rather due to the presence of so many unknown or variable factors that complicate the task of identifying the best way forward.
Just six weeks ago, the Government under the leadership of Liz Truss and chancellorship of Kwasi Kwarteng was clear about the best approach to take: go all out for growth via dynamic tax cuts to incentivise hard work and wealth creation.
Yet now it is reported that our new PM Rishi Sunak and Chancellor Jeremy Hunt are about to impose the very opposite: a tranche of tax increases and spending cuts to bring down the public sector deficit.
OVER AT the Bank of England the Governor Andrew Bailey is piling on the pain by overseeing a series of interest rate increases that are causing monthly mortgage repayments to soar. The Bank estimates that raising rates to five per cent – which may prove necessary to tame inflation – would trigger a twoyear recession and make a million workers unemployed. That would represent the longest period of unbroken economic contraction since records began in the 1920s.
No wonder economic optimism has all but vanished, with measures of consumer confidence close to an all-time low, which in turn is likely to lead to people reining-in their spending even more than necessitated by higher housing costs. That would be very bad for business.
This is the context in which Mr Hunt will deliver his autumn financial statement. There is little doubt that some retrenchment will be necessary. We are carrying a vast amount more debt accrued during the Covid pandemic. Truss and Kwarteng got their sums badly wrong, scaring lenders by lumping unfunded tax cuts on top of an enormously expensive, twoyear commitment to subsidise energy bills. That caused gilt yields – the effective interest the Government must pay on its borrowings – to leap. Hunt has already reduced the commitment on energy bills to six months and cancelled most of the previous regime’s tax-cutting measures. But on November 17 he will come back for more.
Briefings emanating from inside the Treasury say there is still a £50billion financial black hole to fill. Higher capital gains tax and taxes on share dividends are two possible tax rises in the pipeline, with both said to comply with Mr Sunak’s determination that those with the “broadest shoulders” should expect to bear the heaviest burden. Tens of billions in cuts to public services budgets are expected, with even the NHS not necessarily exempt.
The biggest danger facing Hunt and Sunak now is surely not underplaying the need to change course from the TrussKwarteng experiment, but of overdoing the adjustment. Adding a fiscal cold shower to the Bank of England’s icy monetary policy could tip the economy into a downward spiral, as well as causing huge hardship.
Truss and Kwarteng made many mistakes, but they were not entirely wrong to say that for far too long Britain’s potential for economic growth had not been properly realised.
BEFORE them, Boris Johnson had also set his face against lurches into austerity, making clear his own disagreements with the “Treasury orthodoxy” that saw the public realm put on short rations for a decade after the financial crisis. Just as was the case with Truss and Kwarteng, it is Johnson’s mandate that Hunt and Sunak now squat upon.
If they march the country into a two-year recession by adopting an approach diametrically opposite to his then the Conservatives will face the kind of retribution they suffered in 1997 when the electorate caught up with them over the economic mismanagement that led to Black Wednesday.
Financial markets have got the message that Britain is now plotting a steadier economic course. Giving up on growth and tamely inviting in a recession would take the shine off Sunak’s achievement of steering us through Covid without a lurch to mass unemployment.
It would quite fairly be said that he only managed it by running up unsustainable debts that caught up with us later on. We all know that an economic reckoning is coming. But don’t overdose us, chaps.
‘The biggest danger facing Hunt is overdoing the adjustment’