Never mind Ukraine or a global downturn – a UK recession will have Sunak’s name all over it

The Prime Minister vowed to stabilise the markets and restore growth. But he has made a series of mistakes

Whether it happens or not, it will be so close that it makes little difference. At the end of this week, we will find out whether the UK is technically in a recession or whether, by some miracle, we have avoided two humiliating consecutive quarters of contracting output.

If we skirt a recession by achieving a slender fraction of a percentage point of growth, Tory politicians may declare some kind of victory. If we don’t, we will hear all the usual excuses, from the war in Ukraine to a global downturn. But the harsh truth is that our economic situation is dire, and almost entirely the fault of the Prime Minister. From squeezed thresholds to soaring corporate taxes to stagnant productivity, it is clear Rishi Sunak’s promise that “stability” and “fiscal responsibility” would restore growth has turned out to be completely hollow. This will be a Rishi-recession.

And the timing for the Government could not be worse. The economy should be recovering, the Chancellor should be preparing to make tax cuts, the Tories should be getting ready for a potential spring election on a platform of recovery. Instead, after shrinking by 0.1pc in the third quarter of last year, the latest data from the Office for National Statistics could report negative GDP growth in the fourth, too. It is true that fractional variations in output are mainly a matter for statistical nerds: either way, the economy has stagnated, with almost zero growth recorded over the past 12 months, and there is little hope of improvement this year. But a recession will look terrible.

The government PR machine must be preparing lines should the worst happen. We will be told that the war in Ukraine has sent inflation spiralling upwards. That interest rates had to be normalised to counter rising prices. We will be informed that the conflict in the Red Sea has snarled up supply chains, and global output has stalled.

There is, of course, some element of truth in all of this. But one need only look to the US, which is quickly expanding, to imagine how different our situation could have been. The eurozone may only have dodged recession in 2023 by the skin of its teeth, but global GDP growth is running at roughly 3pc. Stock markets around the world are hitting record highs. If the UK is shrinking, we surely only have ourselves to blame.

It could have unfolded very differently. Sunak’s pitch to the nation in 2022, to become a prime minister without a mandate after the ill-fated Truss administration, was that he would stabilise the public finances and calm the markets. Under Jeremy Hunt’s smooth management, these could combine to restore growth. But in the 18 months since, Sunak has made a series of misjudgements.

First, he raised taxes too much. Even the Office for Budget Responsibility, which is generally far too cautious, thinks there could be scope for up to £20bn in tax cuts over the course of this year. But surely it would have been better not to have imposed the tax rises in the first place. All that has happened is that households have been hammered, cutting back on retail spending as a result, while businesses have endured yet more uncertainty.

Second, the Prime Minister and his Chancellor’s strategy of raising more money by freezing thresholds has destroyed incentives. Many families now face marginal rates of 60pc to 70pc on every extra pound they earn, and even more if they have student loans. We can hardly be surprised that the workforce is shrinking and fewer people are bothering to put in any overtime, or take that stressful promotion. We have destroyed the incentive to work.

Third, the huge increase in corporation tax, raised from 19pc to 25pc in a single stroke, has hit businesses hard. Few smaller firms will claim the “full expensing” allowances that are designed to soften the blow. And, as the Institute for Fiscal Studies (IFS) has pointed out, full expensing creates a bias towards investing in the kinds of assets that qualify (in other words, towards investing in plant and machinery rather than other assets), while increasing the “large and problematic” existing subsidy for debt-financed investment. It makes even more unprofitable projects viable, the IFS warns. Meanwhile, blunders such as ending Vat-free shopping have hammered the tourist industry.

Finally, there has been virtually no attempt at bold reform. The public sector has been allowed to continue with relentlessly declining productivity, with extra spending always provided to make up for the fact that millions of staff seemingly do less work with every year that passes. And there has been little effort to deregulate, to diverge from the EU’S suffocating rulebook, or to challenge the vested interests that make it almost impossible to build anything.

A serious programme of reform started 18 months ago would have lifted business confidence, and would be bearing some fruit by now.

There was nothing inevitable about the UK’S persistently stagnant growth. The Prime Minister deserves to take the blame for the mistakes his administration has made.

‘One need only look to the US, which is expanding, to imagine how different our situation could have been’