Our economy can boom. That’s the story the Chancellor must tell

This week’s Budget must set out a vision, one that reminds voters Labour will put our prosperity at risk

All budgets are political, and budgets in an election year are especially political. This is true regardless of the chancellor or party in government. For even the most technocratic budget would be met with political scrutiny from the Opposition, MPS and the media.

Politics – that much maligned art – only really stands for the representation of competing values and interests. The idea that we can reach optimal outcomes if only we put the right data into the right impact assessment is commonplace among officials and wonks, but it is completely wrong. The choices we face reflect our circumstances, and the choices we make reflect our values, interests and understanding of the world.

Conservative chancellors will therefore make different decisions to Labour chancellors, and it will be perfectly reasonable for Jeremy Hunt to draw out this week the contrasts between the Tories and Labour. More than that, he has to tell a broader story – of Britain’s economic strengths and weaknesses, of the world around us, of the events of the past five years, and of the future we can have if we follow his plan.

Amid the reams of papers produced examining our economic difficulties, we sometimes neglect our strengths. The UK is the sixth biggest economy in the world. London is one of the richest cities on Earth, and alongside New York the City remains one of the two world centres of global finance.

We are the world’s third trilliondollar tech economy after only the US and China. We have the largest life sciences sector in Europe, which produced a Covid vaccine that saved six million lives and a treatment that saved a million more. Our creative industries are growing at twice the rate of the economy overall. And following the introduction of the super-deduction tax change nearly three years ago, investment is growing at the second highest rate of the G7 nations.

But our structural weaknesses and longer-term challenges are clear. Whatever the success of London and the South East, some of the poorest places in Northern Europe can be found here. Our manufacturing base is too small, having fallen from 27 per cent of economic output in 1970, to 17.4 per cent in 1990, to less than 10 per cent today. We have a hollowed-out labour market with too many low-paid jobs. Our infrastructure is inadequate, our energy costs too high, and we do not train enough people with the technical skills the country needs. Dependent on consumption for growth, too many are too poor to consume without credit. Personal debt stands at 126 per cent of household disposable income.

Outside the pandemic we have run trade deficits every year since 1998, which is both a product and a cause of our problems. A product, because it is the result of our failure to make, do and sell enough of what the world needs. A cause, because it creates a current account deficit, which puts pressure on sterling. To compensate for this, we encourage the sale of assets to foreign investors – including even land and housing stock, pushing up prices – and build up external debt, which leaves Britain more exposed to changing investor attitudes and increases in international interest rates.

From the financial crash through to Covid, we got hooked on ultra-loose monetary policy. Super-low interest rates and quantitative easing increased asset prices to the extent that historically normal interest rates have become unaffordable for many families, and house prices out of reach for millions. Monetary policy also gummed up the wider economy, by reducing incentives for banks to lend to businesses and slowing the circulation of money. It limited investment, competition and growth by keeping zombie companies alive and encouraging leveraged buyouts and share buybacks. And it lowered savings and returns for pension investments, reducing financial resilience and future consumption.

Because of pension regulation, the British refusal to follow the protectionism of other countries, the sheer scale of US equity markets, and perhaps because of poor corporate performance here, the UK equity market is struggling badly. Ours is the only country in the world where the pensions industry invests less in domestic than international equities. As the economist Simon French explains, every major pension industry in the developed world is overweight in domestic equities by an average of 2,089 per cent, but Britain is underweight by 41 per cent.

These strengths and weaknesses have applied through a succession of huge global events. We have been through the great financial crash and its long effects, an unprecedented global pandemic, the biggest war in Europe since the days of Hitler and Stalin, and now trouble in the Middle East. China is responding to its economic problems by subsidising industrial production and seeking to increase exports. With geopolitical tensions across continents, which might for example cause energy price spikes or interfere with food exports, the need for resilience as well as growth is greater than ever.

These international trends have a very real effect on the job security, wages, rent and mortgage payments, living costs and future prospects of every family in Britain. But while the Government told this story of complexity and interconnectedness well during the Covid pandemic, and immediately after Rishi Sunak replaced Liz Truss, its economic narrative has since grown messy.

On Wednesday the Chancellor needs to tell his story culminating in a plan, action now and later, and a vision for the future. No doubt he will say that the Government has taken the tough action necessary to bring inflation under control, which will allow him to announce some tax cuts that might also be followed by reductions in interest rates.

But then he also needs to set out how the Conservatives can overcome Britain’s long-term weaknesses and withstand the swirling winds of world events. Fiscal prudence and sensible monetary policy are the macroeconomic platform that makes possible the investment and microeconomic reform we desperately need. And Mr Hunt can compare his plan with the inevitability that a Labour government would risk inflation and unemployment by spending, borrowing and taxing too much – as they always do. Budgets, after all, are about choices, and choices are political.

With geopolitical tensions across continents, the need for resilience as well as growth is greater than ever