To judge by the universally negative commentary which has greeted the new Chancellor Kwasi Kwarteng’s ‘mini-Budget’, one’s contrarian instincts make me question whether such a chorus of disapproval suggests that the policy might just work.
Famously, a letter signed by over 360 economists criticising Geoffrey Howe’s 1982 Budget marked the low point for the Government’s fortunes with the UK economy picking up pretty much from the date of the letter. Might the sharply negative reaction to this radical fiscal shakeup prove with hindsight to be an economic turning point?
As I write on the Monday after Friday’s ‘mini-Budget’, the weakness of sterling and rise in gilt yields witnessed on Friday has continued, with sterling having lost over 6% against the dollar at its worst. There are market calls for an immediate rise in interest rates today from the Bank of England (BOE), to defend the pound – and emphasise the BOE’s independence from Government in tackling inflation.
Cavalier attitude
It is indeed to be regretted that an economic historian such as the new Chancellor should appear to be so cavalier in his attitude to financial markets, given his reliance on them to fund his borrowing and attract inward investment into sterling. The sleight of hand used to avoid immediate scrutiny by the Office of Budget Responsibility (OBR) by deeming the slew of policy changes not a Budget is an invitation to markets to take him on.
Were BoE Governor Andrew Bailey to decide he needs to take on the foreign exchange markets, history would suggest that is a battle he is unlikely to win easily. Promising a verdict by the OBR in due course, and a critical Medium-Term Financial Strategy early next year to reassure markets that there is a plan to reign in the ever-rising Government debt-to-GDP ratio has created a long period of uncertainty in which markets will shoot first whilst awaiting the answers.
There are market calls for an immediate rise in interest rates today from the Bank of England (BOE), to defend the pound
The risk of engendering a vicious circle of Sterling weakness lifting inflation further, requiring interest rates to rise higher, impacting growth negatively, undermining Government tax receipts, creating more gilt issuance at higher yields and lower levels of Sterling…we can all write the script for this one, without requiring a Ph.D. in economic history.
Unfunded tax cuts
The scale of the unfunded tax cuts and public spending initiatives is as great as those of Tory Chancellor Anthony Barbour, whose ‘dash for growth’ ended in the energy crisis and inflation of the 1970s. I suppose at least this time we are already in an energy crisis with high inflation, so that can’t come as a surprise.
It is indeed to be regretted that an economic historian such as the new Chancellor should appear to be so cavalier in his attitude to financial markets
To be fair, the Government had already announced how it was going to protect people from the greatest potential distress due to rising energy bills through its Energy Price Guarantee – and rightly the markets were sanguine about the borrowing required to do so. Not to have intervened would have led to a very deep recession with equal if not worse impacts on the public finances.
Still completely missing from tackling the energy crisis is any attempt to encourage a moderation in energy demand. At school during the 1970s crisis, there wasn’t a light switch which wasn’t adorned with a ‘Switch it off’ sticker and my late father, raised during the war, was already temperamentally inured to turning the thermostat down and putting on another jumper. Subsidizing energy consumption with no incentive to reduce consumption seems more Soviet than Thatcherite.
More controversially, lifting the ban on fracking – where there is no local opposition…good luck with that one
But the focus on unfunded borrowing risks overlooking the swathe of supply-side measures introduced last Friday. The Chancellor clearly believes in a smaller state, in encouraging the entrepreneur, incentivising the search for work and using targeted intervention to attract inward investment. This is straight from the Thatcher playbook.
Thatcher playbook
Tackling reform to the sclerotic planning rules so rapidly abandoned by Johnson in the wake of the loss of the Chesham & Amersham by-election is welcome in helping to tackle the root cause of our housing shortage. Fast-tracking dozens of infrastructure projects is sensible. Investment zones to encourage investment, so championed by Michael Heseltine, laid the roots for Britian’s successful car industry today.
More controversially, lifting the ban on fracking – where there is no local opposition…good luck with that one – and announcing new drilling licences in the North Sea does suggest that maybe the energy crisis is forcing Government to accept that despite Net Zero ambitions, it is unlikely we can wean ourselves entirely off hydrocarbons in the next 30 years.
Gas is cleaner than oil, and oil is cleaner than coal. It would be better to encourage more investment in gas to prevent swathes of countries responding to the energy crisis by ramping up coal usage, as seen in China, Asia and even Germany.
Get through the immediate negative reaction and there is much supply-side reform to applaud in this complete fiscal U-turn. Whether the Chancellor will still be in role when many of the multi-year benefits start to accrue is another matter, but the verdict of economic historians in the future may be less harsh than today’s teenage scribblers. How appropriate for the Chancellor.
Richard Buxton is lead investment manager for UK Alpha at Jupiter Asset Management
There is no way that we can wean ourselves off gas and oil, not least due to the simple fact that mining and transporting the minerals required by all those lovely wind turbines, solar panels, and batteries, as well as actually manufacturing them and transporting them to their end destinations, requires massive amounts of carbon!!!
What I find so surprising is that perhaps the biggest impediment to growth has been entirely ignored. It is our lamentable educational standards. How can you expect growth when 20% of the UK adult population is functionally illiterate? One in five are so poor at reading and writing they struggle to understand all the instructions on a bottle of aspirin. Half of adults today (according to the government) can do arithmetic no better than a primary-schoolchild. We are unusual insofar as young people who have recently completed formal education are about as illiterate and innumerate as older adults. The OECD finds that we have the highest proportion of graduates in school-leaver jobs of any developed country because they lack literacy and numeracy. How do the get to university in the first place, let alone get a degree?
For 16–19-year-olds out of 23 developed countries, when it comes to literacy Britain comes dead last. Numeracy fares a little better we are 22nd out of 23.
Perhaps this would be a better point to start at, rather than their ideological clap trap.
What astounded me about Truss’ speech today is that she bad mouthed the brexit deniers. According to most economists, EU membership had a strong positive effect on trade and, as a result, the UK’s trade will be worse off as we have left the EU. On pure economic (and growth) terms leaving the EU has been detrimental. Surveys of existing academic research found that the credible estimates ranged between GDP losses of 1.2–4.5% for the UK, and a cost of between 1 and 10% of the UK’s income per capita. Add in the current worries of inflation, energy prices and mortgage costs. This is growth?
All the other considerations seem to be minor in comparison. Ideology has its place, but common sense, logic, current circumstance and pure humanity should ameliorate bone headedness.