Retrieving a reputation
The
tasks of addressing the U.K.'s economic woes and the reputational hit
to the party of Government was placed in the sharpest of focus by the
adverse reaction of global markets to September 23rd's mis-named "mini-budget." It may only have happened some 8 weeks ago, but let's remind ourselves of some of the bad consequences.
- Interest rates on Government's spiralling debt, for example, soared with detrimental knock-on impacts on everyday lives including those of house owners and buyers;
- prospects for the pension schemes of millions of working Britons were put in jeopardy; and
- sterling fell close to parity with the US dollar ($1.03), an all-time low, affecting trade and making imports more expensive.
The replacement budget of 17 November would have to perform a balancing act to avoid pushing the U.K. into a deeper recession than it is already in, at the same time as placating the global markets its predecessor so spooked. The Government would also have to change tack and base policy on evidence. In so having to do, its campaign pledge that post-Brexit independent Britain would be able to act with impunity is exposed as erroneous.
Four wise economists speak
In the aftermath of global markets' reaction to the "minibudget" (since renamed with terms like "mess" "chaos" "catastrophe" and "disaster"), the most recent post in this series (1) quoted two world authorities on economics to explain the reason for Britain's declining economy.
Nouriel Roubini referred to the problems that are affecting all nations including the U.K. Except that it also has to cope with additional "self-inflicted" problems. Chief among those, he argued, is Brexit which has reduced growth. In similar vein, Mark Carney the former Bank of England Governor pointed to the shock of Brexit both to trade and to labour access. The outcome, he added, is reflected in the shrinking size of Britain's economy over the last six years from 10% smaller than Germany's and down to minus 30% today.
More recently Mr Carney has re-emphasised his theme of Brexit as being bad for Britain (2) and the raising of interest rates by the Bank of England. Likewise Michael Saunders the former Bank of England policy-maker has explained how Brexit has permanently damaged the U.K's economy and is one of the reasons why it is entering a period of spending cuts and tax rises (3).
Fifty-five days on from the infamous "minibudget" and on the morning of the new Chancellor's budget statement the economist Mohammed El Erian, President of Queens College Cambridge, suggested (4) that the key question for Government is the scale of the "black hole" or deficit to be made up. He said that a sum of around £20-30 billion could suffice in economic terms rather than the £50 billion being referred to by Government. The extra amount, he said, may be being included for political reasons as post-General Election measures. In other words, a partial postponement of the pain.
Context
Meanwhile, it's important to place the U.K's travails in context. A recent report from the European Commission provides an interesting contrast to the U.K's position. It says that most member states will experience a "technical recession" this winter before growth returns in the spring 2023. EU Gross Domestic Product is expected to contract by 0.5% in the final quarter of 2022 and by 0.1% in the first quarter of next year (5).
Ireland's overall growth for 2022 is forecast to be 7.9% before slowing to 3.2% in 2023 and 3.1% in 2024. And consumer price inflation (CPI) in Ireland is expected to be lower than the EU average at 8.3% in 2022 and 2.8% in 2023. The U.K., by contrast, reports its highest inflation rate since October 1981 with figures of 11.1% for the year to October, up from 10.2% the previous month (6).
Expert backing
One of the unforgivable mistakes made by the Government in its September "minibudget" was that it attemped to introduce economic plans by ignoring both the Bank of England and the Office for Budget Responsibility. Let's look at their background reports that accompany the new November budget.
The Bank of England's latest monetary policy committee report (7) paints a bleak picture. It predicts that
- CPI will take two years to fall below its 2% target, depending on interest rate levels;
- it also predicts that the U.K.'s GDP will continue to shrink during 2023 and 2024 with the impacts of energy prices and financial restrictions on spending; and
- it predicts that U.K unemployment will continue "to increase significantly" to 6.5% in three years time.
Further bleakness in outlook comes from Britain's spending watchdog, the Office for Budget Responsibility. It says that (8)
- the country is already in recession that will last just over a year,
- unemployment will rise by 505,000 by the second half of 2024,
- households will face their biggest fall in living standards since records began in 1956,
- inflation and interest rates rises have driven the cost of Government debt close to post-war levels,
- the drop in household income will wipe out 8 years of growth as wages fail to keep pace with inflation and interest rates rise; and
- that the taxation will peak in 2024/25 to reach its highest level since 1948, the year before I was born.
©Michael McSorley 2022
References:-
1.https://michaelmcsorleyeconomy.blogspot.com/2022/10/alarm-bells-in-westminster.html
2. Bloomberg.com 4 November 2022 Liza Tetley. Mark Carney blames Brexit for rising BoE rates
3. Bloomberg.com 14 November 2022 Liza Tetley & Lizzy Burden. Brexit "permanently damaged" UK economy, Michael Saunders says
4. BBC Radio 4 Today 17 November 2022 Mohammed El Erian, Interview with Nick Robinson
5. Irish Times 12 November 2022 Naomi O'Leary. EU to enter recession in coming months, commission forecasts
6. BBC News 16 November 2022 Rising food and energy bills push inflation to 41 year high
7 Bank of England Monetary Policy Report November 2022 https://www.bankofengland.co.uk/monetary-policy-report/2022/november-2022
8. The Guardian 17 Nov 2022 Anna Isaac. Worst fall in UK living standards since records began, says OBR https://www.theguardian.com/business/2022/nov/17/obr-confirms-uk-enters-year-long-recession-with-half-a-million-job-losses-likely
This series consists of the following 20 articles to date
Brexit 25 July 2016
Global Populism 27 Feb 2017
Brexit 14 Months On 30 August 2017
Our Precious Union 29 August 2018
Arguments for/against Brexit as Parliament debates UK/EU Deal 7 December 2018
Brexit Briefings to DUP MP Jan/Feb 2019 5 March 2019
Brexit lampooned 27 April 2019
How can the UK’s new PM resolve the Brexit conundrum? 23 July 2019
Omnes ad Unum Conservatives and DUP 24 September 2019
Election Communication 8 December 2019
Leaving Britain Undone 31 January 2020
Brexit Trade Deal: What Price Sovereignty? 30 December 2020
Just how good is the UK’s trade deal with the EU? 22 January 2021
Politics failing the people 28 April 2021
Brexit and empty shelves 27 August 2021
Winning friends and influencing people 15 October 2021
The business of politics 11 May 2022
An Ode to prudence 28 September 2022
