As a longstanding observer of the British economy, I sympathise with the general reader trying to make sense of recent reports on what is happening to it.
One week he or she is told that inflation is falling; another week that it isn’t. One week we are reliably informed that interest rates are going to be reduced; the next that they are not. One week there is no danger of falling into recession. The next week we are informed that we are already in one.
Perhaps the most perplexing of all has been the reporting in recent months of the prospects for the imminent budget on 6 March.
Yes, there is going to be a tax-cutting bonanza on the lines of the historic Nigel Lawson budget of 1988 (which happened to end in tears, with one of the biggest recessions since the 1930s). But hang on a minute. While the ink is still drying on those reports, we are reminded that – with memories still fresh about the disastrous market reaction to the Truss-Kwarteng mini-budget – Chancellor Hunt is going to be fiscally responsible, keep to strict fiscal rules, and ignore the extreme right’s calls for an “election-winning, tax-cutting” budget after all.
But hang on another minute, or another week. Despite the way that the Labour party is tying itself in knots over its choice of candidates, the Tories carry on polling badly, and “something must be done”. That something turns out to be a leak to the Financial Times that there is, after all, a plan for a tax-cutting budget, but that it will be “fiscally responsible”, with tax cuts counterbalanced by reductions in public spending.
Now, the Conservative party is in a fissiparous state. It is furlongs behind in the general election stakes, and is as unpopular as a British governing party could possibly be. Yet the Labour opposition is like a rabbit cowering in the headlights, terrified of committing itself to the Attlee-style economic reconstruction programme it is patently obvious the country needs, let alone to a complete overhaul of the welfare state – very much including the National Health Service – which was once Labour’s pride and joy.
It is terrified above all of being accused, as Labour was in 1992, of planning a “tax bombshell”. So it finds itself too nervous to say that it would reverse the Tory tax cuts, let alone come clean with the electorate and admit that, with many public services in desperate trouble, a financial rescue operation requires Scandinavian levels of taxation.
But that is not the end of it. After the fall of the Berlin Wall in 1989 and the collapse of the Soviet Union in 1991, we and other nations enjoyed a “peace dividend”, when defence spending could safely be reduced, affording room for domestic needs. President Putin and Donald Trump have put a stop to that, and if Labour is indeed elected, it is going to have to increase the defence budget substantially.
What Labour should not be frightened of is long-term borrowing to finance the many investment projects – green or any other colour – that it knows are needed to revive the stagnant economy it will probably inherit. In the end, such investment should pay dividends.
Of course, life for a Labour government, and for the rest of us, would be brighter if Keir Starmer recognised that he was right about Brexit and that we should return to the EU single market and customs union as soon as possible. After the Office for Budget Responsibility’s estimate of a Brexit blow to the nation’s output of 4% of GDP, and the National Institute of Economic and Social Research putting that figure at up to 6%, we now have Goldman Sachs telling us that output is already running 5% lower – with all that that connotes in lost tax revenues – than it would be if it were not for the folly of Brexit.
JK Galbraith once observed, in a very different context: “In Goldman Sachs we trust.” That was an ironical reference to the investment bank’s contribution to the debacle described so eloquently in Galbraith’s definitive work, The Great Crash, 1929. However, I am struck by the judgment of James Moberly and Sven Jari Stehn in Goldman’s report The Structural and Cyclical Costs of Brexit that “UK goods trade has underperformed other advanced economies by around 15% since the referendum” and that “business investment has been weak since 2016, falling noticeably short of the pre-referendum trend”. This fits with one’s general impression from other analyses.
What a shambles it all is. Let us hope that the Labour leaders, buoyed by their sensational victories in last week’s byelections, conduct yet another policy U-turn, this time on their attitude towards rejoining the customs union and single market!
