Welcome to Britain, May 2022 – and one of the most toxic and dangerous economic moments I can recall. Last week, the Bank of England forecast inflation exceeding 10% and predicted negligible growth for the next two years, toppling into months of recession, accompanied by the savage squeeze on living standards. This is serious enough, but less remarked and of as much importance is the 10% devaluation of sterling over the past three months.
This is a reaction to the economic trap Britain is in, intensified by the implosion of our EU trade post Brexit and the Brexit-induced fall-away in inward investment. If sterling’s fall continues, the Bank of England’s policy choices will be even grimmer.
At the moment, it hopes that interest rates will peak at a manageable 2.5% before inflation starts to fall back to 2% in 2025. But that depends on an end to sterling’s decline. If the Bank has to reassure the financial markets about its determination to contain inflation and staunch the pound’s continuing weakness (why would anyone buy it?), interest rates could yet climb higher.
The economy will be forced into deeper recession, with already visible strains in parts of the property market becoming more intense.
The markets would be more reassured if it were clear that the government had a strategy, a programme, a plan. The problem: the government is clueless, hanging on to two quasi-religious shibboleths it cannot shed. In its eyes, the hard Brexit it negotiated is a sacred achievement that can imply only opportunity, not crisis. Its faults cannot be acknowledged. Second, Thatcherism has such standing that any purposeful action to address the economy’s weaknesses is deemed “unConservative”.
The government’s economic understanding is thus childlike: free markets, low regulation, low taxes, balanced budgets and cheap disposable labour as the alchemy to drive 21st-century economic growth.
The uselessness of these attitudes has been in plain sight over recent weeks. Called to brainstorm responses to the cost of living crisis, ministers suggested enlarging the number of children carers can look after, urging people to claim benefits for which they are entitled and making MOT tests biennial. Really? Meanwhile, checks on EU-imported products at our borders are to be deferred until the end of 2023 with no reciprocal relaxation of UK exports to the EU.
To ram home our weakness, Boris Johnson was reduced to pleading with Softbank, the owner of our hi-tech jewel Arm, to float the company in London rather than New York. This is the $40bn acquisition made weeks after Brexit to Tory and Brexiter applause, a sign that Britain remained “open for business”. Those of us who warned it was opportunistic asset-stripping and Softbank’s promises worthless were dismissed as Remoaners over-attached to Project Fear. Expect Arm to float in New York rather than in diminished Brexit London.
Brexit Tories neither understand modern capitalism nor how to manage it. Ensuring that inflation does not become self-feeding and entrenched requires more than interest rate hikes and boosterish bluster.
The markets need to see a confidence-creating plan to restore economic growth, animating investment and productivity.
The working population need to know the government will have their back to protect living standards for the duration of the cost-of-living crisis, thus heading off aggression over wage claims that could trigger a wage price spiral. There is neither.
While the new German government is vigorously pursuing a twin-track strategy of driving to net zero and creating a new digital economy that impresses the markets, we possess nothing. Levelling up, creating globally competitive cities in every region and nation, could have been such a strategy, one that plausibly could double GDP over a generation. It should be made front and centre of the government’s economic policy, along with a drive to net zero. Instead, it was vetoed by the chancellor holding on to his piggy bank to protect tax cuts in 2024.
Nor is there any strategy on the cost of living. There is more than enough scope, even before windfall taxes. The Office for Budget Responsibility projects that in three years the government will have exceeded its target of a balanced budget by £31bn. The chancellor could make a targeted annual cash payment of £500 to each of the 10m hard-hit households reliant on benefits to absolve them of the choice between food, heat and clothes. If he had to do it for the rest of this parliament, the total bill would be £10bn – comfortably affordable and allowing millions to breathe more easily.
The industrial strategy should be revived and renewed, but focused on the new economy of “intangibles” where intellectual property, knowledge, digitisation, brands and human capital are king. We need to build institutions ranging from a smarter competition authority to better banks, and investors who get the intangible revolution – and how to drive it on.
Reality must prevail about where economic opportunity lies. Modern economies are densely interrelated, with supply chains that cross borders. Britain has too few corporate “primes” that lead their sector, but it does have lots of medium-size companies whose business is being part of a wider supply chain.
Membership of the single market with common regulatory standards used to make that easy. Now, as Ulrich Hoppe, director general of the German-British Chamber of Commerce said last week, Brexit Britain is being cut out of these supply chains because the hassle of meeting common standards is too great. Out of the EU and strategy-free, deindustrialisation is accelerating across the Midlands and north.
Yet presiding over this is a directionless government, fiercely protected by its press, whose sole purpose has become maintaining the prime minister in office. Rather than address these weaknesses, future parliamentary time is to be consecrated to pursuing its vendetta against Channel 4 and the BBC. Those whom the gods would destroy, to coin a phrase, they first make mad.
Will Hutton is an Observer columnist