cRanch’s time will come quickly for Liz Truss. After 10 days of national mourning marking the death of Elizabeth II, Britain’s economic problems will return to center stage this week. Thursday Bank of England Announces its latest decision on interest rates. The next day, Kwase Kwarting will make his debut as a consultant The latest in the Small Budget series. Both will be important occasions.
On the one hand, Truss benefited from an interest in property rather than politics during her first two weeks of work. She was able to settle down in Downing Street and think about what she would do with her newfound strength. In the language of cricket, the Prime Minister had time to play her part.
But, to expand the metaphor, Truss will soon encounter some bad short-pitched bowling. If things go wrong, her creasing time will be short.
despite Inflation at 9.9%The economy may already be in a recession and pound There is only one serious downside trend away from parity against the dollar, the government has things going for that. Ukraine military victories Last week it had a noticeable impact on wholesale gas prices, which have fallen sharply this month. The end of the war, while far from a final agreement, looks more rewarding than it has been at any time since the Russian invasion in February.
Moreover, the labor market stands up well for an economy that has been moving mainly sideways since the beginning of the year. Unemployment rate Lowest level since early 1974.
If the government wants to be very optimistic, it can take comfort from the fact that previous periods of sterling weakness have not always been bad for the economy. The devaluation that followed Black Wednesday 30 years ago catalyzed a period of strong export-led growth in the mid-1990s. The last time the pound dealt with parity against the dollar was in early 1985, but in the next three years the economy rebounded.
But not so fast. After Black Wednesday, the impact of the cheaper pound was boosted by interest rate cuts. This week, the Bank of England Monetary Policy Committee (MPC) will raise interest rates for the seventh time in a row. And the comparison with the mid-1980s doesn’t quite stack up either, because at that time Britain was a net exporter of energy and less dependent on food imports than it is today. A declining pound makes importing energy and food more expensive.
Although the Queen’s death overshadowed Truss I’s decision as Prime Minister, it was a major one: to abide by To reduce the average annual household energy bill at £2,500 Over the next two winters, it will boost consumers’ purchasing power and make the recession shorter and less severe. The government is budgeting for a cost of up to £150 billion, which would make it the most costly state intervention in peacetime.
More details about the government’s plan will be outlined in Kwarteng’s mini-budget, a term that hardly does it justice, as the chancellor plans to announce a massive spending increase, tax cutsBig package of regulatory reforms, and more government borrowing. There is even talk that he will announce changes to the BoE’s mandate on inflation. Kwarteng’s statement will not be accompanied by an independent analysis from the Office of Budget Responsibility on the potential impact of all these measures on growth, inflation and public finance: the unfortunate lack of scrutiny when financial markets are extremely tense.
It is not hard to imagine conditions in which markets respond poorly to a bank’s interest rate decision and sell off sterling – either because they think the MPC has done too little or they are guilty of exaggeration. The finance minister will then have to explain why he is borrowing, in addition to borrowing to fund the energy package, to fund the tax cuts.
Frustrated by the economy’s lack of strength in the 15 years since the global financial crisis erupted in 2007, Truss and Quarting are willing to allow budget deficits to balloon. The theory is that tax cuts plus deregulation will lead to faster growth, which will eventually lead to smaller deficits. A growth target of 2.5% will be set, modest by historical standards.
As pointed out by the Resolution Foundation Research Center, per capita income rose more quickly during the reign of Elizabeth II than for any other monarch dating back to 1271 (and before that, too, it was almost certain). The average growth in per capita income over the past 70 years has been 2% per year, twice the rate when the United Kingdom was the world’s leading economy under Queen Victoria.
The economy’s overall growth rate – once you factor in growth in the workforce – is even higher, at 2.4% since modern records began in the mid-1950s, according to Ruth Gregory of Capital. economics. But the average is declining due to the poor performance of the economy in recent years. Productivity growth has averaged less than 1% annually over the past two decades, even allowing for an increase in the workforce, leaving the economy’s primary trend growth rate between 1% and 1.5%. Raising this percentage to 2.5% is a huge task, which will require much more than tax cuts and an attack on red tape.
Britain’s problem is not that it is over-taxed nor that it is overly regulated (the labor market is one of the most flexible in the OECD) but that investment is too low. Setting a growth goal is one thing, and achieving it is quite another.