A flap of a butterfly's wings to freeze the UK economy

The economy has been sailing smoothly this summer. But winter is coming…

The coalition’s economic policies have benefited, like all of us, from the summer sun. But now the nights are drawing in, and the party conference season approaching. We all know that butterflies fluttering over the Amazon can cause snow in Chicago, and there are at least 4 butterflies whose flapping wings may deliver equally chilling results here in the UK in the next few weeks.

The first butterfly starts to flap a month from tomorrow, on September 22, as Germany goes to the polls. The approach of the German election has put the Eurozone crisis "on hold" for the past year. But the delay has made the problems worse, not better, with the Bundesbank warning again this week about the risks from "ongoing uncertainty about the economic policy situation" and the Eurozone debt crisis. The UK cannot therefore rule out the risk of a triple-dip recession in its largest trading partner, if Southern European economies continue to struggle. 

The US will set the second butterfly fluttering in October, when Congress debates the future of the sequester programme and the need to increase in the country’s debt ceiling. As in the Eurozone, US politicians have made a habit of postponing hard decisions in the hope that, Micawber-like, “something will turn up”. But government departments are now having to impose short-time working as a result of the sequester. For example, 650,000 Department of Defence workers are effectively on a 4-day week till September. And markets do not always stay calm once uncertainty rises and the rhetoric starts to fly.

Over in the east, October also sees a third butterfly released at China’s crucial economic policy meeting, the so-called “third plenum”. This is expected to endorse major reforms aimed at boosting domestic consumption from today’s miserably low level, and abandoning the current reliance on export-led growth. But this will not be easy, as China’s city-dwellers have average incomes of only £3000/year, whilst the half of the population still living in rural areas earn just £1000/year. This enormous shift in the world’s second largest economy must inevitably have consequences for us, most of which are currently unknowable.

The fourth butterfly is closer to home. New Bank of England governor Mark Carney’s much-heralded policy guidance has so far been ignored by the markets. Yields in the government bond market for the benchmark 10-year gilt have instead risen by 100 basis points, 1 per cent, since May. This lack of a honeymoon period is a clear omen of potential difficulties ahead for both borrowers and savers. Whilst an out-of-control housing market in London and the south east is making life very difficult for many buyers and renters.

Any of these butterflies could easily send a severe winter chill through an unprepared UK economy. They also highlight how wishful thinking about growth has come to dominate economic policy.

We know, for example, that consumption is 60 per cent of UK GDP, and that consumption falls away as people reach the age of 55. At this age, people already own most of what they need, whilst their earnings decline as they begin to enter retirement. Yet although the average boomer turns 55 this year, policymakers are still failing to connect the dots as regards the implications for GDP.

With 30 per cent of the UK’s population now in this New Old 55+ cohort, it is unrealistic to expect a repeat of the sustained growth seen when the boomers were in their prime wealth-creating years. Voters are not stupid. The party that talks about the new policies needed for today’s new normal, and not around them, will find itself best positioned for the 2015 election.

Photograph: Getty Images
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The 5 things the Tories aren't telling you about their manifesto

Turns out the NHS is something you really have to pay for after all. 

When Theresa May launched the Conservative 2017 manifesto, she borrowed the most popular policies from across the political spectrum. Some anti-immigrant rhetoric? Some strong action on rip-off energy firms? The message is clear - you can have it all if you vote Tory.

But can you? The respected thinktank the Institute for Fiscal Studies has now been through the manifesto with a fine tooth comb, and it turns out there are some things the Tory manifesto just doesn't mention...

1. How budgeting works

They say: "a balanced budget by the middle of the next decade"

What they don't say: The Conservatives don't talk very much about new taxes or spending commitments in the manifesto. But the IFS argues that balancing the budget "would likely require more spending cuts or tax rises even beyond the end of the next parliament."

2. How this isn't the end of austerity

They say: "We will always be guided by what matters to the ordinary, working families of this nation."

What they don't say: The manifesto does not backtrack on existing planned cuts to working-age welfare benefits. According to the IFS, these cuts will "reduce the incomes of the lowest income working age households significantly – and by more than the cuts seen since 2010".

3. Why some policies don't make a difference

They say: "The Triple Lock has worked: it is now time to set pensions on an even course."

What they don't say: The argument behind scrapping the "triple lock" on pensions is that it provides an unneccessarily generous subsidy to pensioners (including superbly wealthy ones) at the expense of the taxpayer.

However, the IFS found that the Conservatives' proposed solution - a "double lock" which rises with earnings or inflation - will cost the taxpayer just as much over the coming Parliament. After all, Brexit has caused a drop in the value of sterling, which is now causing price inflation...

4. That healthcare can't be done cheap

They say: "The next Conservative government will give the NHS the resources it needs."

What they don't say: The £8bn more promised for the NHS over the next five years is a continuation of underinvestment in the NHS. The IFS says: "Conservative plans for NHS spending look very tight indeed and may well be undeliverable."

5. Cutting immigration costs us

They say: "We will therefore establish an immigration policy that allows us to reduce and control the number of people who come to Britain from the European Union, while still allowing us to attract the skilled workers our economy needs." 

What they don't say: The Office for Budget Responsibility has already calculated that lower immigration as a result of the Brexit vote could reduce tax revenues by £6bn a year in four years' time. The IFS calculates that getting net immigration down to the tens of thousands, as the Tories pledge, could double that loss.

Julia Rampen is the digital news editor of the New Statesman (previously editor of The Staggers, The New Statesman's online rolling politics blog). She has also been deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines. 

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