Governing the country when the economy is performing poorly is a tricky business. It does not matter much how culpable you are for the economic malaise, a large part of the public will hold you responsible. Decisions which may have been the least worst option available will, in due course, be judged to be grievous errors. Policy choices which had little bearing on the situation are identified as being of crucial importance. Minor errors become catastrophes.
The public does not give you the benefit of the doubt. Broadcasters become more aggressive in their questioning. Government MPs demand that something must be done. Even governments with a sense of purpose, coherence and strategy can wilt. This government is horribly exposed.
The government has, of course, contributed to our economic difficulties by prioritising a purist form of Brexit over economic growth. This is not an insubstantial error. I am the first to argue that ministers should be held accountable for their recklessness but they are also right to argue that this is principally a global cost-of-living crisis.
The question now is what should be done to mitigate prices rising far above incomes. On this, as a member of the Union of Former Treasury Ministers, I have some sympathy for the situation in which they find themselves.
Any government at times of trouble can be easily characterised by its opponents as having failed to do enough. Whatever has been done, it is always possible to argue that more could and should have been done. This quickly gets simplified into a message in which the government is accused of having done nothing and the opposition can claim that it would do everything.
The current situation is a case in point. The various policies announced by the government so far constitute an additional £22bn to protect people from the cost-of-living crisis. “But you haven’t introduced a windfall tax on oil and gas producers that will fund a further £3bn,” declares Labour, implying that this will make all the difference.
Labour is on the right side of this political argument even if the policy is far from transformative. Conservative MPs were texted by the whips shortly before Tuesday’s vote on a windfall tax highlighting that Thérèse Coffey, the Work and Pensions Secretary, who was winding up the debate, would imply that the government was open to the idea. This successfully saw off a rebellion. It is only a matter of time before Rishi Sunak, the Chancellor, announces a windfall tax but it will please few on the Conservative benches. Some will fear that the policy sends a bad signal to investors. Others will complain that the announcement should have been made earlier and that the government had been politically outmanoeuvred.
In these political headwinds, it is tempting to dismiss every argument deployed by the government against further interventions but for fiscal conservatives there is some merit in them.
First, the government cannot borrow and spend its way out of every problem. This argument is harder to make than it once was because the government did borrow and spend its way through the Covid crisis and it was right to do so — maintaining living standards and preventing economic scarring. The current crisis is very different because it is not a matter of using borrowing to protect both current and future living standards by putting the economy in hibernation until the danger passes. If the world has become a more expensive place, we cannot pass all of the costs on to future generations. To make a slightly unfashionable point, there are limits to what governments can do.
Second, the fiscal looseness of the Covid period, combined with the substantial fall in household expenditure meant that, in aggregate (and “in aggregate” is a very important phrase here) households built up savings, making them more financially resilient. It is not unreasonable to suggest that individuals’ savings (as well as further government borrowing) can play a role in smoothing the impact of price spikes.
Third, the public finances are under strain. The initial impact of higher inflation will result in higher tax receipts but, if the Bank of England’s growth forecasts are correct, we will shortly have a recession followed by years of low growth. Deterioration in economic growth on a sustained basis will require the public finances to adapt.
Fourth, we have a problem with inflation and a much looser fiscal policy will make this problem worse. The consequence of this will be that interest rates will have to be raised further than they would otherwise, damaging the living standards that were supposed to be being protected.
All of these arguments are tough and likely to be unpopular but not, to my mind, wrong. The government can only do so much and it does have to prioritise. Where the government is wrong is that, so far, it has got the wrong priorities — something that was obvious at the time of the Spring Statement. It is the poorest that are most exposed to rising food and energy prices, the poorest that were unable to build up savings during lockdown and the poorest that benefit least from the tax cuts that have been announced (and which many Conservative MPs continue to see as the principal answer). The government cannot do everything but it should have done more for the poorest who are most exposed to rising prices. It should seek to address that mistake urgently.