This has been a grim year for the British economy. We are almost certainly in recession, living standards are projected to fall at the fastest rate since records began in 1956-57, and the public finances have deteriorated markedly – forcing up taxes and squeezing public spending.
When economies struggle in this way, one would normally expect unemployment to be surging and we can be grateful that this has not happened. But the reason for this absence – a significant shrinkage in the workforce – is holding back the economy and contributing to the impression that nothing is really working properly.
Some of this is because of international factors that afflict most Western economies. Russia’s invasion of Ukraine has resulted in energy prices rising, with the second-round effects causing higher prices in other goods. China’s zero-Covid policy has caused further disruption. Post-pandemic labour shortages are affecting many economies.
There are, however, specific factors that apply to the UK. Brexit has damaged the country’s ability to trade with our most important market, contributed to the loss of an important part of our workforce and, over the past six years, damaged business investment. Over-50s appear to be leaving the labour market at higher rates than elsewhere.
Matters have not been helped by the political turmoil. Between 1993 and 2016, we had four chancellors of the Exchequer. We had four of them between July and October this year. We began 2022 with a prime minister who had little interest in or respect for economics, and whose position was already precarious. He limped on for months, survived a no-confidence vote only to fall weeks later after multiple ministerial resignations. The country was then rudderless over the summer while the Tories chose a new leader. Remarkably, it was only after this process was completed that matters got completely out of hand.
The mini-Budget of 23 September was surely the most spectacular implosion of an economic policy and the careers of a prime minister and chancellor that this country has ever seen. There have been unwise financial statements in the past – Anthony Barber’s 1972 Budget being the most obvious example – but when one brings together all the relevant factors, including the international economic conditions and the domestic political situation, the September mini-Budget wins the prize.
The pound plummeted, the cost of government debt surged and the Tories’ poll ratings collapsed. The international community did not know whether to pity the UK or just laugh at us. It was a national humiliation.
But this is all getting a bit gloomy for a pre-Christmas column so perhaps we should draw some comfort from the autumn’s excitements. Enthusiastic Labour supporters can take some solace from the fact all this has increased the party’s chances of forming a government at the next general election. Even a majority is not beyond its reach. But I will focus on three economic lessons which should be learned that could be helpful in future years.
First, and least controversially, economic institutions matter. It was not just Liz Truss and Kwasi Kwarteng’s policies that spooked the markets but their disregard of our financial institutions. There was loose talk of changing the Bank of England’s mandate, combined with criticism of its performance. The permanent secretary to the Treasury, Tom Scholar, was sacked on the chancellor’s first day. The Office for Budget Responsibility (OBR) was excluded from the mini-Budget process.
These institutions provide checks and balances, ensure that expertise is fully involved and increase public transparency. In other words, strong institutions prevent a handful of ministers from doing something really stupid. Weakening institutions is often a leading indicator that a minister is about to do something stupid.
After the events of the autumn, the Bank of England, Treasury and OBR have all been strengthened. Even overseas officials have been telling their UK counterparts that their positions have been enhanced by the British example.
The second lesson, perhaps not so enthusiastically endorsed by every New Statesman reader, is that fiscal credibility matters. A country like the UK really does not want to be an outlier, pursuing a fiscal policy that is noticeably laxer than comparative countries. Truss’s timing was undoubtedly unfortunate – we are in an era of rising interest rates – but markets can turn quickly if they perceive a country as being more ill-disciplined than the pack.
We can count ourselves fortunate that the markets have subsequently been forgiving and that the combination of Rishi Sunak, Jeremy Hunt and the withdrawal of various tax cuts has meant that the “moron premium” on interest rates has been abolished. Given that our fiscal targets are somewhat looser than was the case earlier in the year, we should not take this entirely for granted.
The third lesson is that many of our problems do stem from low economic growth – and this really does matter. Economic growth dropped down the priority list for some years but at least we are talking about it. Doing something sensible about it (and a lesson of the Truss experiment is that it does have to be sensible) may still be beyond our politicians (on our relationship with the EU, immigration and planning reform, for example) but at some point that will change.
None of this will provide much immediate comfort for those struggling with the cost of living but if the lessons from 2022 include a belief in strong institutions, fiscal responsibility and a thoughtful and realistic focus on growth, it will not all be bad news.