We’re essentially already in a recession and it’s set to last from here to the middle of 2024, according to the Bank of England. If so, it is a recession that has a political cause.
It was inevitable that, as the post-Covid growth spurt petered out, the economy would slow down. But the coming round of business failures, wage cuts, job losses and cancelled infrastructure projects will be entirely due to bad policy decisions – both by the Conservative government and the Bank itself.
Facing double-digit inflation alongside a slowing economy, Liz Truss took the disastrous decision to start borrowing money to give it away. Her motivation was justified: the UK’s economy is stagnant after a decade of austerity and needs a growth boost.
But Truss and Kwarteng refused to test their giveaway Budget against the models used by everyone else. They refused to heed warnings that it wouldn’t work, and that investors would demand excruciatingly high interest rates to lend to the British government.
The resulting bond market panic added a so-called moron risk premium to government borrowing, even after Truss resigned – leaving the Rishi Sunak government needing to find £89bn to balance the books over the next three years, according to the Resolution Foundation.
There are three ways of making that £89bn disappear: tax rises, public spending cuts and postponing the deadline by which public borrowing falls to zero. The Sunak government looks set to go for spending cuts, which will further deepen the recession. In the meantime the Bank itself has been forced to make the coming recession deeper and longer, simply in order to meet its own remit (raising interest rates to suppress inflation).
As people lose their jobs, or fall into rent arrears, or shiver in unheated homes, they will be told there is no alternative. We’ll be told there is a fiscal crisis demanding emergency action. But the public finances are not in crisis. Even at 100 per cent of GDP, Britain’s debt is sustainable – in fact it’s almost the lowest in the G7.
In fiscal policy, the alternative is to boost growth by borrowing to invest, to delay the point at which debt has to start falling from three years to five, and to cover any shortfalls by closing tax loopholes, windfall-taxing the energy producers and raising taxes on unearned incomes. Any resort to public spending cuts will, as the Institute for Government has shown, push schools, hospitals, policing and councils into crisis mode.
When it comes to fighting inflation, it is senseless for the Bank to go on raising interest rates. Its own projections show inflation will dramatically collapse in 2023, as the economy slows and the baseline effects of Vladimir Putin’s gas price hikes disappear.
You could fight inflation just as easily by capping the price of energy, food and rents. Since we are in a semi-wartime economy, with Putin waging economic war against us over our support for Ukraine, such temporary measures would be justified. So I want this to be the last of the interest rate rises, and quickly reversed.
And when the history of this episode is written we need the truth: this is a recession imposed by reckless policies and outdated rules and institutions. Ultimately, politicians blinded by narcissism and free-market dogma are to blame.
[See also: Despite it all, the Tories are still clinging to their reputation for economic competence]