By Graham Vanbergen: It’s not just me, or everyone in the Labour party or its membership or seemingly every armchair political commentator on social media. It’s the IMF, financial markets, the Bank of England, the Institute of Fiscal Studies, Britain’s business leaders, the Office for National Statistics and the Office for Budget Responsibility – to name a few. I could go on as the banks, traders, hedge-fund and pension managers all say the same thing. Economically speaking – Britain is heading straight for the plughole. A general election is needed immediately – here’s why.
Britain’s economy is doing worse than all its peer nations in just about every metric there is. A recession is coming; just as it is for most of the Western world, except in Britain, it is expected to be deeper and last longer.
Much of what ails Britain can be read in one article published last week in the Financial Times entitled ‘Britannia Unhinged.’ It is about the book Britannia Unchained, co-authored by Liz Truss and Kwasi Kwarteng and former ministers Dominic Raab, Priti Patel and Chris Skidmore. The book has not aged well at all as it hopes Britain could emulate, for example, companies like Addison Lee, the London-based cab company. It wasn’t long after the book’s publication before the company was bought out by a private equity group that loaded it with debt. The company then faced near collapse and had to be saved by a group of eight banks after its owner of seven years struggled to sell it. It limps on today, very like UK plc is right now.
The book states that low government debt is key and that Canada and Australia are stand-out models to mimic. Anyone with the most basic knowledge of Canada and Australia knows that their fiscal strength is associated with very fast credit growth. And that is now a big problem there.
The FT rightly points out that – “The (Britannia Unchained) book alternates between Daily-Mail-comment-box level economics, relying on cherry-picked facts without context, and what can only be described as haranguing of the feckless and lazy.” The book goes on to say – “We should be more entrepreneurial, it says, to be like Israel.” Whether that means increasing our population by 15 per cent largely by importing highly-educated Russians is not addressed.”
The book makes fundamental schoolboy errors by not checking its facts, like stating UK household-plus-government debt was 171 per cent of GDP in 2012, not 476 per cent or that stating high debt takes 1 per cent a year off GDP growth when in fact, it’s one-tenth of that number. At its core, the author of the FT article says – “the book reads like a parody of the taxi-driver stereotype, deploying every available cliché short of “there’s too many of them over here”.
The point being made here is quite simple. The authors of that book are quite clearly ideologically driven and have little real-world experience, knowledge or even a basic understanding of how economies really work. The book looks more like a script from the political comedy Yes Minister and these people are running the country. If the contents of Britannia Unchained was meant to be some sort of attempt at an economic policy framework – we are doomed.
And doomed seems to be the word.
The IMF has come off the fence and said that UK inflation will be the highest in the G7 by the end of 2023. Worse, they predicted that in the 19-member eurozone, only Slovakia would have a higher inflation rate by the end of 2022. The IMF went further to state that high levels of inflation will persist longer in Britain than in almost all other advanced economies. It also took the unusual position of actually pointing a finger at the culprit – by laying the blame squarely on Kwasi Kwarteng.
The financial markets are spooked. At every announcement that Kwarteng or Truss attempts, shock waves are sent through markets instead of calming nerves. Analysts are now expecting near no growth for five years, the highest interest rate bill for the government since 1950 and the third highest government borrowing since World War Two. If Truss and Kwarteng really do stick to their guns – £60bn of spending cuts to public services will be needed (as a minimum).
“The overall picture is that the economy is in worse shape than we previously thought,” Paul Dales, an economist at Capital Economics, said. “And that’s before the full drag from the surge in inflation and leap in borrowing costs have been felt.”
The Bank of England has been caught out by the hapless announcements of No10 and No11 Downing Street. It has warned of a “material risk” to the UK’s financial stability after being forced to buy up £billions more government bonds. It increased the number of bonds it was buying on Monday but then announced the end of its buying programme on Friday. The result? Government borrowing costs rose sharply and a downturn in the markets. The Pound fell again. It warned: “Dysfunction in this market and the prospect of self-reinforcing ‘fire sale’ dynamics pose a material risk to UK financial stability.” Mortgage interest rates rose from 6 per cent to 6.45 per cent overnight.
Amongst all of this – the Institute of Fiscal Studies then wades in. “The Chancellor should not rely on over-optimistic growth forecasts or promises of unspecified spending cuts. To do so would risk his plans lacking the credibility which recent events have shown to be so important,” IFS director Paul Johnson said. The IFS has worked out that British government borrowing looks on course to hit 194 billion pounds this financial year and to still be 103 billion pounds in 2026/27. It clearly states that the trajectory is unsustainable – meaning out of control. The result – interest rates for new long-term government borrowing leapt to a 20-year high.
Debt interest would cost £106 billion this year and 103 billion pounds in 2023/24, the IFS predicted, due to the large amount of finance raised in years gone by through issuing bonds that pay interest that rises as inflation goes up.
Citi economist Ben Nabarro, who presented the forecasts alongside the IFS, said Britain’s large current account deficit made it vulnerable to a loss of confidence. “The funding basis for that is increasingly precarious,” he said. “Institutional credibility is an absolute must for the UK and any doubts about that risk being hugely destructive.”
Of course, you would expect to hear from the people at the coalface of the economy. Business leaders have said that there has been a significant decline of key economic indicators in recent weeks, with confidence among company bosses over the growth outlook collapsing to the lowest level since the depths of the Covid crisis. You don’t get more precise than using terms like ‘collapsing outlook’ around the worst event since WWII. Shevaun Haviland, the director general of the British Chamber of Commerce, said that -“Our findings paint a worrying picture of the state of affairs at many UK firms. Almost every key business indicator is trending downwards – sounding alarm bells across all sectors and regions.”
Unsurprisingly. the Office for National Statistics has a view as well – and it’s as gloomy and downbeat as the aforementioned. All the other major economies in the G7, it says, including France and Italy, recovered strongly enough to be larger than they were in February 2020. But not the UK. As for this year – ONS data showed the current account gap in the April-June period shrank to £33.8bn, or 5.5% from a £43.9bn deficit in the first quarter, which was revised down from an earlier estimate. However, the January-March deficit remained the biggest on record, the ONS said, revealing the difficulties UK exporters are having finding markets for their products and services. And the message is clear – a recession is on the way.
The Office for Budget Responsibility was not best pleased when Kwarteng decided not to consult them in his mini-budget last month. Sir Charlie Bean, an ex-member of the independent watchdog and a former Bank of England deputy governor said – “What he’ll be confronted with, and I don’t think to be honest most observers and MPs have really woken up to this yet, is the extent to which the public finances has deteriorated since the spring. It will be interesting to see what the chancellor comes up with, what rabbits he can pull out of the hat.”
Bean, the former OBR member, who vetted the tax and spending plans of three consecutive chancellors before stepping down in December last year, stated that Kwarteng’s budget cut plans were a ‘fairytale,’ adding – “The picture you get is of successive upwards revisions to inflation and successive downwards revisions to growth, with the energy price shock the principal driver of both.”
Reality
When all the experts line up in a row and see what looks like a duck, waddles like one and then quacks – they comment in unison – it’s a duck. Facts are facts. The commentary says that Truss and Kwarteng do not understand the basics of market dynamics – only a political ideology that they learned, probably at university and the bubble of party politics and then presented themselves as the answer to what ails our economy.
The reality about what ails our economy cannot be fixed by espousing a view to the most elderly branch of the Conservative membership who understand even less little of such matters. Twenty-five times as many people believe they have seen alien spaceships in the UK than voted for Liz Truss. This is not the way forward for Britain.
A health crisis means well over half a million working people are at home – this is anti-growth. Falling educational attainment against our peers is anti-growth. Having a housing crisis, a care crisis, crumbling infrastructure and institutions that support civil society is anti-growth.
It is true that there is an anti-growth coalition – it’s the people in office, but not in power. It’s the people pulling their strings in think tanks that are funded by dark-money interests such as the fossil-fuel industry. It’s the political donors with self-interest that fund their very existence who are all part of this project of failure. Brexit and its cheerleaders are by far the leading group of the anti-growth coalition. Nothing has done so much damage to Britain’s economy than this – according to the experts.
Folks – this government walks like a duck and quacks like a duck. It is a duck. It will fail. I can see it, you can see it, the experts can see it. The whole idea that this government will turn the coming recession into 2.5 per cent growth is as probable as Kim Jon-un being voted onto the UN as its representative for global harmony.
We’re in trouble here! Big trouble. This is why Britain needs a general election. The only way forward is that No10 Downing Street has an electoral mandate based on a manifesto of deliverables. Currently, neither of those basic democratic principles apply.