Sunday, October 16, 2022
We're still in a mess - and this might help us get out of it
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission

It is indeed a funny old world, as somebody once said. Elsewhere in today’s paper I analyse the revolving door that now characterises the job of chancellor. To the outgoing chancellor, I can only say: “Alas poor Kwasi, I never knew him.” To his successor, Jeremy Hunt, it is a case of welcome to what may still be a poisoned chalice.

Apart from decidedly skittish markets, perhaps the biggest challenge for the new chancellor will be operating alongside a decidedly skittish prime minister. Credibility and stability were not the words I would use after watching her Downing Street press conference on Friday afternoon. Wooden and unconvincing better fitted the bill.

Until Friday’s dramatic events, I was going to recommend junking much of what was in the September 23 maxi mini budget. But the prime minister, as well as sacking her chancellor, and junking much of here “growth, growth, growth” agenda, got there before me. We are still. however, in a mess, so here are some suggestions about how we might get out of it.

Make sure that the U-turn on tax goes far enough.

Markets thought at one stage last week that the entire September 23 maxi mini budget was going to be scrapped, not just the decision not to proceed with the rise in corporation tax next April from 19 to 25 per cent. That increase has been reinstated, and will eventually raise £18 billion a year, but moat of the other tax cuts remain in place. Taken with the cancellation of the abolition of the 45 per cent additional rate of income tax, there remain some £25 billion of unfunded tax cuts. It is still, if not a black hole, a dark grey one.

It may be that this was the extra pound of flesh that the markets wanted but I would not be too sure about that. The markets are not yet reassured and gilt yields are high, as you might expect when we are onto our fourth chancellor this year and the prime minister’s grip on power looks shakier than ever.

The Bank of England should postpone QT for a year.

QT, or quantitative tightening, is the opposite of QE, quantitative easing. QE involves asset purchases, mainly UK government bonds, gilts. QT involves the sale of the assets brought under QE.

The Bank has intervened directly in the gilt market to try to head off a catastrophe affecting pension funds, an exercise which came to an end on Friday. That catastrophe was a window into what happens when market interest rates rise too rapidly, as they did after Kwasi Kwarteng’s unfortunate fiscal event.
Under current plans, QT will begin in earnest on October 31, the revised date for the publication of the chancellor’s fiscal plan, and the target is for an annual £80 billion in the stock of gilts (currently £838 billion) held by the Bank.

Even before this crisis, the Bank’s QT threatened indigestion in the gilt market. The government will be borrowing a lot more in the market because of its much looser fiscal stance. Instead of the Bank being there to soak up some of that borrowing, its gilt sales will exacerbate the problem, pushing yields – and associated interest rates across the economy – higher. That itself could be a risk for financial stability, as well as bearing down on the economy.

It's an energy crisis, so take it more seriously.

Across Europe, measures are being taken to reduce energy consumption in response to the crisis. In Germany, shops are no longer allowed to keep their doors open on cold days, pouring out expensive energy, many monuments and public buildings are no longer lit up at night, halls and corridors in public buildings will no longer be heated and the maximum temperature in those offices limited to 19 degrees. Italy has introduced Operation Thermostat, lowering temperatures in buildings by 1 degree Centigrade. Many countries have restricted the lighting of shops and illuminated advertising hoardings at night. The European Commission has set a target of reducing gas consumption between August and the end of March by 15 per cent compared with the average of the previous five years.

In the UK there has been nothing, with the prime minister even resisting a public information campaign. In an energy crisis, where supply is restricted and gone up hugely in price, and is being massively subsidised, you need to act on price.

The best way to control public spending is to reform it.

The prime minister, having told the House of Commons on Wednesday that she had “absolutely” no intention of cutting public spending, revealed on Friday that it would grow more slowly than under previous plans. In the language we use about these things, that counts as cuts. Cuts can happen stealthily — by not increasing budgets in line with soaring inflation —and that may be the strategy, But the suggestions is that the government will try to go further than that in reining back spending. Good luck with that, particularly in a situation in which the huge gap between private and public sector pay rises looks unsustainable..

Liz Truss cut her teeth as deputy director of the think tank Reform which, as its name suggests, focuses amongst other things on reforming public services. Such reform is badly needed; nobody would suggest that public services are delivered in the optimal and most efficient way. But you need a coherent programme for that.

Get some more effective active labour market policies in place.

The UK has a workforce crisis which will inhibit growth. The workforce is at least half a million smaller than it was before the pandemic, reversing decades of increases, and labour shortages are rife, alongside this rising economic inactivity.

This country has a long history of “active” labour market policies designed to get people out of inactivity and into work. Today the biggest focus is on the over-50s who have left work and would like to get back into it but need help in training and connecting with employers.

Improve on Boris Johnson’s thin and flawed EU trade deal.

Exports are a key driver of economic growth and the UK’s export performance is very poor, particularly since Brexit. Many small and medium-sized firms who used to export have given up doing so, because of post-Brexit hassle and red tape. The UK’s export engine is sputtering, with overall exports of goods and services in volume terms so far this year down by 7 per cent on 2019 levels, and exports of goods to the EU on the same basis down by 6 per cent. A commitment to developing a closer trading relationship with the EU is essential, before it is too late.

None of these suggestions is rocket science, and there are other things that can be done. But they have to be better than the government’s rabbit in the headlights approach, and its denial of responsibility for what is a very situation.