Welcome to the Supplement in the week celebrating the Queen’s Platinum Jubilee in the UK, 70 years on the throne (with interest actually, since the actual anniversary was back in February). I’ve moaned before about the economic estimate that an extra bank holiday costs the economy 0.25% in GDP – but if we measured the GDP by the number of emails in my inbox, then I’d say Thursday probably was one of those days – far quieter than the average Sunday, or the average Bank Holiday!
Anyway – as advised last week, this issue has been playing too far on my mind to let another week go by without addressing it head-on. We’ve entered a new regimen of economics under the Johnson administration – and for me, it needs to be called Bazooka economics. What worries me more than anything is that Boris himself would probably quite like this title, whereas realistically he shouldn’t.
Why bazooka? Well, quite deliberate of course. What do you associate with a bazooka? Significant “impact”. A brute force way to solve a situation, likely to cause some collateral damage. Is that to say there is never a time to use a bazooka? No, of course not. In the heat of war, it may well be the best tool for the job. In the bottom of a pandemic, with economic panic around the corner and employers threatening to close down businesses and make entire workforces redundant, the bazooka of furlough, bounceback loans, self-employment income support schemes, payment holidays and a whole raft of other significant fiscal stimulus measures were justified. The more surgical tools such as a stamp duty break were actually less effective than those bazookas.
The thing is, though, we are not in the heat of that war anymore. We are dealing with the consequences. The Chancellor, Mr Sunak, had shown some of his range with some more surgical “sniper rifle” style policies aimed at energy, in quarter 1 of this year – with some other measures with some more nuance including targeted hardship funds for local authorities. It doesn’t take a genius to note these policies are an awful lot cheaper than the bazooka.
The Ukraine and Russia situation has certainly exacerbated energy prices, and with an energy strategy that has left much to be desired over the past, well, forever really (if any reader can remind me of when the UK had a strong energy strategy, I would be very happy to be corrected on that front). You can’t help but wonder though, if reaching for the bazooka again, even if not firing it multiple times as yet, is a hangover of it having worked so well during Covid times. The further challenge on that front, of course, would be that perhaps some of this inflation wouldn’t be around right now if it wasn’t for the bazooka being fired for multiple shots in 2020 and early 2021.
Economic policy never exists in a void, either, of course. I have some sympathy with the current administration who have won little or no political capital by undertaking some of the most brave redistributive policies for many years, tweaking around the tax system. The stark attitude of the conservative party to those who work, versus those who don’t (with the exception of pensioners) means that they are unlikely to get much credit in this department, even though it is deserved. That’s a shame – because the lack of it means they are less likely to pursue these policies in the future, in my view.
The political will here is to ensure the country stands up and “feels good” for the next election, latest date December 2024, likely date May-June 2024. 2 years away – and those 2 years currently look relatively bleak. Inflation won’t be back under the 2% target by then – it would be remarkable if it were – I’d say there’s less than a 10% chance of that happening. Bazookas make headlines, and make it sound like the administration is doing everything that it can to make the current situation work as well as possible, for everyone.
As usual, I get fairly frustrated in these situations. If we told the truth about the current economic situation, it would look something like this. For the spring statement 2022, the OBR (Office of budgetary responsibility) confirmed that the country was over £130 billion better off than it had forecast, at this point, in 2021. It took a relatively bearish outlook to the rest of 2022, without factoring in quite the amount of inflation that has emerged and is expected still to emerge – so, in this sort of situation, what does inflation mean?
I’ve commented in the past that the UK government is truly the greatest business of them all in the country. Fantastic revenues, extremely low debt servicing levels, minimal accountability and a nice cosy path either to the Lords, into the after dinner circuit, or into a big corporate in a role primarily defined on a bespoke basis to say “we employ Nick Clegg” or whoever. Put 10% inflation into the mixer, solely from an economic point of view, and what happens?
Well, to understand this a little better, we need to look at the tax take in the UK and understand a few things. The “drop”, if you will, public sector income, is nearly up to £1 trillion per year. Taxes make up around 90% of that, and of those taxes, income taxes are overwhelmingly the largest earner, at around £425 billion (around 48% of the total tax take – note, this includes national insurance). VAT is next in the queue – another gigantic revenue raiser at around £155 billion (around 17.5% of the total tax take). Then corporation tax at c. £65 billion, or around 7.5%. All other taxes combined (yes, all) bring in another £135 billion, i.e. less than VAT (and paling into insignificance compared to income taxes).
So what happens to all this in times of inflation? Well, let us also not forget, the percentage increase on national insurance by 250 basis points shared between employer and employee. Simply put though, as discussed recently, with wages up 5% and much more upward pressure on them, income taxes move up, by a similar amount (if not more considering the 2.5% hike). They won’t go up by 7.5%, because of some playing around with allowances at the lower level, in a comparatively redistributive way, but they won’t be far off. 7% of £425 billion is £30 billion.
VAT is another big winner – in theory, as a starting point, with inflation at 10%, the VAT take will go up by 10% or another £15.5 billion. So that’s £45 billion so far.
Then there’s the purchasing power of the fixed-price debt issued by the government. 10% erosion on that c. £2 trillion is £200 billion in real terms.
Now this is in danger of becoming relatively one-sided – of course the government has obligations that are index-linked. But with public sector pay up at 3.1%, and a similar adjustment to benefits, you can easily see there’s a really significant net gain here. To an extent – what the country needed, overall, after Covid – even if we are the ones to pay for it in real terms.
It isn’t this simple of course. Prices don’t just go up 10%, without incomes going up 10%, and consumption not suffer as a result. People outside of the top 20% of wealthiest households on an income basis are likely to be sharpening pencils left, right and centre. At the lower end, horrible choices and fuel and food poverty. In the middle, more centred around luxuries and experiences, to an extent, but energy has hit everyone in nearly the same way – the better off you are, the larger the house, and the larger the energy bill – and, often, the nicer the supermarket that you use (and the inflation is concentrating, to some extent, on the more expensive supermarkets).
However, you’ll see I make a pretty good case for the government to be quietly delighted about the current state of affairs. In a political void, in which we do not live – because this lack of feelgood loses elections. Post-inflationary times, regime change is almost mandatory, and certainly expected. So it is sweaty times in Whitehall just now.
The above, though, is a case for affordability for some of the measures – not an assessment of whether the bazooka is the right tool for the job. My feeling is that inevitably, it is unlikely to be. It is the tool that worked “last time round” (to an extent, whilst leaving behind some latent inflation) – not assessed as the best. Boris likes bazookas – big projects with his name emblazoned all over them, hoping no-one will look too closely at the accounts or the cost-benefit analysis. Bazookas leave a legacy, and overall he is a “glass-half-full” economist and would rather stimulate and pick up the pieces than not stimulate at all.
The extent to which this is a big departure from the right-wing economic thinking of the past 45 years is not really talked about too much, aside from the obvious indignation of some of the particularly non-interventionist mainstream media (e.g. the Telegraph, and to a larger extent in terms of an overall Libertarian viewpoint, the Spectator, although it is not truly mainstream I don’t think). Conservative governments do not intervene to this extent to help everyone – the ideology that really took roots under the Thatcher administration was that you help yourself, and if you are in need of help, the government will help as little as possible with the third sector (i.e. charities and non-governmental organisations) picking up the pieces.
So the question remains – is it the “right” thing to do? Should we celebrate the arrival of the bazooka? Well, the monetarist system has had its degree of successes over the past 45 years. It has been more of a “laissez-faire” small government approach, with one of its driving forces being that larger governments get more bureaucratic, and nothing gets done at an extremely large cost to the taxpayer. Another is that the interference does not help to allocate resources efficiently.
If we look at the successes or failures of that approach, the changeover of administrations since 2010 is perhaps quite a harsh time to do that, due to the financial crisis. Austerity came as a part of that package, but was ineffective and stunted growth in the 2010s – not quite a “lost decade”, but house price growth was below inflation (when considering the entire UK), public sector workers were up to 10% worse off in real terms when considering real pay rises – pay overall was very stagnant, and living standards did not drive forward particularly quickly. Indeed it was the first decade where the output was that the next generation would be less well off than the previous one, since records began.
This was all pre-pandemic, and you can completely understand why an approach which involved limited intervention would have to take a back seat during a pandemic. That is absolutely the time for government to show its worth – I’ve written extensively about the furlough scheme and how it was a great policy for that time, even taking into account fraud and the likes. The most money walked out of the door on track and trace and undelivered PPE contracts, of course – and the pandemic highlighted what corruption still looks like in a large, westernized, developed economy at the top levels.
Monetarism couldn’t have had a tougher time. The counter to the Milton Friedman/monetarist school of policy was traditionally the Keynesian school – and Keynesians would argue that true Keynesianism has never been given a chance. After all it carries epithets such as “Fix the roof when the sun is shining” – whereas in political reality the real truth is “bodge the roof to make sure we win the next election” – but that’s politics for you. Keynes advocated stimulating the economy in recession and slowing it down to build war chests when it was booming, amongst other things. Boris, like Trump, is a Keynesian (the difference between the two I’d suspect is that Boris knows that, whereas Mr Trump may not). Not because they love the theory, but the stimulus really interests them. If you don’t believe that when the helicopter money cheques were issued in the US in 2020, signed by Mr Trump himself, weren’t partially driven by the cheque coming from “the Donald” with his name on it, then we would have to agree to disagree.
So the danger is bigger government, which of course the government have spun as not their way forward by putting the theoretical “axe” to the civil service to the tune of 10,000 jobs. What I’ve not seen is an analysis of how many of those jobs were created since 1st Jan 2020 and were covid related – I suspect there will have been more than 10,000 created, and thus the soundbyte is only there to appeal to their core base, while they inch over further to the left to grab the middle ground that is left wide open by a labour party that struggles to keep pace with the conservatives stealing their best policies (such as a windfall tax) and indeed doing them on a bigger and better scale.
At the moment, then, we are left with the bazooka, without the evidence that is needed to discredit it. However, the windfall tax in the way it is being given back to the people is inflationary at a bad time for inflation, and perhaps instills a false sense of consumer confidence when people should be largely saving for a rough ride in the next couple of years as the pandemic’s economic shadow passes through the economy.
We are, as we have done for the last two years in fits and starts, walking an economic tightrope, and with rates on the rise – there will be either more shots of the bazooka needed (which will lead to even more collateral damage) or the reality of a slower and perhaps receding economy to face. Keep praying for a mild winter folks – a cold one would have 3 or 4 times the negative impact that it did a few years back. A really cold one has the potential to be a “Winter of Discontent” mark II. Keep everything crossed, and carry on!