‘Government’s strategy on tackling economic challenges

One Minister from the John Major era, who called me after the speech, said that even if the strategy works perfectly, it will take time. In the mid- 1990s he experienced an economic shock that affected mortgages, and that was tied to government decisions, at least in part. In his view, British voters do not give credit for cleaning up their own mess, because it has always been a forecast for future years from the Office for Budget Responsibility rather than fact, and it seems contrary to the fact that decades of low growth was only a prediction. The taxation for the past quarter of a century under prime ministers Blair, Brown, Cameron, May and Johnson has averaged 32.8% as a proportion of economic output, or GDP. That number was 32.4% of GDP under Mrs Thatcher's 11 years.

It is clear that lower taxes can help boost growth, but it also raises the question as to what has been weighing down the economy. It is striking that the government's comprehensive and transformational policy agenda isn't done with a thorough, published analysis of what the growth problem is, why it happened here and not in USA or Germany, and therefore how it should be addressed.

What other policies could increase forecast growth so quickly, so that the current numbers would add up, when the OBR does its sums? Increasing the number of foreign workers to address the labour shortages around the country. Are people who oppose changes to immigration rules for political reasons part of the anti-growth coalition Moves to lower post-Brexit trade barriers for British exporters could also help reverse recent reductions to the OBR's long-term growth forecast. For the past 20 years, Britain has set the gold standard for institutional independence when it comes to economic policy, built up by successive governments. That meant low borrowing costs, even though financial, and eurozone crises, as well as the pandemic. In recent weeks this administration allowed the perception to grow that it was fiddling with these essential controls on the economy. The perception was fed by leadership campaign rhetoric and the mini-budget's massive tax cuts, presented without hard borrowing numbers.

The government borrowing costs are higher than they were over the last few days, but the sterling recovered its losses over the last few days. There are higher perceptions of how high the Bank of England will have to raise benchmark interest rates. At some point after a decade and a half of ultra-low interest rates, rates were always going to get back to normal higher levels. It didn't have to happen in a matter of days. Rates for mortgages and company lending have been moving on up to match the PM's choice of theme tune.

The extra interest rate shock will hurt the economy, and how much it will cost the government as a whole, according to the OBR. It's true that the UK's growth will be affected by rising economic challenges elsewhere in the world, including the eurozone and the USA.

If the PM's speech was light on policy, that might reflect the need to not do anything at this point, which could further spook markets. It seems that the lesson of the last week may have sunk in: that macroeconomic stability, rooted in institutional credibility, is a prerequisite for Growth, Growth, Growth, Growth.