There is something absurd in a front page of The Times that has as its top story that interest rates are rising to 1%. There is something even more absurd about that being a 13-year-high. And there is something even more absurd about that coming as inflation spirals past 10 percent, reaching a 40-year high, and defying all the predictions of pundits, politicians, and pecuniary professionals at the Bank even a couple of months ago. In short, it is the clear and utter absurdity that comes from being up economic something-creek without a paddle in sight.
This is hardly news to our Chancellor. Out of a time at the Treasury that has been bumpier than most in its still-short life, his undoubted biggest triumph has been spotting inflation coming down the track long before The Financial Times stopped treating it as a ludicrous scare story.
One says triumph, but it is hardly something to cheer about. It is the equivalent of being the first person on the deck of the Titanic to spot the iceberg. There’s nothing much to do except brace-brace-brace and barge some women, children, and DiCaprios out of the way en route to the lifeboats.
It is to Sunak’s great credit and our good luck that he hasn’t chosen to flee to his own lifeboat-equivalent at the first sign of trouble. He has stuck it out as Chancellor when lucky enough to have a wife flushed with enough cash to make King Croesus look skint, and a pad in California that must make Number 11 seem a tad parochial.
He has done so through Coronavirus, recessions, record spending, and a fiscally incontinent Prime Minister. Surely that shows levels of patriotism unseen nowadays outside of the editorial meetings of GB News? One suspects at least part of the invective directed at Sunak these last few weeks has been down to jealously on the part of those without half as many houses or excellent accountants as he has – even if the latter were rather politically naïve.
Nevertheless, whilst the Chancellor may be praised for his tenacity, there is still the awkward but rather-pressing question of what the hell he plans to do about our current economic deep waters. ‘Cost-of-living crisis’ may be the flavour of the month when it comes to commentator buzzwords, but it seems overwhelmingly likely that it will soon be shafted out by stagflation. Not for the first time am I glad that I took the ‘Britain in the Seventies’ paper in my last year at University – and this time for a much better reason than ‘because it makes my parents feel old’.
The hope had obviously been that the current inflation was transient, the combination of pumping extraordinary amounts of money into the economy, of lockdown-related supply shocks, and of the volatility installed by the ongoing crisis in Ukraine. That may well be true.
But we are also seeing the end of a period of deflation that began not long after inflation last reached these levels in the early 1990s. The one-off deflationary shock of outsourcing manufacturing to China is over, as the pandemic, rising Chinese wages, and the ongoing madness of the Xi regime force companies to reconsider whether relying on the CCP is really that great an idea.
Adding to that, as The Spectator’s Martin Vander Weyer has highlighted, the UN Food and Agriculture Organisation’s food price index already is standing a third higher than a year ago. That may only have manifested itself in the UK so far as a spike in wholesale milk prices, but supermarkets will only suppress prices for so long.
At some point, prices will hike – alongside gas bills. So far, real wages have lagged behind spiralling inflation. What happens when our dutiful denizens of the public sector realise their wage packets are being squeezed by 5 percent or more? Get ready for a summer and autumn of strikes.
Yes, it’s clear as day: the inflation genie is out of the bottle. Growth is already down on what it was forecast to be, and the United States has already slipped into a recession. Soon we’ll get the stagnation to go with our inflation. And whilst the Chancellor may have spared us mass sackings during the pandemic at the cost of a few hundred billion here or there, it will hardly be a shock to see unemployment begin to tick up over the next few months.
So then will come the cries: something must be done! A population that has grown use to the Government’s largesse shielding them from every pain or shock over the last two years will naturally be expectant of intervention.
But what is there to do? Sunak has already announced more spending. Yet he is constrained by both spiralling debt-repayment costs, which make borrowing unattractive, and an undoubted unwillingness to take taxes even further above a 71-year high. He has as much room for manoeuvre as a sumo-wrestler in a Mini Cooper.
Of course, that is not what the Chancellor’s critics on the right want to hear. They long for him to replaced by the Foreign Secretary in some post-locals reshuffle. She stands up for the Telegraph view: cut taxes now, let growth rip, don’t worry about the inflation, and allow the magic of the Laffer Curve to pay for it all.
That is dangerously naïve. “The notion that tax cuts, without any spending cuts or substitute source of revenue, will so stimulate the economy that the Budget balance will improve, enabling further tax cuts to be made…is a spurious kind of virtuous circle [and] emphatically not part of my thinking”. So said Nigel Lawson – and I trust him more than disgruntled of Tunbridge Wells, or nostalgic Reaganite MP.
Lawson, of course, is the Chancellor’s great political hero, and he quoted him in his Mais lecture in February. Despite this site’s best efforts, I fear many may have missed this fascinating rhetorical exercise. That is if only because it features those long economicky words which sometime leave us frit. In it, the Chancellor laid out his solution to our current crisis.
In the long-term, productivity gains and innovation will drive the growth we need, not government money. Companies need to invest more in research and development, and in their staff – both areas where we are well behind the OECD average. Meanwhile, a stable environment with taxes conducive to growth will help generate the “new culture of enterprise” Sunak longs to see.
All very good. But it has been an observation of us here at ConservativeHome, since the Chancellor’s recent travails, that for all his deep learning and economic wizardry, he is not half as good at politics as one might think.
So whilst he may think it “silly” to take action on energy bills now rather than in the Autumn, voters will not agree. And whilst he can see that an increase in spending is unsustainable, expensive, and inflationary, and that a return to spending restraint is very advisable, that is very unlikely to wash outside of the Treasury.
It certainly won’t in Number 10. The Prime Minister is as genuine an opponent of austerity as any Corbynista, holding out in favour of grand projets and boosterism despite the current climate. He is like a Japanese soldier holding out in the Pacific well into the 1970s, but in the interests of fighting fiscal orthodoxy, not the Second World War. As such, effusions of support for his Chancellor notwithstanding, the economic splits at the heart of government are only likely to become more obvious as the summer progresses.
Yet whilst Sunak may be unlucky for having been fined for turning up to a meeting five minutes early, the country will be even unluckier if the Government loses his understanding of the current predicament. For all his political baggage, he knows a hell of a lot more about economics that even most of his predecessors – and we are going to need that in the next few months.