Lord Flight is Chairman of Flight & Partners Recovery Fund, and is a former Shadow Chief Secretary to the Treasury.
Financial Markets were very clear: they rejected Liz Truss and her go-for-growth strategy; and rejected Truss and Kwasi Kwarteng as managers of the economy. The Institute of Fiscal Studies has identified a black hole of £62bn, and the Government a £42bn black hole needing to be addressed by 2026/27.
To the surprise of shrewd investors, the economic and financial situation has recovered well since Rishi Sunak became Prime Minister. The pound is back to pre-Covid levels. Speculators had expected the bank rate to peak at six per cent, but now expect this to be 5.9 per cent.
What is needed is a strategy to conquer inflation without worsening the economic slowdown. John Redwood analysed the paths to prosperity as more freedom, free enterprise, wider ownership, and opportunities for rewarding work.
The British economy needs better value for its public services and needs to be able to reduce borrowing by growing revenues. Those proposing large tax rises and spending cuts risk simply deepening recession.
Over four million people dropped out of work over Covid on full pay and have not yet returned. The tax burden has increased to 36 per cent of GDP and needs to be reduced to 35 per cent or less.
The sharp fall in ten-year gilt yields, down to 5.1 per cent, represents Sunak’s biggest vote of confidence. But the UK’s trade deficit needs addressing. In the first quarter it increased from £14.9bn to £25.2bn, with borrowing for September at £20bn.
Meanwhile, Shell’s tax bill has doubled this year to £8bn; the windfall tax which Sunak had introduced has raised £5bn from energy producers like Shell.
Overall, the IFS forecast a fall in GDP of 0.69 per cent in 2023 and of 0.2 per cent in 2024. Over the next five years they forecast an average growth of 0.8 per cent. If growth is better than forecast this would make a major difference – and deliver an estimated £15bn improvement in the public finances.
The key result of the last few weeks has been that Sunak and Jeremy Hunt are acceptable to the international financial community, where Kwarteng and Truss were not. They now need to produce a Budget which is acceptable to that same community; the scope for reducing the public sector deficit looks to be of the order of £20bn.
The Chancellor and Prime Minister are doing everything they can to satisfy international financial markets, on the one hand, and to improve British economic growth on the other. The failure to reform the supply side of the economy has meant that real, production-led growth has been overtaken by unsustainable growth in consumption – hence the growing current account deficit.
The Treasury establishment comprises too many of those cheering Kwarteng’s downfall, people who are also still obsessed by Brexit and believe, wrongly, that nothing much can be done to improve the UK’s growth rate apart from re-joining the Single Market.
Hunt therefore faces the conflicting objectives of reassuring the markets at the same time as continuing with as much of Truss’s pro-growth agenda as possible.
Where he looks to have some advantage over her is that he has the support of the British financial establishment. A central reason for him making his position clear is to sustain that support. More tax increases would only increase the Government’s problems.
British productivity has been disappointing for some 50 years. A major reason for this is a continuing reduction in the proportion of the population in work; this is now less than 20 per cent.
The Civil Service has ballooned in size since Covid. Benefit spending needs to be controlled, focussed on those in real need and capable of encouraging spending, and must not serve as an incentive not to work, as is presently the case.
NHS spending needs to be managed and controlled far better. The energy subsidy plan is poorly targeted and costing much more than our competitors’ subsidies. It was not necessary to subsidise the energy usage of higher-income households.
When I was a boy, my father used to say he assessed the state of the economy by the relative number of lorries on the roads. I was amazed, driving from London to Worcester last weekend, by the volume of large lorries effectively using half of the motorway.
Let us hope this is some indicator of better-than-expected economic performance. But what we really need is better-value and more effective public spending.