The next step driven by western economies which we are seeing – and which sounds more like a step into the past, not the future – is subsidies. This is more than the timely, targeted and temporary measures that we saw during the pandemic, and signifies a bigger shift in global public policy.
Last year’s US Inflation Reduction Act continues to reverberate globally. It is probably inappropriately-named legislation – since it is effectively a bill offering huge subsidies to US firms to base themselves in the US, particularly those in the green economy. The European Union, though outwardly critical of the move, may see it as an opportunity to respond with its own subsidies. That, after all, has been the clarion call from many firms afraid of losing out to more competitive US companies.
In the immediate aftermath of the 2008 global financial crisis, the fear was that Western economies might be moving into an environment of secular stagnation. Since then, cheap money policies across the West have hidden this reality. Monetary policy became the shock absorber. Few places have addressed the need for structural change.
Now, subsides, like taxes, are being used more aggressively in the economic armoury. Yet, the scope to deploy them is limited because of high budget deficits.
It was interesting to note the former the US Treasury Secretary Larry Summers’ comments last week that a subsidy war is better than a trade war. Such thinking fits better with domestic politics. Trade wars certainly are to be avoided, but the underlying message is surely that we are now seeing more countries openly pursue domestically-orientated policies.
The last US Administration advocated an America first policy. Its successor seems to be following through. The EU, with a long protectionist history, could move more in that direction – while China, with its existing Made in China 2025 policy to boost domestic manufacturing and recent actions, has moved that way too.
When Donald Trump instigated a trade war against China, he spooked financial markets and, even though the dispute was resolved, it sent a clear message to the Chinese who, in turn, embarked upon the clunkily-named ‘dual circulation’ policy. One consequence of this was a shift to self-sufficiency in food, fuel and technology. Events of recent years, including Joe Biden’s trade embargo on chip exports to China, probably means that policymakers there feel vindicated by their move.
Where then does this leave the UK? It doesn’t change immediate policy. While we need to be mindful of developments elsewhere, it does not mean we need to replicate them. But such a changing external landscape, if anything, provides further ammunition to the calls that have been heard in recent weeks for the UK government to have a clearer economic vision.
Since 2016, despite the political carnage and questionable doppelganger graphs found in the press, the UK has remained the major destination for greenfield foreign direct investment into western Europe – and last week’s release of the PwC annual global CEO survey showed the UK is still seen as an attractive investment destination. But that survey also showed that one quarter of UK CEOs felt that their business model may not be viable.
Governments, of course, can’t and shouldn’t micro-manage the economy, but they need to be mindful of the changing global landscape and of the need – as I have outlined here previously – to have a pro-growth agenda that plays to our domestic strengths. Of course, part of the challenge here is that not all the levers that can be used for growth are able to be pulled – for example, tangible planning reform or public sector reform.
While the current economic environment is difficult, the mood in the markets and from policy speeches globally appears to be shifting towards the view I outlined here in my last column, namely less pessimistic but not upbeat.
Inflation, while falling, is still high. While growth may improve as the year progresses, it is currently weak. And there is still much uncertainty about where inflation and policy rates may settle.
But it is a more constructive environment in which UK policymakers can start to plan for the March Budget and deliver supply-side measures to help the UK economy cope in this changing global climate.