When Rishi Sunak stands up in Manchester in October for his party conference speech – or sits down to chat with the audience via a friendly journalist – he will want to have some good news for party members. He won’t necessarily declare ‘Mission Accomplished’ on his five pledges. But he will hope to have flights taking off to Rwanda, a recession swerved, and inflation falling.
As I recently detailed, Sunak has a decent shot at hitting his self-imposed targets. That’s if he maintains his Tiggerish work rate, if gets lucky with everything from the courts to the weather, and if you don’t look too closely at the underlying figures. He hopes he can claim victory, draft a second set of pledges on the back of a fag packet, and go into 2024 as a proven deliverer.
Yet I would hope that if the Prime Minister’s missive mirrors any former President, it is Jimmy Carter, not George W. Bush. That’s not only because Sunak shares the former’s penchant for quietly comfortable knitwear. In 1979, a year out from re-election and facing ‘stagflation’, an energy crisis, Carter made a famous televised address tackling what he termed his nation’s crisis of confidence.
According to Carter, “all the legislation in the world” couldn’t fix “what’s wrong with America” – a country lacking “confidence and a sense of community”. In the heady days of Reaganism – most of which Carter laid the groundwork for – the speech became branded the ‘malaise’ speech, even though Carter never used the word. Mentions to it became short-hand for the sluggishness and self-doubt that characterised the seventies on both sides of the Atlantic.
Yet Carter’s comments were at least an honest attempt to reason with his countrymen about the challenges America faced. Today, the structural problems of our political economy are sufficiently grave that Sunak owes to the country – and to his party – not to shy away from them.
Much commentary has focused on gilt yields being back up to where they were after Liz Truss’s mini-Budget. Interest rates on ten-year government bond is around one and a half to twice that of Germany and France. The reason for this is simple: inflation remains stubbornly high, and markets are increasingly concerned about Britain’s ability to bring it down. It sits at 8.7 per cent, compared to 8.1 per cent in the Eurozone, and 4 per cent in the United States.
The OECD expects inflation to average 6.9 per cent this year – significantly above Sunak’s target of halving it. Interest rates are now expected to rise to 6 per cent (from 4.5 per cent now) to bring that down more rapidly. That raises the spectre of a recession, and the failure to reach another sainted pledge.
Jeremy Hunt is right to say that there is “no alternative” to further interest rate agony. Rate rises are the best tool the Bank of England has for bringing down inflation. With GDP expanding by a miserly 0.2 per cent in April, further tightening will almost certainly snuff out further growth.
It was always unwise for the Government to try and claim credit for halving inflation. When it chose to do so in January, all the major predictions suggested it would fall rapidly this year. Even if last month’s fall from 10.1 per cent to 8.7 per cent was the largest on record, it still under-clubbed the Bank’s prediction – made with crossed figures – that it would have shrunk to 8.1 per cent.
That would still have been more than four times the two per cent target Gordon Brown entrusted to Threadneedle Street when he gifted it nominal independence in 1997. It also comes alongside a rise in core inflation – which excludes those goods and services (primarily food and energy) whose price is more volatile – from 6.2 per cent to 6.8 per cent. That is the highest rate since 1992.
Why has inflation proved so stubborn? One obvious culprit is Andrew Bailey. My dissatisfaction with the Governor is well-rehearsed, and I have called for his sacking on multiple occasions. He was too slow to raise interest rates and seems unable to comprehend inflation might have something to do with record money-printing during the pandemic.
That reflects the ideological uniformity of the Bank, stuffed as is with mid-ranking Keynesian academics and Treasury bods. As Juliet Samuel rightly suggests, there is an urgent need for Sunak and Hunt to refresh the Bank’s leadership. Yet even if my suggested “all monetarist shortlist” for Threadneedle recruitment was implemented tomorrow, it wouldn’t dig us out of our inflationary hole.
That’s because the current high levels are driven by two other structural problems within the UK economy: our tight labour market and its implication for wages, and our persistent trade deficit. We currently have over a million vacancies on offer, despite the Government’s best efforts to encourage more women into work and to try and find the hundreds of thousands of workers who went missing over Covid. Combined with a new minimum wage, all this means we are staring down the nose at a wage-price spiral.
Even if wages aren’t keeping in line with inflation, they are still high enough to push up demand, force up prices, and ensure the cycle continues. Sunak’s flirtation with price controls to keep these in check is well-proven economic lunacy. But with only fourteen months or so to go until the next election, you can see why he might reach for any tool a desperate adviser suggests.
Yet blaming inflation simply on wage-price spirals or Andrew Bailey’s incompetence ignores broader long-standing issues with our economy. Our trade deficit might not be as sexy a topic for discussion as the housing crisis but is a crucial factor in our specific vulnerability to market shifts (as the Truss experiment highlighted).
As Noah Smith and Philip Pilkington have written, we have been running a significant trade deficit for over two decades. Last year it surged to its largest level on record, and further undermining the markets’ confidence in the UK’s economic model. Sunak’s U-turn on the mini-Budget temporarily restored market confidence. But reality cannot be fooled.
Britain has persistent economic weaknesses that are well-rehearsed by those of us on the right. Yet there are others that we choose to wilfully ignore. MPs and commentators are happy to indulge the 736th Telegraph op-ed on why we must abolish inheritance tax. But they are unable to make trade-offs between, for example, the need for growth and the immigration or planning reform that could deliver it.
Which is why we find ourselves staring down a darkening tunnel. Public spending tracks to become ever higher. Our deficit widens. Growth remains sluggish as debt mounts up. But nobody is willing to consider public spending cuts, except in Hunt’s St Augustianian sense.
We complain about taxes going up but do not accept that spending cuts will be required if they are going to come down. Austerity is not only dead but damned. And few – outside of our Reducing the Demand for Government project – are willing to consider the implications of this in a country with an ageing population and stagnant growth.
If Sunak sees in his pledges a route towards an unlikely fifth term, he must explain for what purpose such a government would exist. There is no point in another five years of Tory rule if we persist in comforting delusions and internal squabbling. Sunak’s two predecessors ducked long-term reforms in favour of temporary fillips. He cannot make the same mistake if he wants to tackle our own malaise.