We have lost a chance to change economic direction, but we should not tear up the map just because the driver lost the way, writes Sammy Wilson MP
Over the last two weeks we have witnessed political turmoil in Westminster which mirrors the worst events of the days of the divisive Brexit debates. It remains to be seen whether the PM will survive the political tumult. One thing we do know however is that the policy which was designed to get the UK out of the doldrums of slow economic growth, reduce the burden of debt built up as a result of the massive spending incurred by Covid lockdown, encourage productivity improving investment, provide tax revenue for important public services and build a higher wage economy, has been killed off by a combination of poor political management, party infighting and an assault by the economic establishment whose economic philosophy has overseen decades of poor economic growth.
The aim of the original budget was clear. Give immediate help to households struggling with the cost-of-living crisis, introduce tax changes which would give individuals and businesses more of their earnings to spend as they saw fit (always a good principle), reduce supply constraints by introducing regulatory change, reforming planning laws and creating investment zones across the country. Its hard to see what was wrong with these ideas unless of course you belonged to those who believe that the dead hand of state control was a preferable to the invisible hand of the free market economy.
How we finished up ditching the original budget ideas and going back to higher taxes and squeezed spending with economic growth being a low priority for the future is a story of poor political decisions, appalling communication and political selfishness from some within the conservative party whose political ambitions have been thwarted. There was also an element of deliberate establishment undermining of the policy. Of course, opposition parties are now blaming the high inflation rate and interest rates on what they describe as “reckless ideology” which of course is just plain nonsense but is not even challenged by much of the media.
The fact is that inflation is being driven by a number of factors beyond the control of our government. The first high energy prices caused by the Ukraine war and the sanctions imposed on Russia which has restricted gas supplies to the EU which allowed itself to become too reliant on one source of supply. As economies across the world started opening up after being put in cold storage during covid so the demand for oil and gas increased but output was not or could not be increased to meet the increase in demand. The loss of output of cereals etc from Ukraine a major world supplier has increased food prices and supply chains especially from China where lockdowns are still occurring have caused shortages in manufactured goods.
Equally the increase in interest rates cannot be blamed alone on the mini budget. After years of low interest rates there was already pressure to raise them. Increases in government borrowing across the world was pushing rates up and when America started increasing the federal Reserve rate to dampen inflation it was inevitable that the UK and other economies would have to follow suit to avoid pressure on the exchange rate.
What the government can be blamed for is some of the clumsy political decisions made eg reducing the tax 45% rate at a time when lower income earners were struggling and not taxing the unexpected windfall profits to energy companies to at least help offset the cost of supporting people and businesses with their energy costs. Budgetary decisions even if they can be defended on economic grounds always need to be set alongside the political realities facing the government.
Secondly the reasons behind the tax and other changes and the justifications for them were poorly explained. Economic modelling (as far as any models can be trusted) would have shown how the growth generated from the tax and regulatory changes would have produced more tax revenue which would have reduced government debt as a proportion of GDP whilst staying with the existing fiscal policies would have made it more difficult to pay off our national debt. An independent review of his policies by the OBR could have prevented the market turmoil and perhaps he should have waited until that was available.
The biggest cost item in the budget was the support with energy bills. Whilst I appreciate that the overall cost depends upon what happens in energy markets it could have been reduced if better targeted something which now it now appears will happen after next April. I see little point in giving hundreds of pounds to a high earner like myself when there is already pressure on government finances. By all means help the most vulnerable but why spend billions on helping millions of people who can meet their energy payments from their own resources. Targeted help would have considerably reduced the shortfall in the budget and avoided the panic which occurred.
We are now left with a fiscal plan which I am fairly sure will result in very slow growth at best and a recession at worst. It will severely damage the ability to pay off debt and raise revenue for public services and will lead to spending cuts which if they come from efficiency savings and ending some of the wasteful public spending will be a good thing but unfortunately as experience shows are more likely to result in lower capital spending on the very infrastructure, we need to improve economic efficiency.
We have lost a chance to change economic direction, but we should not tear up the map just because the driver lost the way.