In its last general election manifesto, the Labour Party pledged that when in government, it would: “Kickstart economic growth to secure the highest sustained growth in the G7 – with good jobs and productivity growth in every part of the country making everyone, not just a few, better off.”
That, it’s fair to say, is not going to happen. At least for a while. Instead, as the Organisation for Economic Cooperation and Development (OECD) forecasts today, for the next two years, if not longer, the UK will suffer the highest sustained price inflation in the G7 advanced major economies – namely Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. This means that the cost of living crisis, which has never really gone away, will continue. Food prices will rise once again, and sharply, according to the OECD, which will make things feel even more miserable – and make the significant local elections next year, in Scotland, Wales and London, especially challenging for Labour and Sir Keir Starmer’s leadership.
Stubbornly high “core” inflation, as the Bank of England has already indicated, will slow the already cautious path to lower interest rates, with all that implies for mortgage payers and businesses. It has also been reported recently that the Office for Budget Responsibility (OBR) is soon to slash its estimates of British productivity, a key indicator of trends in future living standards and economic growth. Further downgrades by the official watchdog are likely to arrive with the Budget in November. It will set the backdrop for what will inevitably be another instalment of hefty tax increases. Rachel Reeves, when she became chancellor, declared that economic growth was her “number one priority”, and after last year’s autumn Budget, she said there would not be any need for another round of tax increases. Those, and other presentational and policy missteps, may be two of the reasons why No 10 has clipped Ms Reeves’s wings and required her to present her proposals to a “Budget board”.
The economic outlook is not much better for world growth more widely. As so often in recent decades, China and, increasingly, India are the engines of what global expansion there still is, and Donald Trump’s trade wars threaten to stymie even these dynamic nations. Sadly, for that same reason, the United States’ recent exceptionally good economic performance is likely to fall back in line with the rest of the G7 pack – still towards the front, thanks to technological prowess, but nowhere near as vigorous as under Joe Biden or, for that matter, Mr Trump’s first spell in office. “America First” was always a policy doomed to hurt Americans just as much as her allies and trading partners, and so it is proving.
It is, in this context, no surprise that there is so much turmoil in the world, as economic pressures often translate into wars (as in Russia’s invasion of Ukraine), into increased flows of economic migrants and into domestic social tensions and political unrest in previously prosperous and stable democracies. It would be absurd to suppose that the UK would be protected from these effects.
As she approaches her Budget in a little over two months, Ms Reeves will need no reminding about the scale of the task she faces, and how much is riding on it. In her relatively short tenure at the Treasury so far, she has too often given herself ridiculously inadequate room for manoeuvre on her fiscal targets, and, frankly, taken too many risks. The result has been a constant and hurried search for more revenues and for more cuts in public spending plans. The result of that has been that the Treasury has given the impression of inconsistency of purpose and, in the notable case of welfare reform, a lack of competence in delivery. The “comms” have not been impressive – but neither have the policy failures.
The rumour is that the OBR is preparing to “kitchen sink” its next Economic and Fiscal Outlook for Britain, to avoid having to make embarrassing and inevitable corrections when sometimes wishful thinking doesn’t come true. Ms Reeves will have to do the same, whatever mix of measures she decides on. It will hurt, even more than her last Budget, but not as much as just hoping for the best again. There can be no more miscalculations. People, businesses, and the investors who lend the UK the money to keep going desperately need a period of stability in economic management.
