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A brief economic history of the past few weeks
By Dr Ian Jackson
Senior Lecturer in Economics and Finance, University of Wolverhampton
The statement on 23 September 2022 by Kwasi Kwarteng, Chancellor of the Exchequer to focus the UK economy on creating future opportunities for growth was bold and possibly even daring. The proposal to achieve this objective through cuts to income tax and stamp duty as well as reversals in National Insurance contributions and corporation tax was however a significant economic gamble.
These tax cuts would have cost an estimated £45 billion by 2026-27 and this figure was in addition to the £60 billion in energy support announced over the next six months alone. There was no guarantee that these measures would stimulate the UK economy sufficiently and quickly enough especially during the next 12 months which are predicted to be recessionary and expected to be inflationary. Furthermore, there may be reductions in Public Services as a result of these plans, which needed to be factored into the calculations, too.
Of course, any such measures needed time to work through the economic system over many years in order to provide the necessary incentives for future investment. However, the immediate situation was not helped by rising interest rates to 2.25% (which makes borrowing more expensive) and now 3% introduced this week by the Bank of England to help combat inflation and support the £ Sterling which has depreciated dramatically against the US dollar and also against the Euro.
The last time such a radical departure from the prevailing economic thinking occurred in this country was by Anthony Barber, Chancellor of the Exchequer to Prime Minister Edward Heath fifty years ago. A series of tax cuts and other related measures between 1971 and 1973 resulted in what became known as a short-lived "Barber Boom" that failed amid energy price hikes and ultimate stagflation. Sound familiar?
The long-term problems facing the UK economy include low productivity, skills shortages, income inequalities and unequal growth across the regions and nations (not to mention troublesome trade arrangement post-Brexit and rising inflation as a result of the war in Ukraine). Tax cuts and the other fiscal measures proposed in late September should have formed part of the overall economic strategy once these issues have been addressed fully and fairly. Overall, the markets did not believe that Kwasi Kwarteng and the then Prime Minister Liz Truss had a credible and fully costed plan. And economic history shows that you cannot “buck” the financial markets.
Now there is a new Prime Minister in Rishi Sunak, and a new Chancellor in Jeremy Hunt and relative calm has been restored. However, the gravity of the situation has not subsided. The Governor of the Bank of England, Andrew Bailey is now predicting a severe and lengthy recession in the UK lasting possibly for two years. The brief economic history of the past few weeks is merely a snapshot in time, but the effects will last for quite some time into the future.