Winter is coming. The cold wind of recession is beginning to bite. We are drowning in debt. Prices are rising. Our workforce is becoming sicker. Our health service is on its knees. Our railways aren’t working. War is raging on our continent’s borders. All in all, it’s enough to make one want to hibernate.
Who’s to blame for our economic woes? First, Covid: it dealt a double-whammy to the world’s economy, hitting both demand and supply at the same time. Next, Putin: thanks to his war, this winter the amount households spend on energy, as a share of income, could plausibly be two percentage points higher than in 2019 – a bigger increase than we saw in the energy crises in the 1970s. And then there was the misnamed “mini-Budget”, which spooked the market. This was the spark that lit a tinderbox – a tinderbox created by years of groupthink that captured the entire political class, here and across the West, and seeped into our nation’s view of life.
For years, we’ve begun to believe that cheap money – and ultra-low interest rates – would last forever thanks to the magic money tree, quantitative easing. Better still, we convinced ourselves that inflation was under lock and key. Put all that together, and of course we could afford to borrow more and more. “This time it’s different”, we comforted ourselves.
One by one, the scales are falling from our eyes. The first scale to fall was when inflation was uncaged. The Bank of England acted too late in raising interest rates. Now it is playing catch up. Rates need to rise enough to stop inflation seeping deep into our economy’s pores, but not so much as a throw us deeper into recession. This delicate balancing act requires the Treasury and Bank to work in lock step – ensuring that monetary and fiscal policy are working in the same direction.
That brings us to tax. Liz Truss and Kwasi Kwarteng were right to pull this scale from our eyes: taxes are too high, and risk suffocating enterprise. In just two years, Boris Johnson raised taxes by more than Gordon Brown did in 10. But the “mini-Budget” ignored the fact that taxes are high because spending is high, and borrowing costs are soaring. Unfunded tax cuts are no better than unfunded spending: both rely on a magic money tree.
Enter Messrs Sunak and Hunt. They have rightly pulled another scale from our eyes. We need to get a grip of our public finances if we are to avoid being drowned in red ink. The higher inflation goes, the bigger the impact on borrowing thanks to the soaring cost of servicing our debt. We have the highest proportion of index-linked debt in the G7: 25 per cent, five times what it is in Germany. Add to that the risk of rising rates and it is not surprising that the OBR forecasts that this year debt interest costs might hit a record high of £83 billion. That is getting on for double what we spend on defence. An average RPI rate of 15 per cent next year would boost borrowing costs to almost £130 billion, and that does not include the cost of rising rates.
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And this brings us to the fourth scale, a scale that has yet to fall: spending. Spending has soared in recent years, not solely thanks to Covid or the impact of the war. The last Budget increased total departmental spending over this Parliament by £150 billion. That is the largest increase this century – and does not include the energy package. Meanwhile, health spending is set to account for an ever-growing share of total day-to-day public service spending: 44 per cent by 2024−25, up from 27 per cent in 1999−00.
Bringing spending under control is harder than ever. This is not simply because of the obvious pressure to increase spending to compensate for inflation’s erosion of welfare benefits, public sector pay and departments’ budgets. It’s harder thanks to a growing perception that the state has the solution to our problems, rather than individuals and businesses. “I’m from the government, and I’m here to help”, has become a comforting notion, a default position. And this has been fuelled by a Conservative Party besotted with focus groups, ducking and weaving to tell people what they want to hear, rather than applying our principles to a problem, coming up with a solution, and then finding the best way to explain it to the public.
So the Prime Minister and Chancellor have a mountain to climb, not just in terms of getting our finances under control, but changing the terms of discourse. Neither can happen overnight. A step-by-step approach is required, bringing the public with them. Radical reform to our public services may be needed, but that can wait until we are in calmer waters. Steadying the ship is the order of the day. And for that, honesty about the problems we face is key.
If taxes have to rise, Jeremy Hunt must make it clear that these are emergency measures, required to stabilise the situation. And he needs to set out a path to bring tax and spend back down again once we are back on an even keel, while making the case for lower taxes. That case is not just about growth and GDP. It’s about belief: that people should have the freedom to spend what they earn, and be encouraged to take control of their lives.
Before the 1997 election, the Blairite anthem was “Things can only get better”. Labour plastered the country with adverts saying “enough is enough”. Well, things can only get better if we realise that, as far as spending and borrowing goes, enough is enough.
Lord Bridges is a former Brexit minister.
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