“I saw towards the Upper End of the Hall [in the Bank of England] a beautiful Virgin…Her Name was Publick Credit….Both the Sides of the Hall….were covered with such Acts of Parliament as had been made for the Establishment of the Publick Funds….behind the Throne was a prodigious heap of Bags of Money….But this I did not so much wonder at, when I heard, upon Enquiry, that she had the same virtue in her Touch, which the Poets tell us a Lydian King was formerly possessed of; and that she could convert whatever she pleas’d into that precious Metal.”
Joseph Addison, in The Spectator No.3, 3rd March 1711.
As this August’s GDP data came in worse than expected last week – 2.1% growth in August, half the forecast – I was struck by a simultaneous comment from Nick Train, one of our more successful fund managers, who said he had been buying UK shares, notably in the credit data firm Experian: “I genuinely believe this in part reflects the long period of disappointing absolute and relative returns delivered by the UK stock market,’ he added. ‘It’s simply that more opportunities are being presented to us as other investors give up on the UK.”
In other words, as others have written off the UK as a basket case, Train reckons it is time to take a contrarian view. He could well be right. Rolls Royce shares have doubled in a week since it announced it was raising sufficient capital to cover a “worst case scenario”.
If we are going to get through the crisis and recover, we need millions of domestic and international investors to take the same view. Right now, even retail investors (many of whom presumably voted for both Boris and Brexit) are deserting the sinking ship.
There are those who say “economic policy is Covid policy”. I am not a health expert and will have to leave that to somebody else.
Here are five things the Government should do to lift economic confidence:
First, make restoring investor and economic confidence a priority. You might say the government has lots of priorities and more plates than ever spinning in the air. And you’d be right. But it is hard to overstate the fact that some ministers and their advisers do not properly care about or understand the economy and think only in soundbites such as “Build Back Better” or “Jobs” or “Net Zero”. Not only do they have minimal empathy for the private sector, they sometimes revel in being anti-City and anti-business.
This is a residue of the financial crisis and is the sort of Last War thinking which must be purged. This is a time for some Whiggish optimism.
Every decision needs to be tested against “What will be the impact on confidence?” If the answer is negative, either don’t do it or come up with a mitigation. And assuming that we get a Brexit deal (at this point, any deal will do), and the virus diminishes at some point, the Treasury ought to be planning for a massive economic recovery campaign in the Spring. The Prime Minister and the Chancellor Rishi Sunak, with hundreds of businesses in tow (ok, on Zoom) should hold events in the City and regional financial centres and on Wall Street, in Singapore, Canada, Sydney, Frankfurt and Paris. This could be a massive invest UK roadshow, full of growth and opportunity.
Unleash the banks
Second, unleash the banks. Yes, you heard that correctly. Like cavalrymen in 1914, reminiscing about the effectiveness of Boer Kommandos on horseback, ministers and regulators are stuck in a 2008 mindset. This time round the banks are full to bursting with both their own capital and deposits earning no interest. Ironically, this is more rather then less likely to cause bad debts as economic activity is stifled.
Far from entertaining talk of negative interest rates, which risks undermining the basis of the financial system, the Treasury should do the opposite and encourage a return to orderly market behaviour. It is time to reduce the excessive amount of capital the banks have to hold against certain loans. This is called “releasing the counter cyclical buffer”. Banks should also be allowed to pay modest dividends once more. This would mean that if they did get into trouble, they could raise new capital from shareholders. We have deep and liquid capital markets in the UK and, as Rolls Royce and before that IAG has shown, these are mustard keen to provide new capital to good UK companies.
There is plenty of money
Third, shut up about tax rises. The actual cash cost of the Covid crisis, at around £300 billion, might sound terrifyingly expensive, but actually it is not. It is cheap. It will cost about the same as the Korean War – which saw defence spending temporarily spike from 7% of GDP to 11% of GDP between 1951 and 1954. It is true that the national debt has risen over 100% of GDP now (still trivial relative to the 250% it hit during the Second World War), but once GDP recovers that percentage will fall back.
The Covid crisis is exactly the sort of event that the whole institutional structure of the Bank of England and gilts market was invented to insure against and we will pay it off over 50 or 100 years, by the end of which it will be forgotten. Borrowing to get us through is the right thing to do and nothing to be embarrassed about.
Far from discussing tax rises – I assume the Treasury’s motive is to restrain No.10 spending – we should be planning for tax cuts. It was a mistake to cancel the Budget (as it was a mistake for President Trump to veto the US stimulus plan). We need a recovery package based on lower corporation taxes, reduced stamp duty, a cut in the usurious student loan 6.5% interest rate (believe it or not, that is accounted for as tax revenue) and a dynamic plan to rebuild and reform the economy.
Build back privately
Fourth, bring in the private sector as partners in delivering infrastructure. Sir Peter Hendy, chairman of Network Rail, is conducting a Union Connectivity Review, and he should recommend a new, fairer structure to replace the misbegotten private finance initiative. The private sector could deliver low carbon energy projects, rural broadband, rail electrification and managed lanes on motorways efficiently and at pace. The first Industrial Revolution was a private sector phenomenon, underpinned by the right institutions in Britain, and the next one should be too.
Fifth, bring in men and women of business, just as Churchill and Thatcher did. There is a great line in P.G.M. Dickson’s brilliant The Financial Revolution in England about how, at the end of the seventeenth century, the clouds of division rolled away and “a new generation of statesmen and thinkers, weary of their predecessors’ ideological battles, turned their attention to the problems of administrative and economic reconstruction.” Let us once again hear the sound of financiers, entrepreneurs and engineers, practical people, bustling down the corridors of power, eager to get things done.
George Trefgarne is CEO of Boscobel & Partners, a consultancy