As well as responding to the shock of Brexit, our economic policy must begin to repair the country
“Our economy is about as strong as it could be to confront the challenge our country now faces.”
George Osborne, Monday 28 June 2016
The chancellor’s post-referendum economic strategy amounts to the rhetoric or plea that the economy is strong. Yesterday’s latest quarterly national accounts suggest otherwise (though this is hardly news).
The charts show business investment growth at its weakest for six years, the current account deficit virtually an all-time low, the saving ratio remains at lows rarely seen since the 1960s. In the meantime private (and public) debt is still very high.
All these figures relate to the first quarter of 2016, a long time before the referendum effect.
In January, severe market turbulence around the world was entirely unrelated to the referendum, instead to fragilities exposed with the gradual withdrawal of US quantitative easing (QE).
The present extreme uncertainty hits a UK economy that was already fragile, let alone remarkably unbalanced given such limited growth.
Beyond rhetoric, the only concrete action is left to Mark Carney, the governor of the Bank of England, who immediately stepped in to calm markets and support sterling, and is now raising the prospect of more QE and even a rate cut.
But it is widely understood that monetary policy is running out of road. In a May 2016 speech, the respected monetary economist (and founder member of the Monetary Policy Committee) Professor Charles Goodhart declared QE a ‘busted flush’.
In the wake of post referendum turmoil, QE may be necessary, but it will not be sufficient.
In his considered and important speech yesterday Mark Carney seemed to say likewise. He confirmed that ‘the Bank will consider a host of other measures and policies to promote monetary and financial stability’
But he warned that ‘part of that plan is ruthless truth telling. And one uncomfortable truth is that there are limits to what the Bank of England can do.’
In particular, monetary policy cannot immediately or fully offset the economic implications of a large, negative shock.
The future potential of this economy and its implications for jobs, real wages and wealth are not the gifts of monetary policymakers.
These will be driven by much bigger decisions; by bigger plans that are being formulated by others.
Even to the extent that QE and other monetary devices have supported the economy, they have not prevented the renewal of the imbalances of the pre-crash economy (e.g. on the charts above).
But more fundamentally, reliance on monetary stimulus is virtually powerless to resolve the cleavages in our economy that have been brought into sharp relief by the referendum result.
Any action plan needs urgently to start to address the failure of the London / finance-centric economy to support prosperity through the rest of the land.
The need is therefore two-fold: to protect the economy from the extreme uncertainty in the wake of Brexit, but also to start the long hard slog of repairing the country, restoring dignity through decent well paid work.
It works as part of a modern industrial strategy that operates on a regional level as well as aiming at climate goals.
The central initiatives are around delivering the infrastructure needs that are hardly unfamiliar (building 75,000-100,000 homes a year, announcing plans for more high-speed rail, giving the go-ahead for the third runway at Heathrow, carbon capture and storage infrastructure, renewable energy etc).
Obviously inherent to this plan is putting decisively to bed the ludicrous idea of a ‘punishment budget’. And I suppose we should be relieved that the Chancellor has announced today the suspension of his public surplus rule, but really it is meaningless to get rid of a senseless rule.
From a practical point of view excuses that we haven’t the capacity or know-how to do these projects must be dismissed – it is time to galvanise eager and highly competent professionals through trade unions, businesses, devolved nations, English local enterprise partnerships, combined authorities and city regions as well as the relevant government departments.
From a macro point of view, the notion that there is no money must be dismissed out of hand. As the OECD has made clear – reiterating arguments that some of us made six years ago – the money will come available through the prevention of recession and renewing.
The government must therefore make it clear that any immediate investment will be financed by borrowing rather than raising taxes or cutting spending elsewhere, which would suck demand out of the economy.
Ahead of the crisis Andy Haldane (the Bank’s chief economist) added his voice to the many others calling for infrastructure spending, and observed that interest rates on government borrowing had never been lower (on records extending back 5,000 years!
Since then rates have fallen further; this has continued even after the referendum (presumably a flight to safety).
How does it make sense to not take advantage of ultra-low interest rates when demand is so precarious, when there is so much that needs to be done and when quality work is so desperately needed?
But the finance question goes much further than this.
In the wake of the referendum commentators are rightly returning to fundamental questions around globalisation and the role of international finance.
We have pointed out before that the IMF’s article ‘Neoliberalism Oversold?’ is a fundamental and incredibly important challenge to a consensus that has dominated policymaking and political thinking for decades.
As we emphasise on the front page of today’s report:
“The government must acknowledge and seek to heal the wounds evident in the country – those of the enduring crisis in living standards, of the financial crisis and of the uncontrolled impacts of globalisation. And our political establishment needs to reflect on the causes of the anger and disaffection of many voters. These topics are not those of this paper – although in the coming months the TUC will return to these themes.”
Geoff Tily is senior economist at the TUC
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