HAMISH MCRAE: Political turmoil meets economic plod – new Tory leader has to assemble a competent Cabinet and that has to be in place fast
Gone but not forgotten: Boris Johnson
Political turmoil meets economic plod – and that is what the new government, when it is in place, will have to deal with. It will have to help the country clamber more swiftly out of downturn than it is currently managing to do.
Don’t believe the dire headlines claiming the economy is in some sort of post-pandemic meltdown. It isn’t. Actually it has grown more swiftly between the last quarter of 2019 and the first quarter of this year than France, Italy, Japan and Germany – though more slowly than the US and Canada.
But there are serious problems, and there are at least four reasons to suspect that the new government might tackle them better. There is also one reason to think things might, in the short term, get worse. So you could say it is a case of Four Weddings and a Funeral.
Wedding one is that whoever forms the government and whoever is Chancellor, there will be a reassessment of the UK economy and of the case for investing here. Do not expect any sudden climb in the pound or in UK shares, though both of them are undervalued.
There are much bigger forces at work here, notably the flight to safety that is pushing up the dollar and the question mark over global equities given the possibility of recession.
But there was a modest lift in sterling against the dollar when Boris Johnson announced he was on the way out, and a sharper one against the euro. Given that inflation is driven in part by the cost of imports, any rise in the pound is most welcome.
Next, there is going to be a shift in fiscal policy. One of the reasons for the resignation of Rishi Sunak was his disagreement with Boris Johnson about the need for tax increases. While we don’t know who will end up as PM or whether Nadhim Zahawi will remain Chancellor, this is an opportunity for a rethink.
Taxation is now projected to rise to the highest as a proportion of GDP since 1948. Of course, the cost of nursing the economy through the pandemic has to be paid for, and we look like running a fiscal deficit of around 4 per cent of GDP this fiscal year. (It was 6.1 per cent last year and 14.5 per cent the year before.)
But while it has to keep coming down, the pace at which we cut the deficit is a real debate. I am worried we are doing it too fast.
That leads to wedding three, which is that the new Chancellor will also look at the detail of taxation. Here Rishi Sunak seems to have lost his touch.
Is it really a good idea to jack up corporation tax from 19 per cent to 25 per cent? Sure, you could nudge it to 20 per cent. That is a nice round figure, and you could commit the government not to increase it this Parliament or next one. You might even get more revenue from 20 per cent than from 25 per cent, given the way companies behave. Was the question of National Insurance Contributions well handled? I am afraid not.
The basic point here is that there are ways to tweak the tax system to maintain the current strength in revenues, without stirring anger from the people and enterprises stumping up the cash.
Jean-Baptiste Colbert, Louis XIV’s finance minister, famously observed that, ‘The art of taxation consists in so plucking the goose as to obtain the largest number of feathers with the least possible amount of hissing.’
HMRC needs the feathers, but the backbenches are hearing a lot of hissing from their constituents. The new Chancellor will need to find ways of soothing them down.
And so to wedding number four. There is a well-known saying that retail is detail: what makes shops and supermarkets successful is the attention they give to getting the right goods at the right price and displaying them in the right way.
Well, government is about detail too. The things that have worked well in the past couple of years, such as the vaccine procurement and roll-out, have been the result of thorough, intense, precise planning. The things that have not worked well have been…well, let’s not go there. The next government will make mistakes, but it will be less chaotic, and that is really important.
The funeral? It is very simple. Economies are driven by confidence as much as numbers. We need confidence among consumers to keep spending. We need confidence for companies to keep hiring and investing. That means certainty about who is running the show. I am worried this thing will drag on. The new leader has to assemble a competent Cabinet and that has to be in place fast.