7 August 2022

Weekly Briefing: Banking on a recession


If anyone was feeling a bit too jolly, the Bank of England’s latest Monetary Policy Report should put them right.

Year-on-year inflation of 13%, five consecutive quarters of negative growth and energy bills averaging £300 a month this winter – I think the technical term is ‘Aaaaargh’.

The most positive thing governor Andrew Bailey had to say was that this would merely be a long but shallow 1990s-style recession, rather than a totally crushing 2008-style crash. Still solid employment numbers are one chink of light, albeit begloomed by the surge in wage-related industrial unrest, now including an eight-day strike at our biggest container port.

As the BBC’s Faisal Islam noted, if the Bank’s forecast is even semi-accurate it will make talk of ‘fiscal headroom’ seem positively quaint, and debates about £30bn of tax cuts academic. There are important caveats here though – a) forecasts are often well wide of the mark and b) the Bank’s assumptions are based on current fiscal policy, and there will soon be a new Prime Minister.

Seized by the need to play to the Tory gallery, we’ve not heard nearly enough from either candidate about this looming economic cataclysm.

Rishi Sunak is offering to ‘go further’ with household support than the measures he introduced earlier this year as Chancellor. Given that some analysts are predicting the energy price cap could go as high as £4,400 in January, ‘further’ could mean pretty darn far.

Liz Truss, on the other hand, has offered a hostage to fortune by saying she doesn’t want ‘handouts’, but will look to reduce living costs with tax cuts. The issue there, as Ben Ramanauskas pointed out in a recent CapX piece, is that many of the households likely to be worst affected by rising bills won’t benefit from tax cuts. To my mind that distributional question is more important, especially in the near term, than the inflationary effects of her tax proposals.

One of the strange features of the cost of living debate is how little we’re talking about what the Government has already done. From much of the coverage, you wouldn’t know that Sunak had slated £37bn of support for households for later this year (much of which is, admittedly, eaten up by tax rises and freezing income tax thresholds).

That’s partly because we’re stuck in the weird quagmire of the leadership contest, and both Truss and Sunak want to focus on dividing lines and future plans, but it’s also a symptom of the Government’s chronic inability to clearly communicate its own policies.

What we really ought to be thrashing out is who gets what support and how much it will cost. Why does the Energy Bills Support Scheme cover 29 million households, rather than concentrating on the poorest? How much should businesses be expected to bear vs households? How much is the next PM prepared to let (yet more) borrowing take the strain?

All of this feeds into a broader argument about the medium to long-term trajectory of the British economy. Are we on a highway to hellish, permanent low growth and doom-laden demographic change, or can we turn things around with the right policy mix?

That debate has been memorably characterised as ‘Boosters vs Doomsters’, in a much-quoted recent article by economist Sam Bowman. As luck would have it, Sam will be appearing on this week’s episode of the CapX Podcast, in what is sure to be an illuminating conversation with former senior Treasury adviser (and reluctant ‘Doomster’) Tim Pitt.

Normally I tend to the ‘Booster’ outlook, but after this week’s numbers I’m starting to think the Doomsters might be on to something…

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John Ashmore is Editor of CapX.