6 November 2022

Weekly Briefing: On a Rish and a prayer


As forecasts go, it wasn’t the cheeriest you’ll ever see.

The Bank of England this week set out a grim picture of a two-year recession, soaring unemployment and inflation above 10% for the next six months.

Even with the usual caveats about economic forecasts being designed to make astrologers look good, there seems very little cause for optimism at the moment. To paraphrase Liam Byrne, there is no money, at just the time when demands for it grow shriller by the day.

Of course, Bank of England forecasts are not like most others because the Monetary Policy Committee helps make the weather on which it is commentating. Here that meant trying to tamp down inflation with a hawkish-sounding 0.75bp hike in interest rates, while also offering some decidedly doveish forward guidance. To many City observers this was deeply puzzling stuff. Descriptions from financiers ranged from ‘a dog’s dinner’ (Rabobank) to ‘confused and contradictory’ (Citi) and, my own personal favourite, ‘obsolete on publication’ [Panmure Gordon).

Perhaps the Bank’s confusing stance is apposite for a time characterised not just by gloom, but by profound uncertainty – call it ‘vibes monetary policy’, if you like.

With all this dark prognostication swirling around, it’s little surprise that Rishi Sunak and Jeremy Hunt are engaged in full-throttle expectation management – first with their warnings about painful decisions to come and more recently with the Prime Minister saying that ‘everyone appreciates that the government cannot do everything’. That message may turn out to be a hard sell for a politician who made his name offering enormous state support during the pandemic, but now faces a fiscal landscape where ‘whatever it takes’ has some pretty hard limits.

At times of such uncertainty it’s tempting to grasp at solid-sounding figures. Take the £50bn ‘black hole’ in the public finances. There’s been much discussion about the mix of spending cuts and tax rises required to fill it, but rather less interrogation of what the ‘black hole’ actually consists of.

As Julian Jessop noted on CapX this week, the size of the gap is partly an artefact of what are pretty arbitrary fiscal rules, and £10bn of it is simply ‘headroom’.  The picture is complicated further still by the combination of an unclear path for interest rates and commodity prices that have fallen sharply in recent weeks – all of which means the fiscal crystal ball looks more like a particularly lairy snow globe.

The other great unknown in the Bank’s forecast is changes in government policy. For obvious reasons, the MPC hasn’t factored in the fiscal changes Hunt will announce next week. Given that all the talk is of tax rises and spending cuts, they are unlikely to brighten the picture significantly. But, as we’ve stressed before on CapX, the Government can’t be in the business of only talking about the public finances. It needs non-tax measures to both help stimulate growth and craft a political offer that goes beyond simply balancing the books.

Those in government may be looking with particular interest at the 10 policy suggestions published earlier this week by a centre-right ‘wonk supergroup’, including our own editor-in-chief. From energy to planning and improving the climate for business investment, they represent policies that are workable, sensible and not hamstrung by an excess of wishful thinking.

Then again, in an economy with problems as deep as ours, perhaps wishful thinking is the best we can hope for.

Click here to subscribe to our daily briefing – the best pieces from CapX and across the web.

CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.

John Ashmore is Editor of CapX.