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September 4, 2023 - 10:00am
Friday is normally a good day to bury bad news. But just before the weekend, we had some rather wonderful news, specifically about the British economy.
It turns out that our GDP is 1.8% bigger than the Office for National Statistics (ONS) had previously reckoned. For an economy the size of the UK’s, that’s a lot of money to find down the back of the statistical sofa.
But we shouldn’t be too hard on the ONS. Nor should we indulge in conspiracy theories. The fact is that the pandemic caused unprecedented disruption to the economy — and therefore to the measurement of the economy. There were always going to be revisions.
That said, this one’s a monster — easily big enough to blow previous media narratives out of the water. Contrary to what we’d been told, the UK is not lumbered with a Brexit-wrecked economy that’s yet to recover to its pre-Covid levels. In fact, we reached the recovery point in late 2021 and have since exceeded it. As Chris Giles of the Financial Times put it, “the UK is not a global outlier anymore” — and as John Burn-Murdoch, also of the FT, added: “vibe shift”.
While the Brexiteers have been enjoying their day in the sun, there’s another group of people with cause to be humble: the diehard fans of Liz Truss, who number more than one might imagine.
This week marks one year since Truss became Prime Minister. It won’t be long before we also mark the anniversary of her spectacular downfall. But with the GDP revision, we can expect the Trussites to present some revisionist histories of their own. “We wuz robbed,” will be the gist of it — robbed, that is, by experts whose unduly pessimistic figures and forecasts puts the skids under her government.
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SubscribeIt was foolish of Truss to attempt to fund tax cuts through borrowing rather than making cuts to government spending. She compounded the error by greatly increasing government spending with an open ended universal support for energy costs, rather than targeting only those those in most need. Those things are contrary to the free market philosophy to which Truss claims to believe in. They were lazy quick fixes to avoid controversy and a much needed political battle of ideas.
It was not that Truss was wrong in seeking to reduce taxes -particularly on business – and institute supply side reforms. It was that she was too craven to take an axe to our bloated, parasitic, dysfunctional state, and instead tried to stick the cost on the national credit card.
Truss deserved criticism, but should have been given the opportunity to correct her errors. Those who have greater culpability for the parlous state of the British economy: Johnson, Sunak, Mark Carney and the BoE and the Treasury, were quick to put the boot in to Truss in order to deflect from their own gross incompetence. Tory MPs, still smarting from not having their chosen one elected leader, didn’t hesitate to put the knife in.
Unfortunately for Tory MPs they replaced Truss with an unimaginative technocrat bean counter, hopelessly out of his depth, and leading them to inevitable defeat,
Well said. Her biggest mistake was removing the top rate of income tax. A small sum in the grand scheme of government finances, but gave the media plenty of red meat headlines.
Conspiracy theories? Our own statistical and economic bodies consistently underestimate the country. If the opposite were true (as happens in most other countries) it would also be a scandal. Rasonable people understand that predictions on anything complex are likely to be wrong but the trouble is that when they are always wrong in a negative direction that creates a drag on the economy as investors decide to put their money elsewhere.
This is complete nonsense.
Firstly the lazy term “unfunded tax cuts” is economic illiteracy. Think about it for one second: it is not taxes that are funded or unfunded, it is spending. Secondly, the phrase relies on the false assumption that tax rates and tax takes move in the same direction when often the opposite is true; a cut in income tax has often led to higher income tax takes in the following years.
Thirdly, it completely ignores the fact that the BoE had just announced it was about to sell a load of bonds thereby commencing unwinding the gigantic bond purchasing and loose monetary policy of the last decade plus. This in itself would be enough to spook any market as heavily indebted as ours. That’s where the money markets are relevant.
There aren’t many diehard fans of Liz Truss and we should not fall into the trap of conflating those who argue for supply side reform and tax cuts with “diehard” support for Truss’s mini-budget. For the fourth error this article makes is that it ignores Truss’s huge intervention into the energy markets with her help for household energy bills. It was this that was unfunded, not the tax cuts, and made Truss’s budget more market interventionist than less and lost her support among the free marketeers. It is evidence of poor analysis and political impartiality that journalists and other market commentators focus on the relatively minor tax cuts and not the hugely inflationary energy bailout.
The idea that one needs an excuse to make supply side reforms or cut tax marks the author out as just another statist or social democrat with his hand in the taxpayers’ pockets.
Liz Truss proposed departing from consensus government so she was cancelled.
All this, of course, depends on whether you believe anything the ONS says.
The Bank saw off Truss, we must assume deliberately. The markets were already unsettled before the mini-budget and the cost of Govt borrowing was already rising. Then the Bank first confounded market expectations by not copying the Fed’s larger interest rate rise and then announced it was starting to sell off the bonds it had acquired through its over-extended period of QE. No wonder the markets were skittish. Truss didn’t help herself by announcing an energy support scheme that was open-ended but this had been heavily trailed in her leadership campaign and announced three weeks before the mini-budget with widespread support, including from those Tory MPs who later turned on her.
Truss could have survived had the Parliamentary party supported her but they saw their chance to ride roughshod over the wishes of the membership and install their preferred candidate. They deserve all the pain they’re going to get at the GE. They deserve it but the country doesn’t.
https://www.washingtonpost.com/business/markets-didnt-oust-truss-the-bank-of-england-did/2022/10/26/dd92c4d2-54eb-11ed-ac8b-08bbfab1c5a5_story.html
It’s not so much the ONS or other forecasters themselves; equally to blame (arguably more) is the media reporting of such forecasts. You can be sure that a headline like “UK economic growth lowest in the G7” (or lower than EU) will be headline news on the BBC, Guardian, FT, etc. Qualifications on the accuracy of such numbers, or the inevitability of their future revision, will be mentioned somewhere in paragraph 17 (or five minutes into the news bulletin) – if it’s there at all. It will then become the latest watercooler / social media conversation among my anti-Brexit friends and colleague for a week or more.
Then when the revisions and re-forecasts come and no longer quite fit the narrative, this will be also reported – oh, yes. But headline? Not so much. Bottom of page 2 (or 12). Second to last item in the BBC news (if you’re lucky). And my anti-Brexit friends and colleagues will have found something else to talk about, because this time they won’t have quite noticed.
Confirmation bias? Just possibly.
Not at all to be trusted. Like the British media and non-government organisations that constantly trumped the Democrats success in the current US administration, the proof on the ground in both countries is crippling inflation taking away the financial security of ordinary households.
I think Liz Truss’s rise through the Tory ranks is due to a bit of dodgy Remain propaganda.
It was said during the referendum that it would take years to recreate the third party trade agreements that we get through the EU as an independent nation. Some said it would be impossible.
It always struck me as nonsense. Why would a country we trade with not just want the existing EU agreement recreated and signed by the UK? Of course they would.
Truss was in charge of the roll-over and no doubt did it in an organised and professional manner. But she was hailed as the saviour of the country for doing so (when in reality it was a pretty mundane piece of administration) and spun that into Foreign Secretary and then a leadership bid.
Can someone explain to me what the long term impact of Truss’s policies are? Whether you agreed with her or not (I think the general idea was right but the execution insane) everything was reversed within weeks, a few unfortunates got hammered on their mortgages and it was back to managed decline as usual. Not a brilliant look for the UK, but apart from that?
As the FT is the house rag of the financial and political establishment in Britain so Bloomberg TV is the loud hailer of the WallStreet/DC nexus.
While I watched every minute of the coverage of our Queen’s obsequies I still kept an eye on financial manoeuvres. Aside from the Bank’s clumsy? interest rate announcement and clunky QE reversal I saw that Bloomberg was from the hour of Liz Truss’s appointment out to get her.
It was clear she would fall and Kwasi Kwarteng with her. What she had done or said to offend the ‘Biden’ administration is unclear. I think it may have been her suggestion that getting a trade ‘deal’ with the US was not so important as making her own policy on Northern Ireland.
Not just T. Blair but our politicians as a whole must conform and stay on the leash as Washington’s poodles.
Whatever the rights and wrongs of the mini-budget, Truss is not a leader, let alone a PM. That she was made so is indicative of the paucity of talent in politics, particularly the Conservatives, now long exhausted, a busted flush. The main reasons they have been in power so long: would-be-Labour-voter anger with T Blair; and the reactionary choice of Corbyn, whose leadership qualities & abilities are in the same sorry ballpark as Truss’. The ascendancy of both is an indictment of populism – usually, though with plenty of exceptions, the only takes that are reliably worse than that of the elites.
Quite so, and the result was the selection of technocrats to replace these wide eyed loonies. However they try to paint a different picture, Sunak/Hunt are of the same mould as Starmer/Reeves, technocrats all.
We haven’t really left the EU have we. Laws pretty much the same and no ‘bonfire’ of regulations. TCA ties us close and shortly for renegotiation. Windsor Agreement further ensures close alignment. And then we’ve increased legal migration, in truth because of the economic benefits despite the naysayers – remember education one of our best exports, just they come here for it. And of course we’ve backed down on the import checks too (albeit that means our exporters have a asymmetric disadvantage which in time is not going to help them). So perhaps we’ll settle into a largely tokenistic form of Brexit which will steady our economy and that is what has happened. Suspect most can live with that even if our Nige thinks it a total failure.
As regards Truss, Author pretty much says it all. They’ll be an inevitable revisionist narrative as is the norm. However folks perhaps forget every time Mad Liz spoke, especially to the public (and who can forget the utter car-crash of her morning of radio phone ins) the confidence balloon further deflated. As politicians go you could not be ‘heavier on one’s feet’ than our Liz. Confidence that a country has a leader who doesn’t come across as a wooden, robotic imbecile quite important it turns out.
Nothing is ever perfect J.
I would put the various new and restructured bilateral trade deals on the plus side of the ledger along with entry into the CPTPP and the imminent (we are told) India deal. Indeed it will be interesting to see how the gravity models that were used to dismiss the benefits of these deals stands up to the new Blue Book revisions from the ONS.
On immigration, there is much to be done. What is needed is a balance to be struck between population growth and housing, public service and infrastructure provision. My estimate is that we are about 2M homes short in the England. We would need to fill that gap and double the amount we build each year to break even. I suspect similar shortfalls are evident in NHS provision, railways, drains and sewers, electricity generation and distribution, primary school teachers, etc for those who know these areas. On the other hand you need migrant workers to keep the economy ticking and to help control wages/prices. As you say selling degree and post-grad courses to foreigners is an overall good but the correct procedures need to be in place to stop overstaying and bogus courses.
The point about EU membership is that we had no control over immigration, not the numbers or the nature of the immigrants. Now we do and it requires work from either this government or a future one to deal with it.
I wouldn’t call the Brexit we have tokenistic. It is a fundamental, constitutional shift and one that gets into the heart of most areas of life in one way or another. But it still needs skilful governance (which is in short supply).
As for Liz Truss – she was always evidently a 3rd division politician. The leadership race was pretty much a stitch-up.
Much we agree with there MM.
I’d differ, as we’ve debated before, on whether free movement gave us ‘no’ controls on EU migration. We chose not to use any of the controls that were permissible under the relevant Treaty articles. I also suspect the EU form of migration would have resulted in more ‘temporary’ stays with people returning back home later, and as those Countries further improved their economies these trends would flatten. Whereas more migration from non EU I suspect will have less of that trend, and this as we know has increased. Maybe we can say at least more of our decision, but a semantic for many who expected a different outcome.
Certainly need to tighten up on overstays yet no real evidence they are doing anything much about that. And without ID cards always going to be a bigger challenge.
The other trade deals, whilst in general v welcome, are oversold. V little on expected GDP impact, and in fact many UK Farmers intensely angry about some elements. Even the ex Minster responsible said we’ve poorly negotiated.
One also worries that despite some nice photo calls with Modi, senior CCP members etc (but not Xi), we ain’t carrying the heft we once did when also armoured with 470b EU potential customers. One fears we are getting humoured in these photo opportunities whilst seen as less relevant. Time will tell.
I have it on good authority from contacts in the city that Liz Truss was deliberately pushed out by Sunak with his friends in the finance sector. He was in it for such a long time, ofc he has pretty good contacts and it’s not terribly hard to manufacture a market crisis.
How do we frame the economic argument over Brexit? This might be a short term boost in a slow economic decline.
The argument during the referendum was that if we choose to leave the EU, penury would surely follow.
We left and have grown more quickly than our EU competitors during the intervening 6 years. So it seems that the economic basis of Remain has been well and truly repudiated.
This doesn’t mean that there are not perfectly respectable arguments for Remain – ease of renovations on your second home in the Dordogne for instance or keeping wages low for Svetlana your au pair – just not the macro-economic ones pushed by the BBC and the FT for the last few years.
Depends how you frame it. To many economists we’re in slow decline, having cut ourselves off from the EU. Time will tell. I know Svetlana, you should hear what she says about you.
Sure, time will tell.
Love to Svetlana.
Well played
Your examples for Remain only apply to the rich and those who wish to pollute the upper atmosphere to go on foreign holidays. I suspect that people like Clark and Max Hastings only want to remain in the EU for their own selfish reasons. Or perhaps they miss the mummy figure of the unelected Commission telling them what to do and graciously allowing the UK to spend some of the money that was sent to them on their approved projects. A common market as originally envisaged, a fine idea. A superstate run by unelected Marxist so – called elite is a step too far as some of the EU countries are finding out to their cost.
( Both Clark and Hastings recently described Brexit as an unmitigated disaster)