Sunak's talk of emergency can only knock confidence Posted by David Smith at 09:00 AMCategory: David Smith's other articles My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt. You may have seen a report a few days ago which highlighted people’s lack of understanding of basic economic concepts. The report, based on a survey by the Economics Statistics Centre of Excellence and the National Institute of Economic and Social Research, showed that fewer than half of people knew what gross domestic product (GDP) was when presented with a range of definitions. Most, 67%, knew that the government was running a budget deficit – I don’t know what the other one-third has been doing during this year – but only 40% knew that that meant government
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Sunak's talk of emergency can only knock confidence
My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.
You may have seen a report a few days ago which highlighted people’s lack of understanding of basic economic concepts. The report, based on a survey by the Economics Statistics Centre of Excellence and the National Institute of Economic and Social Research, showed that fewer than half of people knew what gross domestic product (GDP) was when presented with a range of definitions.
Most, 67%, knew that the government was running a budget deficit – I don’t know what the other one-third has been doing during this year – but only 40% knew that that meant government spending was higher than tax revenues.
Welcome to my world. This is meat and drink for those of us who think basic economic understanding should be part of the school curriculum and made available to every adult. Perhaps it helps explain some of the things that have been happening in the past few years.
Though people who have made it this far into the Business section are much more economically aware than most, some of the emails I get show there is still work to be done. Among the public at large, budget deficits and trade deficits are commonly confused, as is government debt and international debt. And don’t get me started on the difference between real-terms changes – those adjusted for inflation – and changes in cash, or nominal, terms.
This brings me on to Rishi Sunak. Chancellors have a duty to explain, and this chancellor has won plaudits for his clarity and the speed of his response to the crisis. I defy even the most economically aware member of the public, however, to have followed his jargon-filled and statistics-heavy spending review statement when it was delivered in the House of Commons last Wednesday, without benefit of the accompanying documents.
That was not my main concern. In rehearsal, the chancellor’s opening burst – “Our health emergency is not yet over. And our economic emergency has only just begun” - may have sounded suitably Churchillian. But it jarred, and it jarred badly.
I know what was meant, that the economic effects of this crisis will be around for years, and there will be bills to pay in future, though Sunak has been noticeably coy about saying anything about future fiscal policy. But as a description it was a strange one, and if his aim was to undermine confidence, this was how to go about it.
The “economic emergency”, which it has been, began in March and, as far as the economy is concerned – our old friend GDP – reached its low point in April, seven months ago. A 23% recovery from that low point by September and a 15.5% rise in GDP in the third quarter show the extent to which that recession low is in the past, not something to be suffered in the future.
This month’s lockdown will have represented a hiccup in the recovery, not an end to it. The 11.3% drop in GDP for this year as a whole, if it occurs, is indeed spectacular, but it is mainly a historical artefact.
As for the new official forecast from the Office for Budget Responsibility (OBR), it is disappointing that the “V” of this recovery will take longer than initially hoped, because of the coronavirus second wave, but if the economy gets back to where it was in late 2019 by the end of 2022, as its main forecast suggests, that will be in line with three of the past four recessions since the 1970s, and shorter than the five years it took after the global financial crisis.
On unemployment, while every lost job is painful, the OBR’s first guess in the spring was that unemployment would hit 10% almost immediately. In July, in another forecast, its Fiscal Sustainability Report, it suggested a peak next year of 12%, equivalent to more than 4m people. Its new forecast of a 7.5% rate, half that experienced in America as a result of the pandemic, is in relative terms quite reassuring. Not for the 2.6m people who will be unemployed if the prediction is right, but for the many others who could have suffered.
The messaging around these things should be simple enough, particularly when the new tier system announced on Thursday, to be introduced in the wake of the second lockdown, has produced another dollop of gloom. It is that while the economy has suffered a huge economic hit as a result of Covid-19, the worst is behind us, and there is every reason – backed by the new official forecast – to expect a strong recovery over the next two years. Jobs will continue to be lost, and some businesses will not make it, but it could have been worse.
That still leaves the not so small matter of a £394bn budget deficit this year and the fiscal challenges to come. I am intrigued to see whether we get to that huge figure, given that borrowing in the first seven months of the year has been “only” £215bn. After that, borrowing initially falls faster than it did after the financial crisis, though remains high at around £100bn even at the end of the parliament.
The chancellor how suggested that this is not sustainable. It remains to be seen how he addresses a tax gap estimated by the OBR to be around £27bn; that amount needed to balance day-to-day spending and tax receipts. To put that in context an increase in VAT of 2.5 percentage points, as announced by George Osborne in 2010, would raise an additional £18bn a year.
An increase in VAT, along with rises in income tax and National Insurance, are officially off limits because the Tory manifesto last December ruled them out. But it also ruled out a cut in the overseas aid budget from 0.7% to 0.5% of gross national income (a close relative of GDP).
There was, it should be clear, no need to do this and, as several former prime ministers have pointed out, it sends the wrong signal at a time of global need and when the UK wants to demonstrate global leadership. Our contribution would have been smaller anyway because GDP has been hit by the coronavirus crisis. But the chancellor appears to be as guided by polls and focus groups, as are the prime minister and his advisers. Cutting overseas aid, on the “charity begins at home” mantra, is popular, as is freezing public sector pay.
The result was that a chancellor who is spending record amounts of money, in a government which it should be said is presiding over record amounts of waste, managed to sound mean and mean-spirited. If universal credit is cut next April, which on current plans it will be, he will add to that impression. Non-Covid spending is also due to be cut from previously expected levels.
Finally, there is the dog that did not bark, Brexit. The chancellor did not mention it in his speech and he does not appear to be taking much of a lead on it in a government that still mainly wants to have its cake and eat it. The official forecaster is clear that the free trade agreement the government is pursuing will hit the economy; in the long run it will be 4% smaller than otherwise. A no-deal Brexit would add to that hit, pushing growth significantly lower and unemployment higher next year, and adding to the long-term damage. It is a risk perhaps, that would justify a more downbeat tone.