There must be moments when Rishi Sunak wonders why he ever accepted the job of chancellor. Only months after he moved into No. 11 he had the Covid-19 crisis to deal with. Now he has the war in Ukraine as well. Already he is under pressure to find a way of alleviating the inevitable pain that is going to cause for the economy.
Oil and gas prices are soaring as Russian supplies start to get cut off, and if there is a ban on importing its energy they will go a lot higher still. Food prices will start rising very soon as it becomes clear how much the world has relied on the wheat fields of Ukraine to feed itself. And all the sales lost as company after company pulls out of the Russian market and stops buying raw materials from the country will very soon feed through into output and profits.
There is a very real possibility of a quarter or two of negative growth, and at the very least there will be a slowdown. Against that backdrop, it wouldn’t be a great surprise if the government, and certainly one as free-spending as this one has proved, decided that some kind of rescue package is needed. That would be a big mistake. Here’s why.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The war has made us poorer
First, we have to accept that the war has made us poorer. The vast supplies of Russian oil and gas, plus all the other raw materials it exported, as well as the vast quantities of wheat from Ukraine, lowered global prices. As all that stuff starts to disappear from the market, as with sanctions it inevitably will, then prices will be permanently higher. At some point, we will start to replace that. If Europe, including the UK, starts fracking in the same way the US has done, there will be plenty of gas available, and if we build nuclear plants as well as more wind turbines, then there will be plenty of electricity as well. If we allow gene editing we can almost certainly boost farm yields enough to replace the lost wheat and corn. But none of that is going to happen quickly and until then we will simply have to consume less. That is what happens in war.
Next, we have to get off the treadmill of permanent rescues. Over the last 15 years we spent tens of billions bailing out the financial system following the crash of 2008-2009. We spent five or ten times as much coping with the Covid-19 pandemic. And now here we are again, with a fresh crisis, and another round of demands for the government to rescue the economy. We need to get off that track. The state can’t always step in with a rescue package to magic away every downturn in the economy. Our debt levels have already soared from less than 50% of GDP before the crash to close to 100% now and are set to rise even higher over the next few years. If we keep borrowing more and more money with no plan for ever paying it back the accumulated debt will eventually crush us.
More cash will pour into defence
Finally, we will have to start spending more on defence. A new Cold War is starting and will only end when Vladimir Putin’s corrupt, autocratic regime collapses, just as the last one only ended with the fall of the Soviet Union. How long that takes remains to be seen. One point is certain, however: it will involve spending a lot more on defending ourselves. Along with the rest of Nato, the UK will need to spend more on military equipment, on stationing troops along the eastern frontier to deter aggression, and on helping the Ukrainians. None of that will be cheap. During the last Cold War the UK was spending an average of 5% of GDP on defence, compared with 2% today. If we have to find another two or three per cent of our total output to spend on our armed forces that inevitably means that we have less to spend on everything else. That includes bailing out the economy.
The very poorest among us may well need extra money to stay warm and pay for food. But we can do that through the welfare system and far more effectively than with price caps and controls for everyone. We will just have to tighten our belts and adjust – and stop expecting the chancellor to bail us out with printed cash every time there is a crisis.
-
December 2023 NS&I Premium Bond winners - check now to see what you’ve wonIf you hold money in NS&I Premium Bonds, you can check from today (2 December) to see if you have won in the December prize draw. Here’s how to check.
-
OpenAI – corporate drama unleashed
OpenAI, the firm behind ChatGPT, was in uproar as its boss was booted out, briefly snapped up by Microsoft and then brought back again.
-
Can Lidiane Jones be Bumble's perfect match?
Dating app Bumble is taking on Lidiane Jones, a well-regarded leader in tech, as its new boss. Can she work her magic in a new arena?
-
UK millennials are worse off than previous generations
The evidence shows that millennials today are getting a raw deal. And, ultimately, that's a political choice.
-
The rise and fall of Sam Bankman-Fried – the “boy wonder of crypto”
Why the fate of Sam Bankman-Fried reminds us to be wary of digital tokens and unregulated financial intermediaries.
-
The jury's out on the AI summit at Bletchley Park
World governments gathered for an AI summit at Bletchley Park in November, but were they too focused on threats at the expense of economic benefits?
-
As a market correction begins, money is on the move.
The force of a market correction is equal and opposite to the delusion that preceded it, so we can imagine that the correction will also be unparalleled.
-
How small businesses can retain staff in a competitive job market
Small businesses are struggling to retain staff and compete against large companies with deep pockets.
-
The French economy's Macron bubble is bursting
Cheap debt and a luxury boom have flattered the French economy. That streak of luck is running out.
-
K-pop hitman Bang Si-hyuk aims to repeat BTS phenomenon
Bang Si-hyuk created the world’s biggest boy band, BTS, making K-pop music a global sensation and himself very rich. Can he repeat the trick with a girl band?
