As we go to press, we don’t yet have a new prime minister, although it seems highly likely that we’re going to get one sooner rather than later. We do have a new chancellor, Nadhim Zahawi, but again, there’s no guarantee that we won’t be getting a new one in short order.
The main question on your mind might be: who would be foolish or ambitious enough to want either job at this stage? After all, the macroeconomic environment they’re stepping into is unenviable, to say the least.
You need only glance at the reaction from investment markets to see this clearly illustrated: there wasn’t one. The pound was barely moved by any of the turmoil at the top of British politics – of far more significance has been the resurgent US dollar, which is surging on the back of fears that we’re heading for global recession. It all feels rather gloomy.
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Is it really that bad?
Yet perhaps we’re getting a bit ahead of ourselves. The UK faces plenty of problems, from painfully high energy prices to an apparent inability to get anything done about chronic problems such as our dysfunctional housing market.
But at least we’re not alone in our misery. As Marcus Ashworth points out on Bloomberg, while Britain’s debt-to-GDP ratio is currently sitting at just under 100%, that’s still “better than many other major economies, so there’s room to borrow”. Meanwhile, the tax take has remained healthier than expected due to employment remaining high.
This implies that the new chancellor has fiscal room for manoeuvre. And politically speaking, they’re going to need it. The outgoing chancellor Rishi Sunak hinted in his letter of resignation that he had thrown in the towel because he and Boris Johnson disagreed on fiscal policy. But the reality is that pushing up taxes now – in the middle of a cost-of-living crisis and with the tax burden in the UK set to reach its highest level since the late 1940s – in order to promise a tax cut at some point near the next general election (which is probably a lot closer now in any case) was never a sensible strategy.
The Bank of England can’t attempt to tackle inflation while also trying to stop a recession. So the government should do what it can to encourage growth. And while it’s not fashionable to say this, the best way to do that is by getting out of the way. That means cutting taxes to allow individuals to keep more of their own money. That would take pressure off a number of areas – it would take some of the sting out of the rising cost of living, and to an extent, reduce the risk of a wage-price spiral by allowing workers to keep more of the wages they already make.
This would also enable the Bank of England to focus on moving interest rates up closer to “normal” historical levels. That would take some of the heat out of the housing market, boosting affordability, as well as helping to prop up the pound, reducing inflationary pressure. Better yet, it might encourage companies to make genuinely productive investments – when money actually costs something, investments have to work harder to earn a return.
Will any of this happen? We can hope. Pessimists or realists might want to look at this week's magazine for ideas on how to invest for rather harder times.
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UK wages grow at a record paceThe latest UK wages data will add pressure on the BoE to push interest rates even higher.
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UK economy avoids stagnation with surprise growthGross domestic product increased by 0.2% in the second quarter and by 0.5% in June
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UK inflation remains at 8.7% ‒ what it means for your moneyInflation was unmoved at 8.7% in the 12 months to May. What does this ‘sticky’ rate of inflation mean for your money?
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ONS: UK economy shrank 0.3% in MarchNews The latest data from the ONS showed falling car and retail sales combined with industrial action caused GDP to contract in March. However, the economy expanded by 0.1% in the first quarter overall.
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Bank of England hikes base rate to 4.5%News The Bank of England has hiked rates again as it continues its battle with inflation.
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It’s been 16 years, but the UK economy finally has a chanceOpinion The UK economy has been dealing with one crisis after another since 2007. Policymakers now have a chance to fix some of the underlying problems holding back growth.
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When will UK interest rates fall further? Latest Bank of England predictionsThe Bank of England has cut interest rates twice so far this year, bringing the base rate to 4.75%. When will it fall further?
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GDP flatlines, but the UK economy remains resilientNews Latest Office for National Statistics figures show the UK economy avoiding recession, although risks remain in the months ahead.
