Editor's letter

Things may look bad – but they’re not that bad

The UK faces plenty of problems, says John Stepek. But things may not be as bad as they look. Our debt to GDP ratio is lower than many other major economies, and high employment means a healthy tax take. That gives the new chancellor room to cut taxes so people can keep more of their own money.

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.

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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