UK Budget Day – A missed opportunity

Blain’s Morning Porridge – October 27^th 2021: UK Budget Day – A missed opportunity

“The UK – a health service with a small nation attached…”

This morning: Its UK Budget day and we pretty much know what to expect – but what’s the big plan? Now you’re asking… It’s time for a bold reinvention of the UK, but Sunak is more likely to prove a traditional conservative..

When I was a lad UK budget day was a big event – full of spiky surprises. We’d huddle round the office radiogram and listen earnestly as the Chancellor put a halfpenny on tax, a bawbee (sixpence) on ciggies – and there would be a cry of despair as beer went up a penny. The lone SNP MP in Westminster would bitterly fulminate about the tuppence tax-hike on Whisky as an English macro-aggression. The analysts would dissect the speech in detail, and the BBC would spend the evening explaining how much better or worse off everyone would be.

No longer. We pretty much know what to expect – Rishi Sunak’s give-aways later today have been briefed, lobbied and explained in detail to any journalist who will listen. According to the FT he will say: “Today’s Budget begins the work of preparing for a new economy post-Covid, an economy of strong public services, vibrant communities and safer streets.”

Yada, yada, yada….

At the end of Sunak’s blather, it’s unlikely I will have any clearer understanding of what The UK Government’s big plan really is. Instead… it will likely confirm government strategy is all about hoping for a recovery ahead of the next election – 3 years away. Hope is never a good strategy.

What we will hear later today is unlikely to feel “joined up”. There is a sense of frying pan/fire about it.

For instance; I’m struggling to understand why Government announced pay rises (after suitable delay and diversions by pay-review boards) for state employees. It simply nails wage inflation to the mast alongside the transitory 2-3 year supply-side inflation spike now upon us. The Unions are demanding inflation plus rises, and y’day the BBC hired some teachers and nurses straight out of central casting to say how crushed and unfair it will be if they don’t get massive pay boosts.

A few weeks ago Boris’ vague soundbite about  a “high-wage, high-skill, high-productivity” economy played well to an enthusiastic Tory Conference but the right wing Adam Smith Institute called the plan “bombastic, vacuous and economically illiterate.”  The CBI warned it’s a “fragile moment” and how empty ambitions and promises on wages and productivity will lead simply to higher prices.

What are the details of the plan to get us to the Hi-Wage, Hi-Skill, Hi-Prod nirvana?

As we are all aware there are massive immediate threats on the horizon: inflation/stagflation, trade, recession, government debt, taxes, consumer confidence, and geopolitics. These are the normal ups and downs of markets that competent governments and functional economies take in their stride. These economic squalls only become truly dangerous storms when they cause serious economic damage, or the ship of state is no longer fit to ride them out.

And that’s what really worries markets deep down about soundbite politics in the UK and the Borisisation of policy. It’s the absence of a discernible joined-up strategy to fully address the UK’s new post-pandemic, post-brexit economic reality that should scare the City.

The reality is crisis is already upon us: supply chain fractures, diminished opportunities and social mobility, Brexit, Europe, a dearth of innovation and entrepreneurship, rising real and relative poverty, insufficient wages in unattractive jobs, decaying infrastructure, crushing bureaucracy, a dysfunctional housing market, and ossified unfit-for-purpose public services.

These are the issues the Government should be solving for in the big plan. What big plan?

Rishi Sunak’s job today is to address the revenue side of the equation while pretending he’s an early Father Christmas. The sums he’s promising for transport, left-behind areas, help with fuel poverty, and some rainy-day savings sound good, but he is likely to play up recent strong UK growth (“fastest growing economy in Yoorp”), to justify financial rectitude.

The problem the UK faces is historical and political. The political cycle is short-term thus the dysfunctional fundamental issues that drive the success of an economy don’t get fixed. They become SEPs (Someone Else’s Problem). Our infrastructure is a classic example of “we’ll fix it tomorrow” thinking. You can see the failure of policy to evolve most clearly in the ravenous maw of the NHS, and the failing delivery of the educational system. As some much of the state is now state connected, the dead hand of bureaucracy and government inertia lies across the whole economy.

All these issues can be solved – but not separately. Addressing these issues holistically requires time, money and joined up thinking. It would require enormous political bravery to reconstruct the state. But, joined-up thinking and common sense are scarce political commodities.

Instead, what’s on offer from government is triage: offering sticking plasters to be slapped on gaping economic wounds, or telling the victims it’s “transitory”. Not enough lorry drivers? Let’s bring in Europeans on 3 month contracts! Energy bills unaffordable? Wrap up well then!

In the absence of any Big Plan, Chancellor Sunak is likely to go back to traditional Tory policy; anchor the government’s credentials via economic orthodoxy; austerity and spending cuts, reining back borrowing, and raising business and personal taxation to pay for it all. Its unimaginative but will look wise to both the party and electorate. It will fix nothing.

It will be an opportunity squandered.

The success of governments around the globe in raising and distributing billions in pandemic support spending packages without causing government debt markets to implode should have been a light bulb moment. Since the last economic crisis in 2009 we’ve proved devasting austerity and spending cuts are not an answer while other solutions to boost the economy, including printing money, are available and proving practical. Rather than austerity, Sunak should have been embracing the possibilities of fiscal boost and new monetary policy.

There is no free Magical Monetary Tree of unlimited government spending – but the markets are open for smart, credible governments to spend more to generate growth.

The key word is credibility – and avoiding policy mistakes like austerity. The UK spending itself out its current hole should be entirely feasible. Rather than hiking taxes, and cutting the modest £20 a week targeted helicopter money of universal credit to the poorest 10% of the economy, the Government could keep the economic wheels spinning through the current supply chain/recession/stagflation threat.

The biggest challenge any UK government faces is reinventing the NHS. That’s easy for me to write – but it will be political suicide for any government to attempt it… Unless… they are really, really clever.. (A porridge for another day perhaps..)

There are host of other policy initiatives the government could consider to strengthen and improve the economy. Creating economic growth through fiscal boost and regional policy to create jobs, growth, and build infrastructure is good. Solving skills shortages by paying doctors, nurses, engineers and HGV drivers to train, rather than charging them, would work. Spending money on fast, small Nuclear energy solutions and tidal power – tick. Helicopter money has been shown to work in crisis. Markets accept the QE money creation trick – it works.

It’s time to ask difficult questions: Why are we charging students for their education? Why aren’t we paying them to upskill? Why aren’t we spending more on the armed forces in a period of rising tension to generate greater security, but also multiplier effects across the economy? There are a million more to be posed…

There are positive signals beginning to emerge – but aside from lots of words there seems to be very little strategic thinking going on in the party of Government to actually deliver these hi-skill jobs and raised productivity.

Words are cheap. Action is difficult.

Five Things To Read This Morning

FT – Levelling up requires making the UK a science superpower

Torygraph – What the hell is the NHS doing with all its billions?

Bloomberg – Sunak Set to Save the Spoils of Record Rebound in UK Economy

FT – UK Budget: crippling shortages and rising prices hit the economy

WSJ – UN Finds Nations’ Climate Plans Fall Short of Paris Accord

Out of time, and back to the day job

Bill Blain

Strategist – Shard Capital