In a sense, Truss benefited from the fact that the focus was on the monarchy rather than politics during her first two weeks on the job. She was able to settle into Downing Street and think about what to do with her newfound power. In cricket parlance, the Prime Minister has had time to play herself. But, to stretch the metaphor, Truss will soon be faced with some nasty short bowling. If things go wrong, her time in the crease will be short. Although inflation is at 9.9%, the economy is probably already in recession and the pound only one more serious slide away from parity against the dollar, the government has the chops to do it. Ukraine’s military victories last week had a major impact on wholesale gas prices, which fell sharply this month. Ending the war, while far from a done deal, looks more possible than it has at any time since the Russian invasion in February. Additionally, the labor market is holding up quite well for an economy that has essentially moved sideways since the start of the year. The unemployment rate is the lowest since early 1974. If the government wants to be over-optimistic, it can take solace in the fact that past periods of sterling weakness have not always been bad for the economy. The devaluation that followed Black Wednesday 30 years ago was the catalyst for a period of strong export growth in the mid-1990s. The last time the pound flirted with parity against the dollar was in early 1985, but the following three years the economy flourished. Not so fast though. After Black Wednesday, the impact of the cheaper pound was amplified by interest rate cuts. This week the Bank of England’s monetary policy committee (MPC) will raise interest rates for the seventh time in a row. Nor is the comparison with the mid-1980s entirely satisfactory, because then Britain was a net energy exporter and less dependent on food imports than it is today. A lower kilogram makes imported energy and food more expensive. Although overshadowed by the Queen’s death, Truss’ first decision as prime minister was a big one: a pledge to cap the average annual household energy bill to £2,500 for the next two winters will boost spending power and make the recession shorter and shallow. The government estimates that the cost will reach £150 billion, which would make it the most expensive peacetime state intervention. Further details of the government’s plan will be outlined in Kwarteng’s mini-budget, a term that hardly does it justice as the chancellor plans to announce a huge increase in spending, big tax cuts, a big package of austerity reforms and more government borrowing. There is even talk that he will announce changes to the Bank of England’s inflation mandate. Kwarteng’s statement will not be accompanied by an independent analysis by the Office for Budget Responsibility on the potential impact of all these measures on growth, inflation and public finances: a sad lack of scrutiny when financial markets are so turbulent. It is not difficult to imagine circumstances in which markets react badly to the Bank’s rate decision and sell off sterling – either because they believe the MPC has done too little or is guilty of exaggeration. The chancellor will then have to explain why, in addition to borrowing to finance the energy package, he is also borrowing to finance tax cuts. Truss and Kwarteng are frustrated by the economy’s lack of momentum in the 15 years since the global financial crisis broke out in 2007 and are prepared to allow the budget deficit to grow. The theory is that tax cuts and deregulation will lead to faster growth, which will ultimately lead to a smaller deficit. A growth target of 2.5% will be set, modest by historical standards. Subscribe to Business Today Get ready for the business day – we’ll point you to all the business news and analysis you need every morning Privacy Notice: Newsletters may contain information about charities, online advertising and content sponsored by external parties. For more information, see our Privacy Policy. We use Google reCaptcha to protect our website and Google’s Privacy Policy and Terms of Service apply. As the Resolution Foundation think tank has pointed out, per capita income rose faster under Elizabeth II than under any other monarch dating back to 1271 (and before that, almost certainly). Average per capita income growth over the past 70 years has been 2% a year, twice the rate when the UK was the world’s number one economy under Queen Victoria. The economy’s overall growth rate — once labor force growth is taken into account — is even higher, reaching 2.4 percent since modern records began in the mid-1950s, according to Ruth Gregory of Capital Economics. But the average has been dragged down by the poor performance of the economy in recent years. Productivity growth has averaged under 1% per year over the past two decades, and even allowing for labor force growth, that leaves the economy’s underlying growth rate between 1% and 1.5%. Raising it to 2.5% is a monumental task, which will require much more than tax cuts and attacks on red tape. Britain’s problem is not that it is over-taxed or over-regulated (the labor market is one of the most flexible in the OECD), but that investment is so low. Setting a growth goal is one thing and achieving it is quite another.
