Events and non-events, dear boy
Plus: we speak to former Venezuelan political prisoner and IEA intern Jesús Armas
In today’s newsletter:
Spring (non-) statement
Freezing rail fares
Booming black market in tobacco
This was an odd week for economic news. The main set-piece announcement from the Government, the Spring Statement, was a non-event. Yet at the same time the outbreak of the US war on Iran sparked a wave of commentary and speculation while jolting international markets - a reality that went almost entirely ignored by the Chancellor.
The Spring Statement told us something we already knew - that the economy is getting worse and the conduct of economic policy is not improving. The OBR downgraded UK growth for the current year from 1.4% to 1.1%, and pushed up the tax burden to a historically-unprecedented 38.5% in a couple of years’ time. What these figures will be by the November Budget is anyone’s guess, but it is hard to believe that, under the pressure of higher energy costs and higher inflation, they are going to be any better.
We know, of course, what should have happened on Tuesday. As I wrote earlier this week, the Government should have set out a change of course: a path to lower tax and spend, a reversal of regulation in all areas but particularly in planning, labour markets, and the public services generally; and abandonment of the EU reset in favour of a more open trade policy to the whole world. Of course this did not happen. For it to happen would have required government ministers to abandon their entire governing philosophy. So we will continue sliding down the slope to worse and worse outcomes, with no serious attempt to fix it.
How might a prolonged war in the Gulf add to these problems? Well for sure there will be a hit to inflation if higher oil prices are sustained - an extra 0.5%, Oxford Economics estimated this week. Give up those hopes of an imminent interest rate cut if so. And those higher oil and gas prices will feed through into growth prospects. Britain may not be quite as exposed as the EU to supply difficulties, but we are still pretty exposed, so expect growth to slow further and the public finances to get worse.
The thing that worries me is the impact of all this on perceptions of the UK more broadly. We are running a huge government deficit and borrowing £150 billion or so every year. The conduct of economic policy is shaky, government MPs are only uncertainly committed to any form of fiscal discipline, and there could easily be a shift further left. This isn’t the best environment in which to absorb another shock. We have already seen 10-year gilt yields tick up by 20 basis points this week. The Government really can’t be complacent about this. The situation is fragile and could easily deteriorate further. We need to hear something authoritative on the subject from the Chancellor very soon.
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Many of you will have seen my announcement this week that my personal commitments mean I cannot stay as expected as DG of the IEA. Instead I will be moving to a new role of senior Policy Fellow, while still holding the fort during the transition. I am delighted to be able to stay closely involved with the Institute. The IEA’s principles need to be heard all the more in this collectivist and statist era, and I will be doing everything I can to magnify and support its voice and its work.
Lord Frost
Director General
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IEA Podcast: Director of Communications Callum Price is joined by Director General David Frost and Editorial Director Kristian Niemietz to discuss the Spring Statement, the economic consequences of the Middle East conflict, and British pride - IEA YouTube
‘Steady as she goes’ statement wrong when we need change
Responding to the Chancellor’s Spring Statement, Julian Jessop, Economics Fellow at the Institute of Economic Affairs said:
“The Chancellor sent a signal of “steady as she goes” today but what was really needed is a change of course.
“There is little sign that the government’s economic plan is working. In particular, the OBR’s forecasts for growth have been revised down and those for unemployment have been revised up.
“Inflation is at least projected to fall a little more quickly, but this forecast has already been overtaken by the surge in energy prices following the escalation of the crisis in the Middle East.
“The jumps in the cost of oil and natural gas could also mean that interest rates do not fall as much as hoped, leading to a renewed increase in the cost of government borrowing.
“More positively, the updated OBR forecasts show a small improvement in “fiscal headroom” since the November Budget. On paper, this means the government is still on course to hit its fiscal targets.
“But the margin for error is still wafer thin, and it may not take much more bad news to force the Chancellor to come back with even more tax increases in the Autumn.
“Today’s speech was light in three areas in particular. First, there was not enough acknowledgement of the part that the government’s own policies have played made in freezing hiring and driving up unemployment. The Chancellor does at least now seem to recognise that the large increases in minimum wages have harmed the job prospects of young people. But employers are still being burdened with additional costs through increased taxes and more regulation.
“Second, there is still no clear plan to bring spending under control, especially in the big ticket areas of welfare, pensions, and healthcare. Difficult decisions keep being put off, which is all the riskier given the need to increase the resources for defence.
“Third, energy policy is a mess. Renewables may or may not be the future, but for now the disruption in the supply from the Middle East has simply underlined the need to make more use of the reserves of oil and gas that we already have.””
Think Tanks Blast Bleak Spring Statement, Guido Fawkes
News and Views
Kidnapped & Imprisoned, Venezuelan Political Prisoner and former IEA intern Jesús Armas speaks to Kristian Niemietz, IEA YouTube
Let the market fix the oil crisis, Andy Mayer explores the economic fallout of the Middle East crisis in CityAM
Could working from home solve the global fertility crisis? IEA research on pro-natal policy was covered in the Financial Times
“However, some evidence suggests cash payments simply pull forward pregnancies that were going to happen anyway. A paper by the Institute of Economic Affairs, a right-leaning think-tank, last year found “financial incentives have limited success, do not address the root causes of birth rate declines, and are prohibitively costly”.
War of words over North Sea oil, Andy Mayer on the mistakes in Britain’s approach to the North Sea, GB News
“To shut down something we are still consuming makes no sense,” said Andy Mayer, energy analyst at the Institute of Economic Affairs.
Does one risky lifestyle choice lead to another or are some people just different? Chris Snowdon breaks down the gateway myth, The Critic
Economy faces £18bn hit as Britons wait years for compensation from ‘justice campaign’ lawyers, IEA research on class action law picked up in GB News
“A report published by the Institute for Economic Affairs (IEA) last year warned the boom in class actions could ultimately cost the UK economy up to £18billion while delivering limited returns to individuals once legal fees and litigation funding costs are deducted.”
Rejected to Relentless: Simon Krystman’s Entrepreneurial Rise, Syed Kamall interviews Simon Krystman, IEA YouTube
What is lifestyle economics and why does it matter? Chris Snowdon on Matt Forde’s podcast The Political Party
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