Budget

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Getting the Box to Work

(Correction – The following is a reworking of a recent blog in which I misspelt the name of the Chancellor Kwasi Kwarteng for which I apologise.)

When I was a child we had a black and white television with vacuum valves which had to heat up
before the set would operate. A common fault was when the horizontal hold failed, causing the
image on the screen to roll up or down making it impossible to watch.

At the back of the TV there were some small knobs that you had to twist to try to resolve the
problem. This, however, was fiddly and the turning so sensitive that the image rolling down the
screen would pause before changing direction and rolling up the screen.

When this happened, my dad, who had no training in electronics as far as I know, would start to
tap the side or the top of the TV. I often tried to identify a sequence to the tapping but it seemed
to me to be completely random, except that the longer it took to stop the image rolling the harder
the tapping became until my dad gave the set a solid slap to both the top and side.

The result of all this tapping and slapping was rarely positive. Turning the machine off and
allowing it to cool down, and then turning it back on again sometimes worked. But more often
than not we had to get the TV repair man out to fix the problem.

I was reminded of all this by the budget, which dare not speak its name, on Friday. Mr Kwarteng
seemed to be adopting my dad’s approach to fixing economic growth. However, he seemed to
have missed the gentle tapping stage. He went straight for the slapping stage and then
augmented this with a hammer.

Very occasionally my dad’s approach seemed to work. His disdain for the technical levers of
change and the approach of technicians, and his sharp rejection of advice were rewarded by the
sudden stabilisation of the picture…for a while.

If my dad’s engineering strategy failed and broke the telly the worst that would happen was that
we would miss Bonanza or Sunday Night at the London Palladium. Mr Kwarteng’s risk appetite
appears to be much greater. What is more he has made it clear he has not finished hitting the
black box of the economy, Friday was only the beginning.

We can only hope his unconventional approach, disregarding the views of the economics
profession, Treasury officials and basic arithmetic, works. However, I never had much faith in my
dad’s approach to fixing the TV. I have a lot less confidence in Mr Kwarteng’s approach to fixing
the economy.

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Covid 19 and Public Debt

The Chancellor has just embarked on a huge spending spree in infrastructure investments. His argument being this is possible because interest rates are at historically low levels. Of course this has been the case for the past ten years. Since March 2009 the Bank of England’s base rate has been at or below 0.5%, with one period at 0.75% starting in August 2018 through to when the rate was cut to 0.25% yesterday.

This compares with rates which back in July 1998 were set at 7.5%. This rate drifted down over the subsequent years to 3.5% in July 2003, then slowly rising to 5.75% in 2007.

So for the whole period of the conservative government rates have been historically low. When inflation is taken into account the cost of borrowing for government has been pretty close to and at some points below zero, as it has in many other Western economies.

Over the period of Austerity many economists argued that borrowing to fund investment in infrastructure following the financial crash of 2008 would be a sensible. Counter cyclical investment of this sort would create new, real assets and not simply inflate the values of existing ones which the whole process of quantitative easing did.

But no, we were told this was not sensible. The public finance had to be put in order and the size of the state reduced to what we could afford. This refrain was repeated up to the last election where the Labour Party’s proposals were dismissed as the old “tax and spend” model lacking a prudent approach to public finances and debt.

Well, blow me, it’s suddenly ok. I don’t pretend to understand economics but I do bull***t.

However we should not be churlish but rather rejoice when a sinner sees the light. With all the zeal of a convert the government have gone beyond “tax and spend” to “spend and spend “. Not just announcing huge increases in borrowing but also increases in revenue expenditure, “whatever it takes” to support the NHS through the Covid-19. Further, they have announced a series of tax reductions to support business.

This is all, genuinely commendable. The real test of this government however will come when the impact of Covid-19 and subsequent exit from one of the three largest trading blocks in the world start impacting on the real economy. Recession is a real possibility and then tax receipts will fall like a stone. How they choose to balance the books then will be a genuine test of their commitment to “levelling up” the economy.