A consensus very quickly formed that this was, at best, a disappointing Queen’s Speech, unparalleled in responding to the greatest pressure on living standards we have seen in years. 1920 or the long-term prospects of slow economic growth.
The consensus view is correct, although to be fair, the Queen’s Speech was never going to provide an answer to the current inflationary push. The best opportunity to do so was in the spring statement, because the most effective ways to protect living standards in the short term are to spend money or cut taxes.
Being generous, the job was left half done. The Chancellor is right to say that he has not been able to protect everyone from the impact of rising prices, that it is unrealistic to expect the state (or, more precisely, the future taxpayers) intervenes as has happened with Covid, and that there is a cost to loosening fiscal policy in times of inflation, in that interest rates will have to rise even more than they wouldn’t be otherwise. In normal times, increases to the National Insurance threshold and the supposed temporary reduction in fuel tax, as well as the previously announced council tax reduction, would constitute a package of measures. But the priority should have been the well-being of the poorest, which required action on benefits (such as the increase in universal credit). The absence of such measures meant that the overall package was inadequate and unbalanced.
Centre-right governments can survive criticism that they are not responding adequately to short-term economic hardship if they can demonstrate that the country has weathered tough times afterwards with a stronger, more competitive economy. The Conservatives won general elections in 1983 and 2015 after suffering such midterm criticism, but persuaded enough voters that it was a necessary sacrifice.
The concern of the current government – revealed by the Queen’s Speech – is that there is no particular plan to create a strong or competitive economy. The Thatcher government sought to defeat the inflation that had ravaged the country for most of the 1970s; the Cameron government sought to stabilize public finances. What is the Johnson government’s economic mission?
One can list a long list of economic challenges and opportunities, but it is difficult to identify a single instance where there is a coherent response to meet the challenge or exploit the opportunity.
This comes at a time when the need for a credible growth agenda has never been greater. The Bank of England may be an outlier in its forecast, but its recent assessment of the UK economic outlook is surprisingly bleak. Not only does he anticipate a recession later this year, but he also foresees very little economic growth over the next three years. If this proves to be correct, the government will be forced to defend a poor economic record in the next general election.
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On the contrary, the government seems ready to make matters worse. Despite all the talk about releasing Brexit benefits, the divergence from EU rules could be more inconvenient than it’s worth, making it harder for businesses to trade with Europe . On data protection, for example, no one claims EU rules are perfect, but if we go our own way – as the government proposed in the Queen’s Speech – UK businesses will face the added complexity and cost of complying with UK and EU rules.
A similar point applies to financial services, which is why industry voices are cautious about post-Brexit opportunities when the practical consequences of leaving the EU could be to make trade with the bloc even more difficult. The Treasury has generally listened carefully to the sector, but Brexiters such as Jacob Rees-Mogg are increasingly eager for tangible change.
The most significant manifestation of the Brexiteer’s economic recklessness is, of course, his approach to Northern Ireland protocol. There are many arguments why legislating to allow the government to unilaterally change the Northern Ireland Protocol is a dumb idea, but the economic argument is particularly powerful.
At worst, the EU will take retaliatory measures designed to cause asymmetric damage to the UK, including imposing tariffs and quotas on UK products. It may not come to this (I am skeptical that this legislation will pass the House of Lords) but at best this stunt will further damage trust in the UK. The prospect of increased cooperation with the EU may be discounted under the current government, as may even the remote possibility of a trade deal with the United States. Moreover, even more uncertainty will weigh on the UK, discouraging business investment and reducing our long-term productivity.
It’s unfortunately the same old story where politics trumps economics. This has real consequences. The Office for Budget Responsibility estimates that our GDP will be 4% lower than it would otherwise be due to Brexit (even without further deterioration in UK-EU relations) and the disruption of supply chains. Supply by Brexit has already contributed to a 6% increase in food prices.
The Brexiteers’ purist view of sovereignty is actually hurting living standards and will continue to do so. If we really want to bring the country back to strong economic growth, we need to change course and forge a practical and constructive relationship with the EU. Instead, the government seems determined to carry on regardless.