The International Monetary Fund’s latest forecasts attracted attention last week, with the Washington-based watchdog predicting that Britain would be the worst-performing major economy in the world this year. Coming behind even sanctions-stricken Russia, the IMF reckons the British economy will shrink by 0.5 per cent – meaning it expects a recession.
The hapless Truss and Kwarteng are being used as scapegoats for much deeper problems
These are only economic forecasts, and forecasts are very often wrong. The IMF doesn’t have a crystal ball. It relies, like every other economic forecaster, on a combination of complex computer models and a fair bit of informed guesswork from its researchers. For all the number-crunching, economic forecasting is more of an art than a science, and not a particularly successful one. “Economic forecasting is there to make astrology look good,” as the American economist JK Galbraith once remarked. Even the IMF’s projections should be taken with a healthy dose of scepticism.
But clearly something is going badly wrong with the British economy. The hundreds of thousands of workers out on strike last week, from civil servants to train drivers to teachers, know what has been happening. Even before the cost of living crisis struck, many people had seen their pay packets squeezed for years. Increases in wages and salaries, and benefits payments, had barely kept pace with even the low price rises we saw in the 2010s. The result was that most of us were being made slowly poorer.
Now with much higher inflation, most of us are being made rapidly poorer – although not everyone, of course. Shell this week announced record-breaking annual profits of £32 billion, double those of the year before. These profits are the direct result of soaring prices. The more oil and gas prices go up, the worse for us – and the better for Shell and other fossil fuel companies.
However, even though inflation has risen almost everywhere, as prices of oil, gas, and food have risen across the globe, it has been worse in Britain than other rich countries. Brexit has played its part here, with the costs and difficulties it has introduced to trade, the shortages of some essential workers that reduced EU migration has brought, and the unwillingness of businesses to invest due to Brexit uncertainties all feeding in to the problem.
It should be possible to ease some of those difficulties with an agreement which may be near – between the UK and the EU on the Northern Ireland Protocol, which provides special rules to Northern Ireland due to its land border with EU member Ireland. And we can expect the argument for a closer relationship to the EU to gain ground, since this would, in principle, remove some of the costs and difficulties of trade.
Much of the media talk about our woes has focused on the Liz Truss and Kwasi Kwarteng “mini-Budget” last September. This attempted to cut taxes for the richest by borrowing much more money, and sparked off a panic in financial markets that led rapidly to Truss and Kwarteng being booted out of office. But most of the damage the mini-Budget caused has been patched up since then, as it was only a temporary, financial panic rather than something more fundamental. Government borrowing costs are back to where they would have been without the mini-Budget.
Really, the hapless Truss and Kwarteng are being used as scapegoats for much deeper problems. Similarly, Brexit is only a fairly recent addition to our woes. As the last decade has shown, with its low and falling real incomes for most people, Britain’s problems run much deeper. We had a low wage, low productivity, low investment and high debt economy well before Truss struck.
Rising house prices played their part in disguising some of these weaknesses for many – good for those who owned a house, but not so great if you had to rent, and even worse if you were trying to buy. But with new mortgages falling sharply, we can expect house prices, too, to fall over the next few months.
Over-reliance on rising property prices has been one of the longer-term, pre-Brexit problems with the economy. Unproductive wealth, especially property wealth, has been better rewarded than productive work. It has been much easier to generate a return from property speculation than from, say, investing in a new factory or starting a new business and creating well-paid, secure jobs. Instead, the pattern has been for vast amounts of money to flow into property and other financial speculation, whilst business investment – even before Brexit – remained low. Worse, austerity reinforced this pattern, with cuts to government investment across the country, but which particularly affected areas outside London, already starved of much-needed investment.
The result is an economy of very many poorly-paid and insecure jobs, with zero hours contracts hitting record numbers a few years ago, whilst a lucky few at the top accumulate great wealth. Two things are needed. First, people need to be paid more. Strikers’ demands must be met, the minimum wage rapidly increased, benefits raised, and if necessary taxes on the very richest raised to cover the costs. Second, investment needs to increase to ensure secure jobs and prosperity in the future. This can be led by government, investing in green jobs and new technology across the whole country.
Boris Johnson promised both of these but never delivered. Rishi Sunak doesn’t even bother to promise. But without a change of government direction, the IMF’s troubling forecasts may well come to pass.