Rishi Sunak has impeccable timing. Today’s goldilocks moment for the British economy is as good as it gets.
Headline inflation has carved a near perfect round-trip to almost 2pc, as it was bound to do given the collapse in natural gas prices and the deflationary trade shock coming from China.
Markets have homed in on the ugly detail of sticky services inflation but as a matter of electoral politics, the mix of cheaper imported goods and dearer home-grown services is ideal.
Real wages are rocketing for millions of people. Labour cannot keep saying that this is the worst slide in living standards since the end of the Napoleonic War. Its biggest gun has been spiked.
Economic growth smashed consensus by coming in at 0.6pc in the first quarter. The early evidence is that April and May will come in “hot” as well.
The International Monetary Fund has upgraded its forecasts – but only to 0.7pc for 2024, nota bene – and given the all clear on a British soft landing. A second Labour gun has been spiked. We will learn only after the election whether it is a real recovery or a dead cat bounce.
The good news is that UK service exports are booming. They have lifted the UK three notches in the UNCTAD league to fourth largest global exporter in total value terms, surpassing Japan and France. It is an unsung success story of post-Brexit trade.
The bad news is that business bankruptcies are still near a 30-year high, firms are shedding labour fast, and more councils are sliding into “section 114” insolvency. The upward creep in UK unemployment is not far from triggering the recession Sahm Rule.
Slippage in public finances is eating up any budget space that the Chancellor might have had for a pre-electoral give-away in the Autumn, leaving aside the mystery of how the Government intends to pay for a rise in defence spending to 2.5pc of GDP. “This goes some way to explaining the decision to call a snap election,” said Citigroup.
The Institute for Fiscal Studies estimates that “non-ringfenced” spending will have to be cut by 1.9 to 3.5pc in real terms each year under the current economic structure – or be covered by tax rises – in order to bring the public accounts under control.
As it happens, the rating agency Scope warned hours before Mr Sunak called the vote that the UK’s public debt is on an unsustainable trajectory towards 110pc of GDP by 2029. The deficit will remain above 3pc of GDP every year this decade, and net interest payments will rise to 7.2pc of revenue.
It accused the UK of abusing its reserve currency privilege to push its luck, concluding that there could be a “sudden reappraisal” by the capital markets.
My answer to this dismal picture is that we must elect a government that goes to the root of the matter and overthrows the current economic structure. Neither the Tories nor Labour offer any way out of our stagnation trap in this election, and neither have my vote at this juncture.
This country is lucky in one sense. Both leaders respect our institutions. Both are one-nation politicians at heart. There is not the slightest threat to Britain’s values or liberal democracy.
That is not the case in the US where Donald Trump is already drawing up post-inauguration plans that would, if enacted, amount to the end of the Great Republic as we have known it since Lincoln. Nor is it the case in much of Europe, where the political centre is collapsing and identity politics is running rampant.
The persistent failing of British economic management is that the country invests too little, and consumes too much. The recent Stern II report by the London School of Economics says public and private capital formation has lagged the G7 average by 4.7 percentage points of GDP for three decades. The savings rate is half the OECD average.
The country has been living beyond its means with a chronic current account deficit. Its net international investment position is a trillion dollars in the red.
The tax burden is the highest since the 1940s but little money is being used to raise the speed limit of the economy. It is being spent on transfers and welfare. Nations that do this fail over time.
Labour talks a good game on industrial strategy. It promises a “golden rule” to exempt public investment from spending limits. But it also has a long shopping list of party pieties that will crowd out all else. Sir Keir Starmer dropped his £28bn pledge for cleantech investment as soon as the plan drew political fire. He did not drop his pledges for social spending.
Rishi Sunak has quietly developed a hi-tech industrial strategy of sorts, leveraging areas of strength where the UK is a world player. You can see it in nuclear fusion, ultra-fast compound semiconductors, and AI. He has backed gigafactory plants because without these we will not be able sell EV’s in Europe under the trade deal.
The Prime Minister has not enjoyed the credit he deserves for these well-crafted policies but they are too little to lift the UK out of its spiral of slow decline. Neither party is heeding the lessons of the US and China. Neither plans to lift public investment to world class levels, or go big with a British version of the US Inflation Reduction Act.
The Stern II report calls for extra public investment of 1pc of GDP annually, sustained through thick and thin. I would push it even higher. To the extent that it is spent on projects that draw in private capital and pay for themselves with a fiscal multiplier above 1.0, this spending will lower the debt-to-GDP ratio over time.
Mr Sunak does not think in such terms, and Mr Starmer is too scared of the bond vigilantes to do much beyond tinkering. The Truss episode taught Labour the wrong lesson.
One thing we can say with certainty as Labour runs 20 points ahead in the polls is that the Conservative Party has gained nothing by flirting with Trumpism and trying to exploit the culture war as an electoral wedge issue. Nor has it gained from cynically shattering our bipartisan consensus on climate change and green energy.
If anything, it has lost two Burkean conservatives to Labour for every culture warrior that it has retrieved from Reform. My advice to Rishi Sunak: ignore the siren voices, regain your composure, and accept the coming loss with dignity.
You could still save an extra hundred seats if you go down with honour.
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