The UK needs to be grounded in an economic war for the next recession | Larry Elliott

TThe wait was almost over. Conservative Party members made their choice. This week, a new Prime Minister will be inaugurated in Downing Street in the most testing time imaginable. Until February 1974, when Harold Wilson took power and ended Britain’s three-day week, did not really correspond to the overall crisis that Boris Johnson’s successor had to deal with. It is arguably the darkest legacy since Winston Churchill in May 1940.

All the smart money is in Liz Truss winning the race, although in retrospect it may be seen as an expensive victory as the new prime minister will come to office with the economy about to hit the wall, High energy billsThe pound crashing and selling global financial markets.

In more normal times, the NHS waiting lists And the possibility of hospitals being overwhelmed by an outbreak of winter flu or a new strain of Covid-19 will be the next government’s top priority. However, in the next few weeks, there should be one and only one priority – avoiding economic collapse.

Throughout his seemingly endless Tory leadership campaign, Truss has been radiating positivity, but the time for a boost is over. There is less than a month left to the jump in October fuel bills, and it will make households much worse. Last week, the Resolution Foundation think tank said the impact of higher energy costs would wipe out 5%. Household purchasing power This year and another 6% next – together the largest decline in living standards in at least a century.

The possibility of a collective default leads to a sell-off in sterling. While it is true that currencies were generally declining against the US dollar, the decline of the British pound was more pronounced than most currencies. The Pound finished last week at around $1.15 against the Dollar and looks set to fall further. More bad economic news – of which there is likely to be a lot – could lead the Pound to quickly head towards parity with the US currency. The depreciation of the pound adds to inflation by making imports more expensive.

International events also conspire to make life more difficult for the new prime minister. Veteran investor Jeremy Grantham said last week that the world is entering The last days of super bubble Before the brutal financial meltdown, which was exacerbated by the deliberate attempts by the US Federal Reserve and other central banks to put pressure on inflation.

The current super-bubble is characterized by an unprecedentedly dangerous combination of asset overvaluation (with bonds, housing and stocks all massively overvalued and now rapidly losing momentum), commodity shock, and Fed hawks. Every cycle is different and unique – but every historical parallel suggests that the worst is yet to come.”

Time will not be on the new prime minister’s side as the deadline for the next election is just over two years away. It could be the worst of a while stagflation The stagnation coupled with the rapid rise in prices will end by 2024, but it is starting to look very tight. There is already speculation, both left and right, that Truss may call an early election on the grounds that the economy is heading south rapidly and that she needs a mandate to sort things out. In this regard, faced dilemma It was Gordon Brown in the fall of 2007 when the financial crisis was in its infancy: it’s not good but it may be as good as it has been for some time. As against this, politicians who have spent their entire careers scrambling to the top find it difficult to risk losing power quickly when there is no need to do so.

In truth, there is not much difference whether there is an early election or not because the strategy has to be the same in both cases. Truss’ premiership will likely be determined by decisions made in her first few weeks in office.

The pretense that Britain’s problems can be easily solved must be dropped. The cost of living crisis poses as serious a threat to the economy as the pandemic, and it is time to put the country on an economic war footing.

In the spring of 2020, the government borrowed heavily to finance the holiday and various support packages for businesses. Sunak, the finance minister at the time, decided that keeping the economy afloat was more important than keeping the books on balance, and he was right to do so. Once again the government needs to spend fast and spend big, even if that means adding tens of billions of pounds to public borrowing,

Should take full advantage of emergency budget Being prepared by the Treasury for the new government. Officials consider Truss to insist on going ahead with her plans for tax cuts, but they also assume that the new prime minister will want to provide more direct support to consumers and businesses. Truss and her new advisor – expected to be the current business secretary, Kwasi Quarting – need to choose carefully from a list of options, combining some comprehensive support with more targeted assistance to families in need.

Not all of the things that need to be done can be done quickly, so there should be a second batch of ads with a full budget later in the fall. This month’s mini budget should provide an idea of ​​the potential direction for travel, such as a commitment to improve Britain’s inadequate home insulation and boost energy security.

The harsh truth is that it is already too late to prevent a winter recession. However, Truss (or Sonak) didn’t lag to make sure it was on the milder end of the spectrum.

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