How do we respond to the economic emergency?

Readers of the Daily Mail are still being told that the UK economy is in good shape, that there is room for tax cuts for the better off, and that the opportunities Brexit offers are beginning to benefit the country. Readers of the Financial Times, and of the business pages of the Times, are now being told a very different story: that we are in an economic emergency, with a collapse in exports to our largest – European – market, a continuing decline in the external value of the pound (which pushes up domestic inflation and makes UK companies cheaper bargains for foreign private equity to snap up), and the slowest rate of growth in the developed world.

Even without the impact of the Ukrainian conflict, our falling currency would be exerting inflationary pressures. Disruption of oil and gas flows, as well as global grain and fertiliser supplies has imposed additional inflationary pressures on everyone in Britain; and the longer the Ukraine-Russia conflict continues, the worse this disruption will get. Growing authoritarianism and antagonism towards ‘the West’ in China is further disrupting the global economy. The prospect is of zero economic growth in the coming year, a widening external trade imbalance, falling private investment and declining living standards. Yet Boris Johnson’s boosterish approach to political campaigning means that the government has downplayed the seriousness of our current situation, even as food banks report record demands for help and unions go on strike for pay increases to cope with rising costs.

These gaps between the underlying crisis, media interpretation and public perception create real problems for opposition parties in putting forward alternative policies. It’s an even greater problem for Liberal Democrats that Labour remains so reluctant to spell out the seriousness of the situation, or to call for emergency measures in response. Like it or not, the UK is directly affected by the Ukraine-Russia conflict, on top of the adverse impact of Brexit. Defence spending will have to rise – not at the cost of spending on welfare, pensions or health, but as part of an overall package of higher public expenditure. Public investment, public and private spending on research and development, education and training, are all lower than in comparable countries; Conservative rhetoric indicates that the government will hold down public sector salaries as inflation rises, while salaries in the financial and other sectors soar.

What narrative can Liberal Democrats try to craft, as the British public slowly realises the emptiness of the government’s promises and the added impact of external events? We should be emphasising the need to spread the burden fairly: that in a crisis, compounded by war at the other end of Europe, the highest-paid and wealthiest should contribute the most, and the moderately well-off (that’s me, and many of you) will also have to contribute to relieve the extra costs the poorest face. We should be talking of investment, in education and training, research, in our poorest regions, in new technologies, in shifting towards a more sustainable and resilient economy – yes, and in new transport links outside the south-east. And we should be talking of closer cooperation with our neighbours, rather than the constant battles the government wants to pick with France, Germany and the EU to hide the damage that its botched Brexit has inflicted on our economy.

Opinion polls indicate that voters are beginning to appreciate the weakness of the government’s response, but not yet to understand how sharply fiscal and economic approaches need to change. We are facing a domestic recession AND a global security crisis, under a government determined to antagonise our closest European partners and over-reliant on a distracted USA. It’s not enough to condemn the government’s incoherent responses; we have to articulate a different approach to economic recovery in the face of a darkening international environment.

* William Wallace has fought five parliamentary elections in Manchester and West Yorkshire. He is a former president of the Yorkshire regional Liberal Democrats.

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17 Comments

  • Jenny Barnes 4th Jul '22 - 5:43pm

    Yes indeed. With the price of oil over $100 / bbl, and the £ dropping v the $, the UK is about to hit the buffers big time. Once people have paid for essentials, fuel for the car& house, broadband/phone, food – which is going up in price partly because of the oil/fuel price – debts like mortgages or rent, there will be very little left over for things like new cars, holidays, eating out, clothes and so on. So a lot of those businesses which may have just hung on through covid are likely to go bust. On the bright side, maybe there will be a reduction in the number of holiday lets in tourist areas.

  • George Thomas 4th Jul '22 - 8:04pm

    I can’t see where you’ve mentioned the climate change crisis, or the growing disrespect to devolution to Celtic nations within the UK, but am otherwise impressed with how you’ve described the immediate challenges facing the UK so effectively.

    It’s become very popular to make football-based analogies (the Van Tam effect) so I would say that we need the person/party who are willing to organise the club even if it means they don’t oversee the most successful period – what Man United fans thought Ralf Rangnick was going to do for them – otherwise the late 20’s and 30’s are going to be even more difficult.

  • James Fowler 4th Jul '22 - 8:28pm

    I’d agree with pretty much all of this. I’d only add that today’s direct action by fuel protesters shows that the dire state of the state of the economy is cutting through, even to the Daily Mail. It’s not even wintertime yet.

  • Readers of the Financial Times, and of the business pages of the Times, are now being told a very different story: that we are in an economic emergency, with a collapse in exports to our largest – European – market,…

    Really? The latest ONS figures show our exports to the EU have risen to a new record…

    ‘UK trade: April 2022’ [13th. June 2022]:
    https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/april2022

    EU exports have increased for the third consecutive month in April 2022 and are at the highest levels since records began.

    …a continuing decline in the external value of the pound…

    That’s more to do with the strength of the dollar…

    ‘British Pound Q3 2022 Forecast: The Bank of England – It’s Time to Decide’ [3rd. July 2022]:
    https://www.dailyfx.com/forex/fundamental/forecast/weekly/gbp/2022/07/03/British-Pound-Q3-2022-Forecast-The-Bank-of-England-Its-Time-to-Decide.html

    The British Pound if looked at in isolation against the US dollar has performed poorly, with cable down around 10 big figures since the start of Q2. However, Sterling’s effective exchange rate index is flat over the last year, highlighting the strength of the US dollar. This US dollar strength is starting to weaken as markets begin to price in a recession in the United States.

    Cable = £/$ exchange rate.

  • Jenny Barnes 5th Jul '22 - 9:50am

    So what to do about it?
    Energy is a major driver of inflation and other problems, our N. Sea fossil assets are declining fast and should be minimised because of climate change. Wind & solar are intermittent, and a regular perusal of gridwatch says that we are nearly always using 15GW + of gas fired electricity.
    Start building 2 new 3GW (like hinkley point) nuclear power stations, plan at least 5 more. Probably nationalise the nuclear stations and the grid.
    House and building insulation, and increase building standards for new builds.

    Repurpose the roads budget to
    – Electrify the remaining main lines on the railway so that we can move freight with much less HGV usage.
    – build cycle infrastructure so people can safely replace short car journeys with cycling or walking
    (Amazon are introducing electric delivery cycles and distribution hubs)
    – fix potholes.

    Defence
    Sell or scrap the HMS White Elephant carriers, replace with new frigates type 26(£1.6BN) & 31(£0.3Bn), cancel the F35B STOVL Lightnings and replace with F35A land based + in flight refuellers. Research long range drones.
    Cancel the failed Ajax contract, replace with off the shelf IFVs like the German Puma

    Increase Universal credit by at least £20 / week.

    Get back to a much closer relationship with the EU. Probably not rejoin, because we need to keep our own currency, but in the Single Market/ Customs Union, and free movement of people. Maybe we would get some farm workers and care workers.

  • …and the slowest rate of growth in the developed world.

    That’s an OECD prediction – one of those “organisations with acronyms saying they know best and getting it consistently wrong” – their estimate for world inflation was out by a factor of two. Due to early vaccination, the UK was first out the gate in opening up post-Covid and was, by far, the fastest growing G7 economy last year. Other countries are now catching up in their recovery phase, hence their higher growth.

  • William Wallace 5th Jul '22 - 10:08am

    FT editorial, 4th July: ‘UK needs to decide how it will share the economic pain…Britain needs to share out the pain of adjusting.’ That’s not what the current government is thinking about, but we should.’

  • The major problem is inflation and it is deal with inflation where the government should target its money. The government should cut the energy price cap to £1290 and increase it to £1303 in October. And apply it to business users as well. It should abolish all future support to help people to pay their energy bills, and provide a £20 rebate for Council Tax payers of rates E-G instead. They should also increase Universal Credit and the legacy benefits by £20 a week. It will also need to provide subsidies to the providers of energy to maintain these prices, partly paid for by a windfall tax on the profits of energy producers.

    The government should aim to reduce the price of petrol to £1.53 per litre. To do this they need to reduce the duty to 21.32 pence down from 52.95.

    Using the average pump price of Monday 27th June the price would be made up of base price 106.16 pence; duty 21.32 and VAT 25.5 = 152.98. As the base price increases the government should reduce the duty each week. If the base price falls then the duty should be increased to keep the price of petrol stable.

    The government then should tell retailers to reduce their prices to their April level by the 1st August and if they haven’t done so they will be fined either 10% of their profits or 1% of their turnover whichever is higher, for each month they fail to comply.

    The effect of this should be reduce the inflation rate, hopefully to below 7%. Therefore wage increases should be kept to below 7% too.

  • Peter Martin 6th Jul '22 - 10:41am

    “our falling currency would be exerting inflationary pressures.”

    The pound is relatively stable against the euro. It was 1.17 euros both yesterday and on 6th July 2021.

    So is the pound and euro falling against the dollar or is the dollar rising against the pound and euro?

    It is true that oil is usually priced in US dollars. The benchmark price of Brent crude is today $113.50. But would it make any difference if it was listed as 111.03 euros, or even £95.07

    The dollar is just a unit of measurement. We don’t actually need dollars to buy oil anymore than we need inches to buy lengths of string. Any viable currency will do just as well. We just need a calculator to do the conversions.

  • Peter Martin 6th Jul '22 - 10:59am

    @ Michael BG,

    “The government should aim to reduce the price of petrol to £1.53 per litre. To do this they need to reduce the duty to 21.32 pence down from 52.95.”

    Of course this looks attractive from our personal POV. However isn’t it like giving a subsidy to homebuyers? The subsidy doesn’t create any more houses so the price rises to accommodate the increased level of puchasing power?

    Government interventions everywhere should be geared towards reducing our fuel usage. The German government has the right approach with its 9 euro monthly rail passes.

    We could do something similar but I’d start with bus services. There looks to be quite a lot of spare capacity o them.

  • Joseph Bourke 6th Jul '22 - 2:04pm

    Wage and price controls didn’t work for Ted Heath in dealing with Inflation in the 1970s and won’t work now. We had petrol rationing during the 1973 Opec Oil crisis that drove an already high level of inflation into double digits and a 3 day week was introduced for businesses during the miners and rail strikes of 1973-74.
    The price of oil and gas is highly susceptible to imbalances of supply and demand. Even what seem to be relatively small shortages of global supply can cause market prices to double. Sudden demand shocks cause dramatic falls in producer prices as happened in 2020 when oil price futures went negative.
    The supply of oil and gas requires continual investment to maintain or increase. In an industry that does not have a long-term future that investment is unlikely to be forthcoming. The imbalance of supply and demand is something that will need cooperation between producer and consumer countries as energy companies make the transition to renewables.
    Sri lanka is experiencing a severe fuel crisis and does not have the foreign reserves to address the situation. From last week, state-run fuel company Ceylon Petroleum Corporation stopped issuing fuel to private vehicles and was supplying it only to essential services. The Sri Lankan government is exploring options to buy subsidized oil from Russia and is negotiating with Qatar for an agreement on long-term fuel supply Oil crisis deepens in Sri Lanka. I wouldn’t count on Nadeem Zawahi to come up with any solutions for the UK cost of living crisis, but the price of oil has begun to fall with Texas crude trading under a $100 a barrel Oil tumbles as much as 10%, breaks below $100 as recession fears mount

  • “What narrative can Liberal Democrats try to craft… ?”

    Yes! That is the key question.

    I’m just old enough to remember the 1970s when Labour’s Post-War ‘Butskellite’ narrative gradually failed making Britain the ‘Sick Man of Europe’. The wheels finally came off in the Winter of Discontent of 1978/9.

    That was the Conservatives’ opportunity. Under Thatcher they developed and offered a radical narrative of ‘free’ markets, deregulation, lower taxes, privatisation, etc. which was plausible enough to sweep the field since no-one else had an alternative (famously, TINA). Although a fundamentally Tory worldview, Blair’s Labour later used the same basic diagnosis (but with better welfare) as did the LDs in Coalition.

    Tories still trot out that narrative at the drop of a hat but it’s now more broken than Labour’s in 1978/9 and therein lies a once in two generations opportunity for Lib Dems to offer a truly Liberal narrative.

    That means working out how things really work (as opposed to self-serving Tory fairy stories) and what therefore needs to change. The public’s hive mind already knows much of this but mixed with junk, so the task is to come up with a narrative explanation that speaks to voters’ experience and helps them join the dots.

    Hence, narrative is the substance of the cake whereas policy is just the eye-candy icing on top. Unfortunately, developing a narrative is tough for LDs as I don’t think they’ve ever done it and don’t have the mechanisms to do so.

  • Joseph Bourke 7th Jul '22 - 3:08pm

    When things get tough, public support for more generous welfare provision funded by higher taxes tends to wane. William is right in pointing to the need for emphasising the need to spread the burden fairly. With inflation heading into double-digits, interest on government debt reaching the £100 billion per year mark and public services creaking at the joints, economic policy is going to be a battleground for years to come.
    We don’t want a repeat of the 1980s. Economic management needs to focus on the creation of decent jobs across the UK at wages that provide sufficient for a typical household to provide for a family in relative comfort.
    At its base needs to be a social security net that ensures all have unrestricted access to the basics of food, clothing, shelter, transport and effective support with securing employment and training. That can be delivered with UBI (or more precisely a Guaranteed Minimum income) supplemented with a job guarantee program. For tax policy look to the 2010 Mirrlees review and land reform to address the housing crisis. On energy, our focus has to be on renewables and nuclear power to make the UK as independent as possible and introduction of grant funding to local authorities for a countrywide program of insulation delivered as part of a job guarantee program.
    The narrative should be self-reinforcing and appeal to the British sense of fair play i.e. help to help yourself and no one left behind, whatever your condition and wherever you live in the UK.

  • I find all of this discussion interesting.
    My priority for the party would be to find a means of selling our policies with simple slogans. Get Brexit Done worked well for that group. We know it did not happen, but all remember it.
    Where do we get the resources we would need to work up such a campaign?

  • William Francis 9th Jul '22 - 6:10pm

    @Jeff

    “Goods exports to the EU reached £16.4 billion in April 2022, their highest level in current prices since the series began in 1997.” Using raw monetary terms figures doesn’t offer as opposed to % of GDP doesn’t capture the full picture. Plus the ONS data shows that not only have imports surged much fastest than exports.

    @Joseph Bourke

    Whilst I generally agree with your proscription, a job guarantee is not a good way to achieve full employment. Designing a series of roles accessible to all (so no paying people to dig ditches in the countryside for a living wage and refilling them), that are useful enough to be politically viable, but not so useful as cause the UK great harm during a good job market, is a very hard needle to thread. Full employment achieved via aggregate demand management, is what we should be aiming for.

  • Peter Martin,

    I wouldn’t oppose a £8 monthly rail pass. I wouldn’t oppose a £4 monthly bus pass. These would encourage bus and rail usage and would move some people out of their cars, but it would do nothing to reduce the cost of transporting goods.

    My suggestions would mean that people would have to spend less on energy and petrol and so would be able to spend the saved money on other things – restoring demand to its per April levels; and because transport costs and energy cost for businesses would be reduced other prices would be reduce to their April levels reducing inflation further and providing more money for people to spend on other things.

    Joseph Bourke,

    I am not suggesting wage controls. I am not aware of the government proving subsides to keep petrol and energy prices stable in the 1970s.

    My suggestion with regard to petrol prices would mean that as the base price reduces the duty increases. It would be possible to keep this policy if the base price of petrol fell to below what it was in March and this would mean increasing the duty to a higher rate than it was in March.

    I would like our party to be pushing the idea of Job Guarantees and Training Guarantees which were passed as our policy at our Conference in September last in (motion F24 A Fairer, Greener, More Caring Society). If these are not included in the Fairer Society Policy Motion will you propose an amendment to include them?

  • William Francis,

    Normally I would be an advocate of trying to achieve full employment via aggregate demand management, but not at the moment. Aggregate demand isn’t falling in value. It is just purchasing less goods and services. Full employment for me is having an unemployment rate of less than 3%. Two regions of England have unemployment rates below 3%, therefore demand needs to be increased in the regions with the highest levels of unemployment. The ones with 4% or above include North East, West Midlands, North West and Yorkshire & The Humber.

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