The end of eras
Posted 9 September 2022
With great sadness, we pass from the second Elizabethan age. Our Queen was a constant during this period of intensely rapid change. Across the political spectrum, we can acknowledge her ceaseless responsibility to her people. She retained her dignity as monarch throughout her reign supported by her faith and her humanity that was obvious to all.
Despite her failing health, her last official act on Tuesday was to invite Liz Truss to form a government, the 15th Prime Minister during her reign. The official pictures show the Queen undertaking the task with a warm smile and a welcoming handshake.
The Prime Ministers are perhaps more signals of change than constancy. Truss has moved commendably quickly to propose action on the energy crisis. Underneath the action is a stronger sense of political principle than under Johnson, May or even Cameron. In this respect, Truss seems to want to emulate Margaret Thatcher in being a strong support for business. Within the energy policy proposals, a six-month energy price cap for businesses will be welcomed by many. We look at the emerging energy policies in the UK and Europe in the article below.
The finance-related cabinet team is also imbued with a radical pro-business deregulatory agenda. Kwasi Kwarteng is said to be focused on policies which create an attractive UK environment for global firms. The current refusal to countenance windfall taxes is such a signal, as is the proposal made (in the Conservative leadership campaign) to cut corporate taxes. The appointment of John Redwood also signals a wish to get back the reforming years of Margaret Thatcher’s premiership.
The immediacy of Truss’s proposals is commendable, but it is also clear that the political need for speed has led to only partially-formed policies. The Institute for Fiscal Studies and the Resolution Foundation both point out that is remarkable for such huge proposals to be costed only in the most sketchy way – the announcements told us about achieving outcomes without any real clarity on how they will be achieved.
This is not to say that the policies will be ill-formed. The aims are laudable but we just don’t know yet whether they will be achieved in a way which solves problems or add to them.
One aspect of this is the growing dissonance between fiscal and monetary policy. Both Bloomberg and JP Morgan Research expect that the Bank of England will still raise rates, although the energy price caps have the effect of lowering consumer price inflation forecasts over the next year, and hopefully go some way to lowering future inflation expectations. Both expect that the fiscal boost will support the economy enough to avoid more than one-quarter of negative growth next year.
This means that both expect rates to peak at a higher level than before. However, neither expect rates to go higher than 4%. The interest rate market was already discounting rates above 4% before they published their research.
The biggest conundrum will be around the new debt that will have to be issued by His Majesty’s Treasury. During the pandemic, the Bank of England bought much of the debt issued. It will be difficult to countenance a repeat of that while inflation and a weak sterling are its monetary problems. Over the past two weeks, gilt yields have risen and the Sterling has fallen. Potentially, they could go further if the details of the policies show open-ended costs.
During her campaign, Truss talked of re-establishing a money supply-led monetary policy, in the manner of the early Thatcher years. However, her fiscal largesse is some way from the economic policies that Thatcher favoured. The era of neo-classical economics may be also passing.