Political Update by Mark Garnier MP
There’s no doubt about it, the Chancellor has a lot to think about. With his spending review underway and his Autumn budget due at the end of October, he has little time to relax.
Whilst there is the massive COVID hit to public finances, he must also address worrisome imbalances in the economy, and what the effect of Brexit has actually been. And whilst the Bank of England is charged with the task of keeping inflation at 2.5% as targeted, Rishi Sunak’s own interventions could have an effect either way. Does Rishi want to increase taxes whilst inflation is running out of control? Might another intervention increase inflation?
Quantitative easing – the Bank of England’s unusual intervention tool used when interest rates are super low – now stands at £895 billion. That’s getting on for half the total government borrowing. But injecting all this liquidity into the system has the effect of inflating asset prices. The quandary with QE is that for it to be QE and not old-fashioned money printing, the markets need to believe that it will be repaid. But imagine what would happen if that level of cash was withdrawn from the economy! Make no mistake about it: QE sure makes Rishi’s life easier, in the knowledge that he doesn’t have to test the bond market to the full extent of his needs, confident that the Bank of England will create money to buy newly issued government bonds.
The recent so-called “fuel crisis” illustrates further problems. There had been many arguments as to why we should quit the EU. One was that foreign migrants undercut British workers’ pay. But we now find that in both the haulage and agricultural sectors, that migrant workforce was crucial to allow flexibility. With the absence of migrants, wages for drivers and farm labourers risk going up, increasing prices for consumers. The government’s response is to allow 5,000 lorry drivers and 5,500 agricultural workers in from overseas. But free movement isn’t what it used to be, and form-filling will prove to be time-consuming.
All this leads to increased government intervention, increased spending (and thus taxation) and heavier inflation pressures. All this is happening at a very difficult time and it is possible that the pandemic has camouflaged a number of problems that are, in reality, Brexit conceived. Meanwhile, China continues its journey towards global economic dominance whilst the US appears increasingly inward-looking. Politics is looking increasingly complex, especially in the EU as we witness the start of the post-Merkel era in Germany. We live, as they say, in interesting times.