Consciousness of Sheep
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The UK government was keen to take responsibility for borrowing less than expected in the second quarter… although this may come back to haunt them, since the gap between income and spending was mostly closed by the unsustainable increases in taxes beginning in April. These were the same tax increases that drove most of the jump in inflation to 3.8 percent for CPI and 4.2% for the more realistic CPIH, which includes housing costs. Although, obviously, the government were less keen to accept responsibility for this.
As has become customary, the Office for National Statistics took some of the heat off government by pointing to the big (15% this year) increase in air fares which always happens in the school holidays as demand far outstrips supply. This made predictable headlines in establishment media who serve a professional-managerial class which thinks it is hard done by because a flight to Spain has increased by £20, even as a growing majority of us can’t afford holidays at all. But the reality is that air fares make up a tiny fraction of the inflation calculation so that, even without it, the rise in inflation would have still been high.
At face value, this is worrying given that the Bank of England narrowly voted to cut interest rates at the beginning of the month in the face of rising unemployment and business failures and a big decline in job vacancies. The devil though, as the saying goes, is in the detail.
I have long pointed to the two sectors of the economy – essential and discretionary – and have argued that the consequence of the rising energy cost of energy would be a big decline in the discretionary sector even as the price of essentials rises remorselessly. This is precisely what the latest inflation data is showing. Sectors like hospitality and non-food retail are in freefall, with businesses slashing prices in a desperate – and probably futile – attempt to maintain sales volumes. Almost all of the “inflation” was in those sectors that are unavoidable – energy, water, council tax, business rates, commuter transport and food – the latter currently the result of supermarkets trying to pass on April’s tax and employment cost increases through higher prices.
Nor does the cut in interest rates help very much, since most mortgage deals have already been fixed at the higher rate, while new mortgages are harder to obtain as banks tighten lending standards in the face of economic uncertainty. Indeed, if the economic geniuses on the Monetary Policy Committee treat inflation as a bigger threat than the rapid deflation of the discretionary economy (where most people work) we might even see a rate hike next month.
Either way, it is difficult to see a way out for the UK; particularly if the government insists on pursuing neoliberal monetary policies that are way past their use-by date. This is one reason why I lamented the difference between the British and American system last year:
“Starmer… will be arriving in 10 Downing Street in the midst of a still unresolved economic downturn, following a massive hit to the standard of living of all but the very richest people in the UK. Moreover, the long-term Tory austerity since 2010 has left the UK’s utilities and critical infrastructure broken beyond repair… in the course of the weekend – 6 and 7 July – a parade of MPs will enter 10 Downing Street to be offered various ministerial positions. At least some of these will keep the role they had in the shadow cabinet – it is highly unlikely, for example, that Rachel Reeves will not take over as Chancellor, and Yvette Cooper – one of the few Labour MPs to have been a minister in the last Labour government – is almost certain to become Home Secretary…
“In a sane world, the prime minister would be able to bring in experts from outside parliament to either take over or at least support key ministries such as energy, health, and transport. But the British system requires that secretaries of state and ministers must be drawn from sitting MPs. And, as we have seen, this means that on 8 July – the first day of real work for the new government – a cabinet of clueless professional gobshites will sit around the cabinet table for the first time to begin managing the affairs of state… which might not have been such an issue if Starmer was inheriting the kind of economic stability enjoyed by Blair. But he isn’t – and the dire state of the UK means that the new Starmer government will be in crisis mode from day-one…”
Insofar as there is a way forward for the UK, it begins with ditching the tired ideology of the last half century and instead addressing fundamentals. An economy that can no longer support something as basic as steel production is an economy that is on death’s door. And the quaint notion that we will be able to rely on the kindness of strangers even after the pound has plummeted in value is no more than economic midazolam. The main reason for the failure of steel – and other industries – being the excessive price of energy in the aftermath of lockdowns and, especially, self-harming sanctions on Russian oil and gas. Although this has been exacerbated by the massive increased taxes on employment which came into force in April.
Government borrowing is not, in and of itself, a problem. And the fiscal rules that the government is following are entirely arbitrary. The problem is less with borrowing than with the lack of any coherent economic direction. There is, for example, no point in claiming to want big tech to build datacentres in the UK when we have to import 20 percent of our electricity already. Nor, given the pledges on electric vehicles and heat pumps, can unconnectable wind farms fill the predicted 60GW gap. If the UK government is to have any chance of avoiding a serious depression, it must put forward a credible plan for drastically reducing the cost of energy to industry, together with a tax regime which promotes innovative small businesses… but that would require a degree of competence which is entirely lacking in all of the mainstream parties and most of the permanent state. Nevertheless, as a more competent Chancellor once put it, “when you’re in a hole, stop digging.”
As you made it to the end…
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