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British chancellor of the exchequer Rishi Sunak. Picture: REUTERS/OLI SCARFF
British chancellor of the exchequer Rishi Sunak. Picture: REUTERS/OLI SCARFF

Who would want to be the UK’s chancellor of the exchequer?

That’s what I asked myself as Rishi Sunak and I sat down to talk on Thursday in a snazzy “shared workspace” in the city of Stoke-on-Trent.

Steering an economy through its first serious bout of stagflation in more than a generation isn’t going to be straightforward for any Group of Seven finance minister. 

Prices are being propelled higher by costlier energy, as in Europe, and a tight labour market, as in the US — something the International Monetary Fund (IMF) described as the “worst of the two worlds” for policymakers to deal with. 

Arguably the chancellor has a further handicap: a Prime Minister whose political instincts risk making the situation worse. 

Less than two hours before the chancellor and I chatted, it was revealed that the nation’s GDP unexpectedly contracted in March as mounting bills led consumers to pull back spending. 

Putting it all together, Bloomberg Economics now expects the economy to shrink in the second and fourth quarter of 2022.

While that may swerve the academic definition of a recession (two consecutive quarters of negative growth), it’s going to feel like one for many. 

The cost of living crisis will leave the average UK household £2,370 worse off this year, BE estimates. Adjusting for inflation, disposable income in the UK is predicted to drop by 3.4% in 2022 and to fall again 2023. 

That’s by far the worst two-year deterioration in living standards on record. So those who say we’re not going back to the 1970s are right: on that measure the current squeeze is worse.

There are, it’s true, global forces at play in this economic car crash: supply chain disorders related to the pandemic, an overheating US economy and Russian President Vladimir Putin. 

But the increasingly perilous stand-off with the EU over the Northern Ireland protocol is a reminder that UK businesses suffer an extra level of supply strains and uncertainty that’s entirely home-grown.

In a speech in February, Sunak argued that low business investment was the key obstacle to improving growth and productivity, noting that capital investment by UK businesses had been stuck at about 10% of GDP for years, compared with an OECD average of 14%.

“None of this is to blame firms,” he said. “I know there has been a cloud of uncertainty hanging over the British economy in recent years. But that cloud is lifting ... The form of Brexit is clear, with a comprehensive free trade agreement.”

Britain was also putting the pandemic behind itself faster than most, he said.

If you missed that speech, don’t worry. You have an excuse. Russia invaded Ukraine on the same day. 

So much for the mists of uncertainty lifting. Even that comprehensive free trade agreement is now being cast in doubt.

Sunak is right to say there’s no easy way out of the current situation. And the errors of the past shape the options of the people who come after. 

Paul Volcker believed he had to hammer the US economy to tame inflation as Federal Reserve chair in the early 1980s, because the persistent over-exuberance of his 1970s predecessors appeared to give him little choice. 

Admirers of Margaret Thatcher would say the choices facing her government when it came to power in 1979 were equally constrained.

Britain’s options today aren’t as bad as they were in the 1980s and the inflation we are living with now hasn’t — yet — become ingrained. 

But there are still tough choices to be made and those aren’t the kind of selections Prime Minister Boris Johnson is known for.

He is a politician who would risk triggering a costly trade war with the EU rather than accept the consequences of the Brexit withdrawal agreement. 

In the search for extra cash to throw at the inflation pain, the Prime Minister is also reportedly warming to the idea of a windfall tax on the profits of energy companies — after months of his government insisting it would be the wrong thing to do.

Windfall taxes have been successfully deployed by Conservative and Labour governments in the past — most recently by Tony Blair on taking office in 1997. 

For a different kind of government, they might have made sense for 2022. 

But those past administrations simultaneously went out of their way to prove their commitment to business and to economic growth and stability. 

In the weeks before unveiling its windfall levy on utilities in 1997, for example, Blair’s Labour government made the Bank of England independent. 

Arguably, Johnson’s government has done the exact opposite. 

It made a virtue of ignoring the lobbying of mainstream business groups at almost every stage of the Brexit negotiations. 

Far from easing the pain of that hard separation from EU, in his budget of March 2021 Sunak delivered the biggest increase in business taxes since 1974.

There is an intriguing promise in the government’s recent blueprint for “levelling up,” which Bloomberg analysis this week showed is already struggling.  It reads: “We will not pursue growth at the expense of the government’s wider objectives.” 

Judging from the government’s past record, there doesn’t seem to be much danger of that. So, Sunak’s first instinct on the windfall tax might well be right. 

Clawing back billions in profits from some of Britain’s most successful global businesses to boost the government’s support could be the final straw for businesses wondering if the government is ever going to prioritise growth at all.

More stories like this are available on bloomberg.com


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