After a week of drama in Westminster, journalists may be hoping for a week of respite; recent ONS data confirming the UK’s fall into recession will not offer them any condolences. Sunak, too, with better-than expected inflation figures being released yesterday would have been hoping for good media coverage ahead of what will likely be a double by-election defeat early tomorrow morning. Instead he will have to grapple with another bruising round of headlines on his economic policy-making.
What are the headlines?
The Office for National Statistics has just published their first quarterly estimated of GDP, which they have estimated has fallen by 0.3% in the time period. Coupled with the previous quarter’s (July-September) negative 0.1% growth in GDP, the UK is now in a recession, defined as two consecutive periods of negative growth.
The Conservatives have quickly come in to distract potential observers of the government’s failure: rumours of a new ISA in the upcoming Spring Budget (more on that below), Hunt trying to return the conversation to the monetary, not the fiscal (interest rates and inflation, not tax and government spending) and consistent references to comparable states (Japan and Germany to name two) also facing negative growth; the Conservatives are not lacking in strategies to avoid talking about the dreaded r-word. One other argument may involve what was alluded to in Radio 4 Today, where Liz McKeown (director for economic statistics ONS) mentioned, in passing, the US’ decision to change the definition of a technical recession (which, if adopted in the UK, would allow Sunak to avoid accusations of a recession).
But are these attempts effective? Leaders of Labour and the Liberal Democrats, along with many media, have branded the event ‘Rishi’s Recession’ (clearly the opportunity for neat alliteration is popular in opposition media circles…).
What else does the data show us?
GDP takes into consideration millions of economic data spread across dozens of industries and sources of spending. It looks at commercial activity, household spending, export, imports, government spending and household spending: it’s this final area of the economy which as particularly hurt the UK’s GDP. With the cost of living continuing to grow, and wages not rising enough to match this growth, it makes sense that households hold back their spending, and it was this decrease in spending which many economists are blaming for the recession.
This was indirectly supported by Governor of the Bank of England Andrew Bailey, at yesterday’s Lords Economic Affairs Committee hearing, where he confirmed (albeit in other wording) that whilst the ‘government economy’ was relatively healthy, the ‘market economy’ (or non-government economy to you and me), was the biggest obstacle to the growth of the UK GDP.
The other question, beyond the immediate one of whether Sunak and the Conservatives are unable to manage the economy and this recession, is what will happen beyond 2024 to relaunch the economy. Labour have enjoyed using planning and consistency as their go-to solution to growth (both of which are often cited by business leaders as hindrances), whilst the Liberal Democrats, in their pre-manifesto policy paper, announced their plans on investing in the NHS and Social Care, among other things, as well as their desire to increase trade with the EU, and the Green party have lauded wealth taxes as an opportunity to drive government-stimulated growth in the UK.
However, whilst opposition parties may be finishing their manifestos and looking to the General Election, the Conservatives still may have one final chance at launching the economy: Chancellor Jeremy Hunt’s Spring Budget.
What does this mean for the Spring Budget?
For many months now, factions in the Conservatives have been pushing for their own various visions of the economy and how to make it work for the country (and no doubt, the Conservative Party too). The newly-created PopCons (with members including Liz Truss MP and Jacob Rees-Mogg MP), have announced their support for tax cuts, whilst the Treasury team maintains the need to focus on inflation-cutting.
Indeed, for the last few months, in preparation for the Spring Budget, a plethora of ideas have been fed to the media, including: stamp duty cuts, inheritance tax cuts, child benefit reforms, taking a penny off national insurance, reducing green investment, scrapping the tourist tax and now, rumours of reforming the Individual Savings Accounts (ISAs).
However, whilst tax cuts might sounds plausible, with Hunt having been able to cut taxes and introduce full expensing on capital allowances, previous tax cuts were made possible through generous fiscal headroom (unexpected rise in tax revenue and decrease in spending). With the UK now in a recession, fiscal headroom is now less expected… which has led to rumours of spending cuts, from the Financial Times. Just 3 weeks until the Statement comes out!
