Foreward: A Risky Present

It is a truism that politics trumps economics. Indeed, with the prospect of our fourth Prime Minister since the advisory referendum on the UK's membership of the EU was called in February 2016, it seems that politics has become trump and joker rolled into one. The swiftest turnover of PMs since the 1920s itself is indicative of economic doldrums and some national atrophy. Politics though not only decides the feasible space for many economic decisions it can also interact with decision-making by households and firms and elevate uncertainty to the extent that plans are delayed, and opportunities lost. I am afraid that is where we have sat as a country for the past six years. As the Office for Budget Responsibility indicated recently in its 'Fiscal risks and sustainability' report, we have entered riskier times. Meeting the challenges of climate change with an aging population and an increasing demand for health and social care will push up our level of public indebtedness in the long run to extraordinary levels, unless the tax base is widened or we find some way of returning to higher levels of productivity. But the risk may also manifest itself in other ways. Our modelling suggests that higher levels of risk may mean we have more cyclical volatility, with a greater frequency of downturns that we have come to expect in the post-industrial period. Recall that we had termed the period of growth from 1992 to 2007, the long expansion. That period already is looking like an arcane piece of economic history; a third year Special Paper. Climate change itself may re-enforce this change as patterns of production are disrupted. Such patterns will provide an acute challenge for fiscal policy. This is because, as we have been recently reminded, downturns are most keenly felt by poorer households who may need new forms of income support. During the Covid-19 lockdowns and again during the cost-of-living crisis we have eventually innovated fiscal support with a furlough scheme and money for energy bills. It would therefore seem that, in this new riskier world, fiscal support may have to be redesigned and targeted to meet modern requirements. The best way of funding this over time will be the taxes levied on wealthier households. No politician who wants to get elected traditionally says such things. But if we look to the long run, our ability to withstand increases in economic volatility will be considerably easier if our physical and digital infrastructure has been modernised, and we address the gaps exposed by Covid-19 in the provision of our health and social care. Managing risk therefore implies a redesigned tax system to raise revenues more efficiently and a consistent, long-term commitment to public sector investment. In the short run these interventions imply, unfortunately, a greater encroachment of the state in the private sector but as growth is spurred injections of public investment now will, in the long run, not look overwhelmingly large. Somehow this transformation of fiscal policy must be affected while, at the same time, the main economic priorities are addressed. The Monetary Policy Committee must reign in inflation by focussing on normalising interest rates, embarking on rapid quantitative tightening, and concentrating on communicating its stance over time more clearly. The government's objective of levelling up or regional regeneration is to be applauded but, as yet, no targets or measures of success have been agreed. And there will have to be some acceptance that it will require not only more public investment, but also some devolved powers to local and devolved nations, perhaps in some form of fiscal federalism. The huge fall in real disposable incomes this year, which primarily arises from the external terms of trade shock of war in Ukraine interacting with Brexit, will greatly strain industrial relations in the public sector and will lead to considerable hardship in many families in the lower income brackets. The incoming PM will have an overflowing in-tray of economic problems to resolve and solutions for the common good must be found. The prizes awarded for success are huge. If we fail, the UK will continue to decline in importance on the international stage, indeed the rate of decline may accelerate as the main actors fail to take a lead from British empiricism. But if we can adopt the right set of policy interventions, that increasing tide of global risk may decide to lodge more of its funds in a modernised and forward-looking country. And that is where we can benefit from a riskier world by nurturing good governance, lively debate and wise choice.