The UK economy is barely out of first gear, so now is no time to hit the brakes

It is difficult not to laugh: as the economy has been recovering, in certain sectors, from the biggest contraction in output for several centuries, the Bank of England has been desperate to “achieve” the official inflation target. Finally we learn that it has indeed been achieved – that the index of consumer prices has risen by 2.1% in the past 12 months, marginally over the target of 2% – and, hey presto, there is panic in the ranks.

Sorry, I should say some ranks. There is one hell of a debate going on in economic and financial circles about whether recent price rises in certain sectors warrant early counter-inflationary action – higher interest rates – or whether the “green shoots of recovery” could thus be nipped in the bud.

Frankly, I think it is far too early to apply the brakes. Parts of the economy are recovering, but others are, to use the epithet fashionable among economists, deeply scarred. I hear some frightening predictions from people close to the coal face about carnage in store as the chancellor’s emergency help is withdrawn. There is a burgeoning consensus that we need an investment boom in new – and, for that matter, certain older – technologies. This will hardly require deflationary monetary policies.

One should not dismiss concerns about inflation. But some historical context is in order. The price of oil may have risen by 50% since this recovery began. But we are some distance from the situation in 1973-74 when the price of oil quintupled, making a major contribution to the acceleration in UK inflation to – here younger readers should reach for a stiff cocktail, or at least a strong coffee – over 25% a year.

Inflation is broadly defined as a sustained rise in average prices, and the thing to beware of is accelerating inflation. Despite the pockets of rises, the economy is nowhere near that point, although – you guessed this was coming – the Brexit catastrophe has not helped.

Which brings us to the other big domestic economic topic: the gunfight at Downing Street corral between Big Spender Boris Johnson and Low Spender – except in a Covid emergency – Rishi Sunak.

Now prepare for a shock: there is one good thing to be said about the worst prime minister since Lord North. Johnson is on record in the Financial Times as having declared that the Cameron/Osborne austerity policy was “a mistake”. Shall I repeat that? A mistake.

Now, I have known many chancellors over the years and, while having my differences, have sympathised with their complaints that they were outnumbered in cabinet – one cautious Treasury “controller” against ministers representing spending departments – which was why, from time to time, the chief secretary to the Treasury, directly responsible for keeping a Swiss penknife at the ready for “cuts”, would also be given cabinet status.

But this is, in some respects, a postwar situation. As President Joe Biden appreciates, the major western economies need to grow sufficiently fast to allay classic fears about reducing debt while achieving many enlightened social goals. The demands for extra finance reach Sunak from all sides. But he is hoist with his own petard: the impact of the disastrous Brexit which he espoused is substantial, both on the revenue side – tax revenues are being badly hit – and the expenditure side. While we were in the European Union, we did not need all this ridiculous extra spending on trade deals – epitomised by the gallivanting around the world of trade secretary Liz Truss, as though she were in a revival of the Carry On films.

And what a carry on it is! Food and drink exports to the EU were down 46.6% in the first quarter. The British Legion cannot sell poppies in the EU because, like many, it is hit by the extra costs that come with Brexit. There are jokes that if Johnson visits the farmers and fishermen who, in their ignorance, voted for Brexit, he will need extra bodyguards.

Can this strange nation think again? The conventional wisdom is that it is still bitterly divided, but I think the message is percolating. The Chesham and Amersham byelection was a real shock to the Brexiters. This is a constituency that my close friend the late Sir Ian Gilmour won and held on to easily for five elections running, despite his opposition to Thatcherism.

In Chesham and Amersham, 55% of the electorate voted Remain in that fateful referendum five years ago. Sir Ian, later Lord Gilmour, would have approved.

He would also, like me, have been delighted to hear the following from pollster Sir John Curtice. Notwithstanding the obstinacy of the people who voted leave in 2016 and are still Leavers in the face of all the evidence, among those who did not vote in 2016, not least those who have since come of age, Rejoiners outnumber “carry on Leavers” by two to one.


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