Rishi Sunak and Jeremy Hunt had a plan for the economy, and they have spent much of the past year telling us that the plan is working.
The problem is that this plan seemingly involves inducing an economic recession. That’s a tough sell for any government in an election year.
Politics live: ‘Rishi’s recession’ jibe from Labour
The priority was to get inflation down, they said. That would require fiscal restraint and interest rate rises from the Bank of England.
Growth would suffer. It would be painful but it would be worth it. When the economy turned a corner, the chancellor could then start cutting taxes and turbo-charging growth.
But when should this corner have been turned?
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As part of his five pledges – the targets he wanted to be judged by at the end of the year – the prime minister said he wanted to “grow the economy.”
Britain’s economy eked out growth of 0.1% over the course of 2023 but, with the economy spending half the year in recession, it’s fair to say the spirit of that pledge has not been met.
There’s no doubt he wanted the economy to end the year in growth.
Just yesterday, Mr Sunak confidently announced that the UK economy had “turned a corner”. A day later it was revealed that the country was in recession.
Not only that but GDP per capita, which takes account of population size and gives a good indication of living standards, fell by 0.7% last year and has done so consistently since the middle of 2022. That’s a record.
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Recession or not, most people will recognise the symptoms of that drop in living standards: rising costs, higher rents and mortgage repayments, as well as depleting savings.
Despite the chancellor’s best efforts to put a positive spin on the news, there are damaging headlines, and Labour were quick to paint this as a Tory failure.
Speaking at a news conference in central London, shadow chancellor Rachel Reeves said the Tories had become “managers of decline”, presiding over a “spiral of decline”.
Her message was clear: “The plan is not working.”
She rejected the claim that a recession was necessary to clamp down on inflation, saying that other countries had managed this better.
The US is the obvious example here, with it having achieved a softer landing in its efforts to eradicate inflation.
However, it is perhaps fairer to compare the UK to other big energy importers in Europe, where it is by no means alone in entering recessionary territory.
Ms Reeves’ argument was that the country needs new ideas and a bolder vision to turbo-charge growth.
But Labour recently dropped the central tenet of its economic growth plan – its £28bn green spending pledge – which raises questions over whether the party has the ambition to drag Britain out of its stagnation loop.
Big policy interventions typically require the government to spend money, but both parties are eager to present themselves as fiscally disciplined.
They want to spend “within their means”, but those means are shrinking because below growth is weakening the public finances.
That is the bind.
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With an election looming and a budget coming up in a matter of weeks, the widespread expectation is that the chancellor will try to prioritise tax cuts to make people feel better.
However, he has been warned that this is like selling an illusion.
With Mr Hunt not prepared to raise borrowing, those tax cuts could be funded by further cuts to public spending.
Unprotected budgets are already set to decline by 16% in real terms in the five years to 2028.
Unless those plans are revised upwards in the budget, this will herald a return to Osborne-style austerity.
High taxes or public spending cuts – that’s the product of a low growth economy and, either way, its a tough sell to the public.
