This article first appeared in ICAS’ CA magazine.
We emerge from the pandemic with cautious optimism – and a huge fiscal hangover. How do we balance the books and what role can CAs play in supporting the economy’s nascent recovery? IoD Chief Economist Kitty Ussher shares her thoughts
Kitty Ussher is sitting in a meeting room at the Institute of Directors (IoD) headquarters on Pall Mall. The macroeconomist and former MP for Burnley was appointed Chief Economist at the business organisation – her “dream job” – in September. The role mixes talking to businesses, mainly SMEs, at the coalface and traipsing down the road to Westminster to advocate on their behalf. She has also been on the other side, serving as Economic Secretary to the Treasury during the early phase of the financial crisis (2007-08) and as a junior minister at the Department for Work and Pensions (2008-09).
We’re talking on the day September’s GDP data was released, showing a monthly rise of 0.6%. “A little more positive than we might have expected,” she says. “Growth is being steadily driven by the continued reopening of schools and the public sector.” And Ussher says that “putting all this together, there’s nothing in today’s data that affects the growth forecasts for 2021 as a whole of 6.5–6.7%”.
When you forcibly shut down the economy, because GDP fell further than it ever has done, and probably ever will, almost overnight, that alone straight away costs the taxpayer money.
Cautious optimism for sure. But there’s an elephant in the room – the debt. How are we going to pay for it? “Basically, it’s cost more than anything we can get our heads around,” she says, of the mooted £300bn-plus figure of direct pandemic support measures. “It’s such a big number, you can’t really conceive of it.” The economic shock itself also has knock-ons for the public finances. “There’s a very strong correlation between economic growth, GDP and tax revenues, which also affects government debt,” she explains. “So when you forcibly shut down the economy, because GDP fell further than it ever has done, and probably ever will, almost overnight, that alone straight away costs the taxpayer money.”
The most meaningful way of thinking about government debt, she says, is the amount that the whole of the public sector owes as a proportion of the size of the economy. “Nowhere near as high as it was during the Second World War, for example, but the highest it’s ever been in peacetime,” she says. And in the 1950s and 1960s we recovered from the increases of the 1940s. However, the most important thing for international finance flows is whether the rise in debt looks like it’s accelerating out of control. And here “the word sustainable is crucial”.
“I might surprise you with this one,” she says, on the thorny question of debt repayment. “Because actually, the decisions on how to pay for it have kind of already been made. In the March Budget 2021, the government pre-announced it would raise corporation tax significantly, years in advance. In policy terms, all they really have to do is show there’s a plan and that this level of debt is going to come down.”
The economy is putting itself back together. There’s a bit of catch-up, and then it’ll stabilise. There’s nothing to divert from that.”
Such a pre-announcement was a clever move, she says, as it didn’t affect decisions and investment intentions at the heart of the pandemic. “And it was so big, it showed it was going to come down.” There was another factor too: “They said they were going to freeze, in cash terms, the income tax thresholds that affect all of us. So it would drag more people into the higher 40% tax bracket. Back then, when we were all very grumpy about the third lockdown, the Institute for Fiscal Studies was saying to anyone who listened that this was the biggest tax-raising budget that has ever happened, but it didn’t really break through. But what will happen, of course, this time next year, is that this enormous rise in corporation tax will start to feel very real to business.”
There’s no reason, she says, to assume the Chancellor is making any mistakes here: “We don’t seem to have a general sense of market instability. Of course, there’s a risk of another lockdown, which would obviously affect demand, but less so, as we’re more used to it.” For Ussher, the overall story is a “very simple headline, which is that the economy is putting itself back together. There’s a bit of catch-up, and then it’ll stabilise. There’s nothing to divert from that.”
She also believes the private sector will start to invest significantly more in its own future. “That’s a common-sense response, because you can do medium-term planning in a way that you couldn’t last year,” she says. There’s a presumption in the official forecasts that business investment will be 15% more in 2022 than in 2021. And that drives the growth forecast. In reality, business investments have been quite muted since the Brexit vote so, as our economy relies on these decisions, this is definitely one area to watch.”
If investment intentions are slightly higher than they were during the depths of the pandemic, with cost expectations rising faster, Ussher is also increasingly aware from IoD survey data how much SMEs are affected by perceptions of the wider economic climate. “We saw a complete collapse in confidence in the economy this early autumn,” she says, “with people as pessimistic as they had been back in the first quarter of the year during lockdown. When we ask business leaders what has had a negative effect on their organisation, the UK’s economic climate is always near the top. So that’s something the government can do something about quite easily. There was an attempt to spread blame on the government in September. I don’t think that helped.”
Something enormous has happened, so if you didn’t look at the impact as part of a longer-term trend, it might feel overwhelming. The key point is: there is a plan to bring debt down.
One other question whirring around the heads of many of us is, of course, how long it will take to repay the debt. Will our grandchildren be paying for this?
“I think we’d have to have no further economic shocks for 10–15 years to get us back to the levels of government debt as a proportion of GDP,” she says, though admits that “anything could happen. A steady state with a higher level of government debt is possible. But I think over the long term, you’d want it lower.”
So while she thinks there’ll definitely be a “hangover”, she wouldn’t characterise it as “everybody being in poverty, because growth will continue to rise during that time”. If Ussher sounds positive about the future, it’s borne out of her contention that in the long-term view, “economies like ours tend to grow around 1.5–2% a year. Standards of living will continue to rise. Our children will have more technology and higher productivity. Because that’s how advanced economies work.”
So what assurances would she offer CAs who might be less optimistic? “Something enormous has happened, so if you didn’t look at the impact as part of a longer-term trend, it might feel overwhelming. The key point is: there is a plan to bring debt down. There’s no reason at the moment to think that plan will divert. Options are limited when you’ve got a huge debt, but until something messes that up, the plan is that the debt will fall.”
Businesses, she thinks, will have to keep their nerve and focus on the basics. “Times like these make the board concentrate more,” she says. “You’ve got more variables changing, but fundamentally, it’s the same process: who are your customers? What do they want?”
Ussher recalls a moment from the pandemic that stuck in her mind: “I was doing a webinar around April or May 2020, with 100 private-sector firms who’d just been told to shut everything and send everyone home. A business leader said: ‘Please, could you tell me what to do now?’ I said: ‘You need to work out who your customers are, what they want, and then sell it to them. Do you need to pivot? Is there an opportunity? How do you get your staff in? To what extent do you decide to come out stronger or not?’”
She also recalls a public policy research project she undertook 10 years ago, which revealed that the common factor in success stories for SMEs was that during a crisis “they faced a moment of choice as to whether they were going to give up or not. And the one thing that came through was that the ones [that didn’t] became massive businesses.” As she says: “The stakes are raised, but the decisions are the same.”