Watch: War brings Reeves’ failures into focus
War in the Middle East rendered the Chancellor’s Spring Statement “irrelevant” according to City analysts as the economic impacts of the Iran conflict become frighteningly clear.
Rachel Reeves made just a passing mention of the Iran war when she addressed MPs on Tuesday, referring briefly to global instability while trying to paint a picture of domestic economic harmony. I can’t sugar coat it; the Chancellor appeared out of the loop, out of depth and out of ideas.
We’ll come back to the war and its economic consequences in a moment but first let’s consider what Reeves said about the government’s record. “Our plan is working,” she insisted, claiming again and again that government policies are bearing fruit and that we can’t afford a change of course. Opposition MPs said there was more gaslighting than Victorian London; the shadow chancellor Mel Stride said the Chancellor was “in denial” – asking “what planet is she on?”
It was a fair point, given that Reeves claimed her plan is working on the very day that the official watchdog downgraded this year’s GDP growth from 1.4 per cent to just 1.1 per cent. Modest upgrades to next year’s growth rate don’t make up for the loss.
Unemployment was also forecast to continue its climb, a grim trend we’ve seen month after month. So in what possible sense can the government’s plan be described as successful?
Employers sound the alarm
The impact of higher employment taxes, more regulation and increased costs for businesses is clear to see, employers have been shouting about it for months and I may have mentioned it once or twice myself. The economy is being deprived of fuel, the engine is spluttering, the warning lights are on – and the Chancellor says everything is fine. To be fair to her, there are rumours that the planned hike in the minimum wage for young people could be postponed, but this too little too late given the damage that has already been unleashed on the jobs market.
If they acknowledge now that higher costs have an effect on employment, why couldn’t they have foreseen it? Or even listened to the warnings from employers?
Beyond the harm caused by recent government policies there are also major structural issues with our economy that are not being addressed. Yesterday top City economist Simon French published a paper accusing successive governments of effectively rationing three things that serve as fuel for our economy; land, energy and capital.
Layer after layer of regulations and policy decisions building up over years means that the supply of these three critical factors has been artificially constrained with growth-sapping consequences. Electricity costs are among the highest for an advanced economy; construction, particularly housebuilding, is held back by damaging regulations and the cost of capital for UK-listed companies is significantly higher than in European and the US.
French says this has all “led to slower UK economic growth, pressure to raise minimum wages, declining living standards, and higher marginal tax rates.”
Energy security?
The government will insist that its planning reforms will bear fruit – and we hope that’s the case – while net-zero zealots like Ed Miliband cling to the delusion that we have to go all in on renewables, regardless of capacity and cost issues. The Chancellor met leaders of North Sea oil and gas companies yesterday in response to the prospect of an energy crisis triggered by the war in the Middle East, amid talk that the crippling tax regime in the North Sea could be scaled back, but again – too little, too late. It will take more than a photo-op roundtable to correct the mistakes of successive governments when it comes to energy security.
While the Chancellor’s speech on Tuesday was a masterclass in self-delusion, the rest of us can see that there’s nowhere to hide; any sustained price spike in oil and gas will feed through to higher inflation which in turn would interrupt and possibly reverse the downward trajectory of interest rates. This would be bad news for households, businesses and the government, and while it’s not certain that this will happen, and let’s hope it doesn’t, the fact that we’re so vulnerable, so exposed to the risk, underlines the urgent need for a more radical and effective growth agenda while highlighting the errors of government policy and the apparent complacency of this government.
War or no war, economic growth – the only thing that matters – is being sacrificed in favour of Labour’s natural instincts to increase taxes, increase regulation and increase welfare spending. Around the edges of the choices the Chancellor still talks about growth, but 20 months into office the question isn’t so much whether their plan has failed, but whether they ever had a plan in the first place.