Monday, April 15, 2024
HomeNewsJeremy Hunt’s inflation 'analysis' is just embarrassing

Jeremy Hunt’s inflation ‘analysis’ is just embarrassing


OH DEAR, I’ve just spent the last two minutes watching this video in which Jeremy Hunt cheerfully explains what he thinks has caused inflation and what he’s doing about it.

Don’t waste your precious time on it. He blames everyone but himself for this crisis. It’s Covid, Putin and likely continuing high energy prices for this mess. That’s all he says on the why.

Even more laughably, he goes on to explain his plan to halve inflation. This is built on ‘investing money in renewables, encouraging energy efficiency and taking the difficult decision to balance the nation’s books’.

His analysis of why UK inflation is the worst of any developed nation is selective in the extreme, while his plan to control it is just plain wrong and is a complete misunderstanding of the largely self-inflicted problem.

Firstly, a bit of context. As outlined by the chart below it is a matter of record that the UK currently has the worst inflation of any major economy on earth, Russia included.

CPI inflation in 20 largest nations by GDP

Source: ONS

Moreover, it is not that the UK economy is performing well. It isn’t. Again GDP growth is one of the lowest of any major nation.

GDP Growth year on year % change

Source: ONS

So why are we in this mess?

There are numerous reasons why inflation in the UK is so bad. Here are the main ones, none of which Hunt seems to think are worth mentioning.

a)    The Bank of England, in common with other major central banks, adopted a highly unusual monetary policy for well over a decade with aggressive Quantitative Easing designed to suppress the cost of debt. The initial scale, £479billion or around 25 per cent of GDP between 2009-14, was unprecedented. Coupled with adopting an interest-rate policy of near zero, this distorted asset prices and broke the age-old check and balance on Governments where their spending had to be broadly related to tax raised.

b)   This policy, while arguably justified as an emergency measure, remained for over a decade. QE was not unwound and the Bank of England kept rates at an ultra-low level maintaining the unproductive sugar rush. This was a major policy error as they had a decade to normalise policy but they took the easy, delusional option.

c)     The Government and central bank thought running the economy on hot was clever micro-management, as they thought there was no inflation. They were sort of right on their narrow definition of inflation but taking the wider view they were very wrong. Inflation of basic things was subdued due to the ‘China effect’ and massive technological shift online which gave the impression of low inflation and prosperity, but actually many things went up a lot, including property assets, decent hotels, domestic services, fast cars and the like. The CPI numbers simply did not pick this up and it created a wealth illusion.

d)   Lockdown was a policy choice and as I and others have argued, a catastrophic one. Britain had one of the most generous/delusional lockdowns in the world. Furlough, Test and Trace, bounce-back loans and more. The National Audit Office puts the direct cost at £376billion. That is almost certainly a significant underestimate due to the longer-term impact on productivity, working patterns and cultural change, but let’s run with that low estimate. The unpalatable truth is the entire lockdown was funded with more QE – around £450billion more, and continuing near zero interest rates. This money went directly into the economy, providing a further sugar rush.

e)    Lockdown unleashed supply chain problems, discouraged work and changed cultural norms. It also resulted in a massive transfer from the relatively productive private sector to the increasingly unproductive public one.

f)      This transfer was so great that before lockdown public spending was, according to the Office of Budgetary Responsibility (OBR), a very high £887.7billion, but the latest available figures (2022-3) show that public spending grew to a staggering £1,172billion, about £150billion more than inflation’s rise. Lockdown embedded spending in largely unproductive areas and has been a massive drag on the economy.

g)    This shift from the private to the public sector, which under Tony Blair was around 35 per cent of GDP, is 47 per cent today. No other advanced economy has grown its State so aggressively over that period.

h)   This wealth transfer from to the State has been largely unproductive and is inflationary especially given the heavily unionised nature of much of the public sector, while greatly increasing long-term pension liabilities. It has also crowded out choice resulting in very mediocre public services.

i)       Hunt then blames Putin. Of course the energy shock has been very great but it need not have been thus. The US is energy self-sufficient and has energy costs (gas and electricity) around half ours. The UK could easily have followed this lead given abundant energy assets locally. HMG chose instead to de-emphasise oil and gas and invest in renewables. Hunt makes a virtue out of this, arguing this is part of the strategy to ‘halve inflation’. Really? Renewables are simply on no basis efficient either in terms of reliability or price, hence the green levy on consumers. Hunt’s statement arguing that the dash to renewables will temper inflation is nonsense.

j)      Hunt then claims he’s taken the difficult step of ‘balancing the books’. This is the biggest joke of all. Cameron inherited National Debt of £1,015billion. It is £2,516billion today despite the highest taxes in 70 years. Public spending remains in structural growth funded by a depleted private sector. Hunt makes no mention of this, while spending remains very weakly controlled.

I could go on, but frankly I don’t think I have ever seen such a dispiriting essay from any UK Chancellor as his pathetic video. Sure the car crash has been ten or 15 years in the making but the primary exhibits of delusional monetary policy, excessive and largely unproductive public spending at the expensive of private enterprise, self-inflicted lockdown and an energy policy based on spin and wind, and not what works, is the real reason for the mess. He mentions not one of them.

The tragedy is that our predicament is largely of the Government’s own making and they are compounding the error. However, while I have zero confidence that our current politicians will change tack, the solution is really simple. It’s a solution that has worked the world over, from Singapore to pre-Chinese Hong Kong, from 1980s Britain to 1980s US, from West Germany to Eastern Europe after the fall of communism.

So let’s start with a modest proposal. Let’s mandate to cut public spending by £100billion – that spending still more than 10 per cent higher than before the lockdown and recycle that into tax cuts (taxes would still be higher than when Johnson took office). Let’s harness our natural resources encouraging energy self-sufficiency, just as the US has done and secure the most basic need of all, heat and light, the very bedrock of any successful economy, and let’s harness the voters’ wish for a more appropriately regulated economy, not the ‘regulation central’ Whitehall has created. Do this and we will send a bright signal and quickly the UK will start to re-generate and grow. Out of small acorns we can properly ‘build back better,’ based on individual desire and creativity, not some Orwellian central-planned regulatory dystopia.

This article also appears on Global Britain, published here at the same time by agreement. 

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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