Everyone should calm down about both chancellor and economy

The chancellor was under pressure from day one, criticised for unpopular tax increases at a time when the economy was clearly weakening, interest rates were punitive and inflation remained too high for comfort. A low point came with a budget that was widely condemned by economists and the business community.
This is not, you may have guessed, Rachel Reeves, though aspects of it clearly apply to her baptism of fire as chancellor. It is the late —Sir Geoffrey Howe, Margaret Thatcher’s first chancellor from 1979 to 1983, under whom the economy was ultimately set on a path to stronger growth after a rocky start which included what at the time was the deepest recession since the 1930s and the “austerity budget” of 1981.
Or it could apply to George Osborne, whose first act was a big increase in VAT to 20 per cent (from 17.5 per cent), alongside spending decisions that established the austerity of the 2010s. He was famously booed while presenting medals at the London 2012 Paralympics. Osborne’s goal was to put the public finances back on a sustainable footing and he succeeded in that task, in the wake of widespread criticism, until events after his time in office intervened.
Difficulties and unpopularity go with the Treasury territory. Whether Reeves, as Britain’s first female chancellor, expected it to be different, I cannot say. In many respects it looks to have been worse, particularly over her career before entering politics.
Make no mistake, she is a bona fide former Bank of England economist, as those who worked alongside her have attested, and was clearly rated highly by the Bank when it chose her to work for a period at the British embassy in Washington as part of the Bank and Treasury team there. It was and is a plum posting.
I do not blame her in the slightest for continuing to describe herself as an economist even when she went north to work for Halifax Bank of Scotland in a different role and cultivate a Leeds parliamentary seat.
I too have a master’s degree in economics from the University of London, worked as an economist before writing full-time for these pages and continued to say I was one for many years. Sometimes I still do. Once an economist, always an economist. The pile-on against her has been silly and unedifying, mainly from people who do not know any better. I hope this episode does not discourage other people from entering politics.
There has been, I would say, an outbreak of mild hysteria, about the chancellor’s CV and the economy’s performance, in recent months. People seem determined to see the economy going to hell in a handcart. They should be careful what they wish for.
Figures showing a rise in inflation from 1.7 per cent in September to 2.3 per cent last month were greeted as terrible news and blamed on the government, but were almost entirely a predictable consequence of what economists would call energy price base effects.
Inflation fell sharply in October last year when household gas and electricity prices plunged. This October, in contrast, prices rose, reflecting higher international prices. Energy prices have exaggerated the highs and lows of inflation over the past two to three years and will continue to do so for some time. Inflation will go a little higher than 2.3 per cent in coming months but should then hug quite close to the 2 per cent official target.
There has been a similar panicked reaction to other economic news. Retail sales fell by 0.7 per cent last month, a drop blamed on pre-budget uncertainty. But consumer confidence has recovered this month, according to GfK, as people realised that the October 30 budget was not as directly bad for them as feared. I would be very surprised if retail sales did not show a strong rise this month.
Even the apparent sharp slowdown in GDP (gross domestic product) growth in the third quarter to 0.1 per cent, from 0.7 and 0.5 per cent respectively in the two previous quarters — after falling in the second half of last year — was not quite what it seemed. Household spending, up 0.5 per cent, and business investment, up 1.2 per cent on the quarter, 4.5 per cent on a year earlier, were better than their average rise in those two previous quarters. The business investment figures were encouraging.
The big picture is that the economy is growing, if only modestly, maintaining the sluggish pattern of recent years. There are many uncertainties ahead, including those from across the Atlantic, but you would be hard pressed to conclude from data and surveys that the economy is heading into recession. Growth next year should be better than this.
Of course there are issues. Reeves showed a less than secure political touch in some of her budget decisions, which may require some modifications. There were too many budget announcements that raise relatively little revenue but generate an enormous amount of political heat. If the aim was to bring the tax-dodging wealthy into inheritance tax, there were more targeted ways of doing so without triggering a tractor protest. There is time to modify the details of a policy that does not take effect until April 2026, as the Institute for Fiscal Studies and others have suggested.
The reasons for a tough budget were, however, laid bare in the latest figures which showed that public borrowing was £17.4 billion last month, the second highest October on record, with a running total this fiscal year of £96.6 billion, more than last year. They underlined the chancellor’s very difficult fiscal inheritance, the budget being her attempt to put the public finances on a sound footing.
There are things I would have done differently in the budget, as I am sure many reading this would agree. It would have been better to reverse some or all of Jeremy Hunt’s pre-election cuts in employee national insurance, rather than load it all on to employer NI, which businesses are understandably very angry about. I would also have put up fuel duty, but then I am not a politician. I don’t envy those who are.
David Smith is Economics Editor of The Sunday Times
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