By Catherine McBride – 4 minute read
(If you missed Part One before Friday’s mini-budget, go here first.)
ONE OF THE BEST THINGS about the Chancellor’s speech is that it did most of the things Liz Truss had promised to do during her election campaign. It seems incredible to say this but for many years now, Conservative voters, such as myself, have been bitterly disappointed that after voting for smaller government, less government intervention and lower taxes – we just seem to get a repeat of the government we previously voted out, producing more regulation, more taxes and more public servants – half of whom seem to be employed to write press releases that attempt to fool the population into believing they are getting what they voted for.
So, three cheers for Liz Truss and her Chancellor Kwasi Kwarteng. They have revived my belief in politicians.
I should add that the opposition parties are no better than previous Conservative Governmnets. Just remind yourselves of the fuss they made about the National Insurance rise in March and now listen to the fuss they are making about the removal of the same tax they opposed less than 6 months ago.
What the UK really needs right now is sensible government that does what is says in its manifesto – the front page of the manifesto, not just some tiny paragraph on page 57. And we need this on both sides of the house.
Removing increased taxes on employment – National Insurance – and not increasing corporate taxes when the economy is, according to the Bank of England on Thursday, already in a recession, are exceptionally sensible decisions. As was the Bank of England’s decision to not mimic the US Federal Reserve and to only increase UK base rates by 50 basis points. Sure, this has lowered the Pound Sterling relative to the US dollar but so what. We have a floating currency. That is how they work.
I can think of multiple reasons why if I were a major currency trader, I would be moving my money from pounds into US dollars:
- The UK economy is in a recession – see Bank of England notes;
- The UK isn’t self-sufficient in energy – unlike the US although we probably could be in the future under Truss’s plans;
- The UK is not a safe haven currency if Putin goes postal or there’s a coup in China – both stories are scaring the markets at the moment;
- The UK is still tied into the EU financial system due to a major gamble made by Philip Hammond when he was chancellor – anyone watching the spread between Italian and German government bonds will understand this. if the Euro goes, we will unfortunately go with it;
- The UK still imports a lot of food from the EU and unfortunately our new trade deals won’t help us for 5 to 16 years. Our farmers claim that we could be self-sufficient – well now is their chance to prove it. Although we will still need to import fertilizer ingredients, gas and diesel, one of the many reasons that UK farmers have been unable to compete with EU farmers (especially in Ireland) has been the higher pound.
I could probably think of other reasons if I spent more than 5 minutes thinking about it but you get the idea.
You may also have noticed I didn’t mention the interest rate differential between the US and the UK – because this is the one thing we have going for us. It will keep borrowing costs for our struggling businesses and consumers lower than in the US. Nor am I worried about increased government borrowing. What matters is not how much you borrow but what you spend it on. If you borrow money to build a business with a higher return than your borrowing costs, then there is nothing to worry about. If you borrow money to blow on buying everyone in town a fish supper, then have fun because you will be paying the bill for a long time. Most people live for years with mortgage debts that are 4 or 5 times their earnings without thinking about it because they have an asset equivalent to the borrowing.
Liz Truss is borrowing money, but she is also using it to build an asset that will be worth more than her borrowing. And that is what all governments should do.
Unfortunately, we have become use to the Government borrowing to give us furlough money, or in-work benefits, or to protect us from imaginary risks, or to subsidise rent seeking businesses, or even under Sunak – to buy us a fish supper. That time is over, now we need to rebuild the economy.
Luckily, Liz Truss has a plan to rebuild the UK economy and it will help if our currency’s value relative to the US dollar is lower. This makes
- imports generally more expensive, encouraging consumers to buy domestically produced goods;
- helps our exports – especially to the US and this includes service industries;
- it attracts direct foreign investment, especially into developing our oil and gas reserves;
- and it will help industries re-shore production that has been moved previously to countries with cheaper currencies.
It is interesting that no one worries about a country having a cheaper currency when we are moving our factories overseas to it or are tourists visiting it – generally the cheaper currency is the attraction. The complaints from the media unfortunately show the arrogance of many commentators. These are the people who still dream of Empire – not the Brexiteers. Well, I have news for them – we haven’t ruled the waves for a long time, we have lived on taxing the few successful people left in the country and giving that money to less successful people. We have tied our industry down with so much regulation that much of it has simply moved to other countries, even our financial service and insurance industries are restrained with regulations designed for very different financial markets.
Any Conservative MPs claiming they will vote against this plan has obviously not been paying attention to global financial movements or doesn’t understand them – which means they probably shouldn’t be commenting on the currency and definitely shouldn’t be running the country.
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Catherine McBride is an economist who writes about Trade and agriculture. She is on the Government’s Trade and Agriculture Commission and is a fellow of the Centre for Brexit Policy.