I was away last week, but coming back to the UK feels like we’ve gone back to the 70s. Talk of a sterling crises, stagflation, rising interest rates, tax hikes, government spending cuts, energy shortages, strikes – it feels like we are in the grip of a terrible 1970s Labour government. The only difference is that we are in the grip of a terrible 2020s Labour government.
To be fair, some of the problems are driven externally. Good US jobs data has strengthened the US$ against the pound, and the threat of US trade tariffs is a potential global inflation driver. But Rachel Reeves’s budget not only put the UK in a desperately vulnerable position, it has also delivered its very own set of inflationary and anti-growth measures of its own.
I’ve rehearsed these arguments in this column before. Reeves inherited an economy in good shape. But her mistake is to imagine public finances are the economy. They are not. Public finances took a serious whack over the lockdown measures and the support for families hit by the Ukraine driven energy crises – all supported by Labour and Rachel Reeves. But in her naivety, she thinks public finances are the economy, and that taxing the private sector to pay for public sector pay rises and increased spending is to boost economic growth. Growth comes from the private sector, not the public sector, and that is where Reeves has proved she is not the economic genius she claims.
Hold me to account on this prediction. Taxes will rise. Government spending will be cut. Inflation will rise. Interest rates will not fall by much. 1.8 million households coming of fixed term mortgages will suffer. All largely down to Rachel Reeves. Her criticism of Liz Truss (of whom I am no fan) look weak compared to the damage Reeves has inflicted with her appalling choices.
But I will cut her some slack. She and I nearly passed each other in Beijing airport last week. I was there looking at UK Sino relations and the governance of artificial intelligence globally. Reeves is right to engage with the second biggest economy on the planet. Aside from being an extraordinary market opportunity, many UK businesses rely on Chinese supply chains. Of course, we must hold them to account on human rights, freedom of speech, intellectual property issues. But we must not rule out engaging with those we have some disagreements with. China isn’t going away.