What is Rishi’s recession and the fiscal ‘time bomb’ that awaits Labour?

Britain is in recession. Though hardly a shock, the bald headline and the facts that lie behind it certainly have a sobering effect and won’t help to maintain business and consumer confidence. It’s a mild recession by historical standards, and much of the West is in a similar kind of position. The relative performance of the British economy has been unsatisfactory for many years, and such growth as there has been is due to population increase and net migration, whereas much of the downward pressure on economic activity, especially investment and international trade, has been down to Brexit. In any case, whatever the reasons, the economic effects are being felt across the country and, before long, the political consequences of a weak economy will make themselves known...

Bad for the government, obviously. It goes against the “growth” narrative that ministers constantly push and feels like the prime minister has failed to deliver another of his promises. The downbeat media coverage will also affect the voters’ mood, as will the economic consequences of a stagnant economy – less room for pay rises, mortgages staying higher, property prices more depressed than otherwise and less cash for tax cuts or public spending. The “feel good factor” is dangerously absent in an election year: Tories certainly can’t deploy their traditional slogan of “Britain is booming – don’t let Labour ruin it!”. Instead, they have to “stick to the plan or go back to square one”, which is at best opaque and at worst makes a return to how things were in 2010 feel quite appealing.

Despite the endless rows about small boats and culture wars, British general elections are still determined by the economy and public services.

Basically, yes. Although presented in the vaguest of forms, his keynote speech on 4 January 2023 on his priorities for 2023 included the phrase “grow the economy”. That was not taken to mean “grow the economy by 2025 or some such but in 2023. Now, it is true, to be fair, that the economy was, by a tiny margin of 0.1 per cent, larger in 2023 than in 2022, but it was shrinking by the autumn, and by more than feared. The contraction of 0.3 per cent in the final three months of 2023 is actually quite chunky (an annualised hit of 1.3 per cent), and the December figure was negative. The first quarter of 2024 may well also be marginally negative – but yet to be seen.

That’s what Labour would have us believe, but the truth is obviously more complicated. Sunak has indeed been chancellor and then prime minister and therefore clearly in charge of economic affairs since February 2020, so he has the most recent responsibility. However, he could do nothing about Liz Truss’ disastrous mini-Budget; and nor could he do much to deal with the pandemic or the invasion of Ukraine and subsequent spike in inflation beyond spending and borrowing to prevent a deep slump. In other words, whoever had been in government since 2019 would have been faced with running up huge debts and ramping up taxes (and arguably Brexit). That said, the Tories have been in power, in various conformations, for 14 years, so that must count for something.

Technically, any of the figures from the last year and more could be revised up (or down), and the technical recession could, by a stroke of the statistician’s keyboard, be made to disappear when revisions are made in the coming months. But the basic picture of a miserable economy that has not grown properly since before the global financial crisis in 2008 remains of course correct.

A bit. Recession is a powerful word, albeit a little technical. It’s been defined since the 1970s by economists as “two-quarters of negative growth”, perhaps the most widely used oxymoron of all time. It does matter, in the sense that it conveys the impression of an economy in trouble and going in the wrong direction. But it never feels very different to one that is displaying feeble growth or broadly flatlining, as the UK is. Businesses suffer, there’s less money around and less for public services and tax cuts. Things are also made worse by the persistence of inflation. After being cut by more than half to 4 per cent, with Sunak over-delivering there, it is going to be much harder to cut it in half again, to the 2 per cent official target. This means the Bank of England will keep rates higher for longer than we’d like; their principal aim is targeting inflation, not growth or employment as such.

Slow growth means lower tax returns than expected, and so, if Jeremy Hunt wants to find some “headroom” to offer tax cuts in the 6 March Budget and maybe again in the autumn, he has to make some heroic assumptions about restraining public spending. It’s widely reported that this is precisely what he is up to now. The problem is that those assumptions, after a decade of austerity and a record bill for interest on the national, are becoming absurdly unrealistic. Yet they are the only way that, with slow growth, Hunt can meet his target of eventually reducing the burden of debt and cutting taxes.

The strategy – nakedly political – has been criticised by the IMF and it leaves a “poison pill” in the public finances for the next government. Labour’s Rachel Reeves, if she is made the first female chancellor, will be confronted with an unsustainable path for spending on public services, and therefore an unrealistic debt reduction target, plus reckless tax cuts that will be politically impossible to reverse. Put at its most cynical, Sunak and Hunt seem like they have given up on winning the next election, so they have instead set things up for Labour to fail.

Funnily enough, not that much, given we’ve been flatlining for so long – it’s no great surprise.

The Conservative Party has been consistently behind Labour in the polls by around 15 to 20 per cent since shortly after Sunak became prime minister, and the flow of economic news, good or bad, has made no material difference. Various budgets, autumn statements and kites about tax cuts have failed to shift the dial on Tory unpopularity, and the national insurance reduction that actually did turn up in January pay packets has similarly come and gone without any political impact. People even seem to understand what freezing tax allowances (“fiscal drag”) at a time of high inflation has done to their take-home pay. It looks very much like the voters made their minds up long ago.

Just what Reeves has been doing – make as few promises as possible about anything, and start warning now that the Tories have planted a fiscal “time bomb” in the Treasury and underfunded town halls across the land.