The Corona Budget
MR SUNAK’S BUDGET GAMBLE
THE Markets responded brutally to Rishi Sunak’s first Budget, on Thursday morning. The FTSE100 bombed by a nuclear 8% – only even more than the 6% drop on Wall Street on Wednesday. We are now in “bear” territory with investors in a “sell, sell, sell” mood. I’ve been reluctant to call an end to the gigantic asset bubble that grips the global financial system, if only because Donald Trump will print as much money as he needs to win the presidential election in November. But the arrival of an unexpected virus from Wuhan may have put paid to that transparent manoeuvre.
Since 2008, the global capitalist economy has been living a massive lie. So-called quantitative easing (aka printing money) has acted like a bicycle pump forcing air into asset markets, jacking up the prices of bonds, shares, derivatives and land artificially. This works on the pass-the-parcel principle that you are prepared to pay an absurd price for an asset that pays a miniscule annual interest rate or yield, on the basis you hope to sell it on to the next mug. But eventually the music stops, and somebody is left with a worthless piece of paper. We are not there yet but the moment of reckoning suddenly looks awfully near. Hence the sell, sell, sell!
Enter our new Chancellor of the Exchequer. OK, Sunak knows his numbers, as you would expect from somebody who made his millions playing the markets as a hedge fund trader. His performance at the dispatch box was a lot more assured than Philip Hammond, whose wooden style and fiscal conservatism telegraphed the middle English property developer he was. Sunak, on the other hand, is part of the financial Del Boy class who now dominate the Johnson administration. If we were still allowed to shake hands, you would be advised to count your fingers after meeting Mr Sunak.
OBR TELLS IT LIKE IT IS
What are we to make of the Budget? With the global capitalist economy in flames, the Del Boys have decided to join Trump and bet the farm on a massive spending sludge, finance through borrowing. A close look at the Office for Budget Responsibility (OBR) forecasts published on Wednesday reveals that the biggest component of economic growth in the UK in the next 5 years comes from government spending. Take that away and the economy flatlines. As it is, predicted GDP growth comes in at circa 1.5% per annum till the middle of the decade. That’s way below the 2.5% norm.
Buried deep in the OBR small print is a rather obvious admission that none of the civil servants think the government will be able to spend all this cash. Corona spending aside, the truly interesting bit of Sunak’s Budget is the plan to double government infrastructure and science expenditure to circa 3% of GDP and more. That is way above where we’ve been at for half a century. This shift has little to do with the clueless, ex-journalist now in Number 10, and everything to do with Dominic Cummings.
Mr Cummings has been obsessed for years with turning the UK into a de-regulated, de-taxed technology hub, offshore from a declining continental Europe. There is something Dr Strangelove about this plan. It is not the reborn Atlanticism of the resurgent Tory right which this week challenged the Johnson Cabinet’s strangely pro-Chinese stance on Huawei – with the SNP weirdly supporting Iain Duncan Smith and David Davis in the No lobby. Cummings’ messianic vision is more of a reborn Cyber Punk British Empire powered by computers, not steam engines. It fits perfectly with the high-risk financial gamesmanship of our new Del Boy class – though Cummings’ personal nuttiness exists on a scale of its own.
The trouble comes when you crunch the numbers, as the OBR has done. You can easily crank up government investment spending (especially as interest rate costs are effectively zero) but it is difficult to identify immediate projects in which to put all the cash. Which perhaps explains why the Chancellor has fallen back on filling potholes and building by-passes in the English shires, as a way of using up the spondulas – hardly high-tech stuff. Even then, the OBR reckons that fully a fifth of the new investment cash will simply sit in the bank. Respectfully, the OBR civil servants don’t provide a growth forecast corrected for this obvious underspend. They do, however, note that any impact of the new investment spending on productivity will take decades to make an impact. So, over the next five years, UK productivity – especially on a per capita basis – remains dire.
As does trade. A closer inspection of the OBS forecasts shows that the contribution of international trade to GDP growth is actually negative over the next five years. So much for Brexit and all those free trade agreements we were promised. Of course, as that fact becomes obvious, the Johnson administration will seek salvation in Sunak’s pet project – free ports. I predict that within two years, our new Chancellor will be opening low tax, low regulation zones across the UK, targeting rundown Northern seaports and challenged regional airports such as Prestwick.
MEANWHILE NORTH OF THE BORDER
What are the implications of the Budget for Scotland? Of course, there are Barnett consequentials, but most of these have already been factored into the SNP Government’s own budget. Most of any extra will be tied to fighting the current corona pandemic. Also, the SNP Government is wedded to the nonsense of spending an extra £3bn on roads rather than putting it into fighting climate change. Once again, can I suggest we capitalise the new National Investment Bank properly, ignore the UK Treasury, and start investing for our own future.
Finally, note that the OBR forecasts, linked to the virus crisis, have permanently buried the Growth Commission report as a policy. For starters, the low growth predicted by the OBR means that an indy Scotland sticking to Andrew Wilson’s fiscal rules (i.e. pay debt off first) would see less than a half point of GDP available for increased public spending. Who is going to vote for independence, in that case, when they can have Mr Sunak signing blank cheques? Also, just wait for the next GERS calculation to factor in Scotland’s (bogus) share of the Chancellor’s accelerating National Debt. The true argument for independence has to be that we have the skills and resources of our own to escape both Dominic Cumming’s technocratic, free market nightmare and the gigantic gamble the Del Boys are taking with the UK.