They have no one to blame but themselves. Responsibility for the sudden collapse in consumer confidence that survey data revealed last week lies squarely with Rachel Reeves, the Chancellor, and her Prime Minister, Sir Keir Starmer.
Ever since assuming office, their message has been one of unrelenting gloom, doom and buck-passing. If recession wasn’t already on the cards, they have done their utmost to manufacture one by constantly going on about a truly dire economic inheritance that will take punishing decisions in the forthcoming Budget to address.
Small wonder that everyone has taken fright; economic confidence is an extraordinarily fragile construct that it doesn’t take much to puncture.
That our political leaders should have seen fit to go full tilt at undermining it in their attempt to foist blame for all the sins of the world on the last government almost beggars belief.
There’s talk of Labour’s high command attempting to somewhat shift the narrative at this week’s party conference onto a more positive note, but the damage has already been done.
In economics, perceptions matter. “Realism” about the UK’s economic prospects is all very well, but it is a thin line that separates telling it as it is from making things even worse; Labour’s leadership has stepped straight over it.
What the Government has in effect done is hoist a giant “Britain is a basket case, so don’t invest here” sign over the UK economy.
On some level, it plainly made sense for Reeves to take time in drawing up her first Budget; all new Chancellors need space to get the measure of things.
Having unadvisedly ruled out any change in the main sources of taxation, Reeves has also been struggling with the complex choices and trade-offs involved in the search for alternative sources of revenue to pay for the public sector pay awards the Government has so recklessly committed itself to. It’s bound to take time.
Speculation has run riot
Yet as is already clear, taking nearly four months to deliver the new Government’s first Budget – which isn’t until Oct 30 – was a major mistake that has allowed speculation over what nasties the Treasury might have up its sleeve to run riot.
All over the shop, consumers, savers and companies have busied themselves not with spending and investing to support the still nascent economic recovery, but in taking evasive action for things that may not even occur.
The Government’s dithering also speaks to a wider concern about its intentions and competence.
It’s good to know that ministers are walking back a little from the ruinous package of new workers’ rights that had been promised to unions, but this too is indicative of a government that has no real plan for dealing with the country’s myriad pathologies, or beyond platitudes, even a credible set of goals.
It should come as no surprise that already Downing Street is beset by infighting and allegations of sleaze. Other than the promise of change for the sake of it, the Government doesn’t seem to know what it is there for. Division and paralysis follows naturally from the party’s lack of purpose.
All this is scarcely the most auspicious of backdrops to the “international investment summit” that the Government is planning to host in mid-October. If your underlying narrative is that the UK has been reduced to a economic disaster zone by the last government, it’s somewhat unlikely that international capital will be biting your hand off to invest.
Britain still has many attractions as a destination for inward investment, but you would be hard pressed to see them amid the relentless gloom of Downing Street’s messaging.
No one is going to be dipping their hands in their pockets until the full horrors of the Budget and the following spending review are known.
In any case, uncertainty over what the Government might do has created a damaging hiatus in economic activity.
It’s true that the pound has of late been remarkably strong, which might ordinarily be taken as a vote of international confidence in the UK economy.
Sadly, this has little to do with any relief that investors might have felt about the change in government, utterly spent as the last lot plainly were. Instead, it’s much more down to the growing interest rate differential between the UK on the one hand, and the US and Europe on the other.
Downward trajectory
Partly as a direct result of the Government’s decision to make inflation-busting public sector pay awards, the Bank of England is proving slow to cut interest rates, although discussion of the Government’s largesse was curiously absent from published minutes of the Bank’s last monetary policy committee meeting.
The expected downward trajectory in rates is, on the other hand, much clearer for both the US and the eurozone.
The resulting strength in sterling is bad both for the balance of trade and for inward investment, and seems to be sustained only by hot money chasing a higher interest rate. These flows can disappear as quickly as they arrived, so even as a way of satisfying the UK Government’s insatiable appetite for debt, they cannot be relied upon.
If the private sector won’t invest, then by fiddling around with the fiscal rules ministers could theoretically increase their own capital spending and thereby fill the gap.
A top drawer group of economists suggested such an approach in a letter to the Financial Times last week.
There may be merit in the idea, yet you only need to look at Japanese experience in attempting to address economic paralysis with a major programme of public works to see that investing simply for the sake of it is unlikely to be the answer.
The result was famously a mass of roads and bridges to nowhere. Even as Keynesian-style demand stimulus – paying people to dig holes only to fill them in again – the Japanese experiment failed miserably.
Besides, recent experience in the UK in ensuring value for money in public sector investment has been abysmal, HS2 being only the most obvious example of it.
Every Chancellor I’ve known has spent a great deal of time worrying about Britain’s poor record of investment and productivity growth. In this regard, Reeves is no exception. She talks a good game in declaring her determination to do something about it.
Yet so far almost everything she’s announced conspires against the uplift needed. Exceptionally poor productivity in the public sector has been rewarded by unconditional, inflation-busting pay awards, while plans to keep Britain ahead of the game in artificial intelligence with a new supercomputer at Edinburgh University have been scrapped. I could go on. The list of deterrents to productivity growth already announced is a long one.
Ultimately, it’s nearly always the private sector that drives gainful improvement in investment and productivity, yet there is little evidence of the new Government understanding the incentives needed to supercharge the entrepreneurialism that is required. Business is right to be fearful of the coming Budget.
I hope to be disproved, but I am not holding my breath.