Rishi Sunak is a class act. His budget was delivered perfectly. His handling of yesterday evening’s press conference consummate. This morning’s performances clear and resolute. On top of the detail, fluent and modest, he was convincing in having his cake and eating it. He pledged support for levelling up, public services generally and encouragement for business and future entrepreneurs through incentives for investment, green technology, the creation of freeports etc. How refreshing a contrast to the Prime Minister. ‘Honest Rishi’ certainly beats a dissembling Johnson.
And yet we know there is pain to come. It is spend now and pay later and, as this plays out, the concept of ‘levelling up’, already under pressure, will buckle. There are obvious reasons for this and more subtle ones.
First, the obvious ones. The government will have spent some £400bn on cushioning the impact of the pandemic through highly sensible measures from furloughing, small business loans, and grants to businesses particularly hard hit by lockdown. At an individual level, benefits have been topped up, the self-employed have received assistance, even evictions from rented accommodation were suspended, to list a few initiatives. But the universal credit increase is due to end in September, furloughing will wind down, leaving the scars of higher unemployment and some small businesses will simply never recover. Many public sector wages will remain frozen and initiatives to move some government activity up North feel like window dressing. In several respects, one can argue ‘tough’. The government cannot continue supporting the economy and individuals at this level for ever. Something has to give if you are to avoid an entirely socialist model of governing or, even worse, a collapse in the impact and credibility of endless government debt. This is a reasonable argument.
The more subtle reasons for ‘levelling up’ faltering and disparities of wealth growing are due, however, to the same policies that have been in place since 2008 to manage economic shocks; huge monetary easing. The unintended consequences of such actions, essentially pumping vast amounts of money into the financial system through government bond buy-backs and maintaining low, almost zero interest rates, have created huge asset bubbles which have continued throughout the pandemic. These are partly exacerbated by some additional poorly-directed government largesse in areas such as housing.
The evidence during this Covid crisis is stark. The economy is awash with cash allowing cheap borrowing. Stock markets rose globally by some 10% in 2020. Property prices have risen, despite the crisis, fueled by housing shortages and stamp duty holidays. Covid business loans have not always been used appropriately but to finance takeovers, for example, and that is before one considers fraud with some £20 billion estimated to have gone missing. Targeted austerity in relation to public services in the UK may be over, but it will not offset accelerating disparities of wealth. If you have investments and own your own home, you will be doing well regardless of the pandemic, just like you have been doing since the economic crash of 2008. If you do not, then you will be struggling and that is before you consider the additional wealth gap across generations.
This is a global phenomenon not simply a domestic one. An article in yesterday’s FT highlighted the fact that the Federal Reserve stimulus has made private equity executives, who are some of the richest people on Wall Street, even richer as they have received hundreds of millions of dollars in payouts despite a struggling US economy. This is before a proposed US$1.9 trillion Covid stimulus package, which, whilst necessary in parts, will inflate asset prices further. If all this fuels a return to inflation which is highly possible, guess what this has historically always done, exacerbated disparities of wealth…
On balance, this budget does not stand up to the ‘levelling up’ test if the aim is to reduce overall disparities of wealth absolutely and across regions. Whilst the government has introduced many sensible measures to mitigate the impact of the pandemic, it will not counteract and may even add to the unfortunate side-effects of long-term policy largesse.
One thing is for sure. Recovering from Covid will be as tricky as Covid itself.
Inside Right Politics 