The writer is director of the London School of Economics and Political ScienceThe government’s recent fiscal plan fails to respond to the UK’s twin economic crises in a manner that takes into account either evidence or experience. While they are absolutely right to focus on cushioning the shock of the skyrocketing cost of living and trying to stimulate growth, the policies they have outlined do neither well. The market’s extreme reaction to the “mini-Budget” reflects the fact that the government has not told a credible story about its economic strategy.
The UK economy has two urgent problems. The first is a cost of living crisis fuelled by dramatic shifts in the supply and demand for goods — particularly energy — in a time of war, plague and other trade disruptions. The second is more than a decade of low growth and productivity, or what the Economy 2030 Inquiry memorably calls “Stagnation Nation”. With the highest inflation rate in the G7, growth in labour productivity well below the OECD average, stagnating real wages since 2010 and a host of other terrible economic indicators, it is no surprise that the Bank of England projects British households are facing the biggest collapse in living standards since such records were first kept 60 years ago.
We should let the BoE get on with doing its job of raising interest rates to fight inflation. This is not the time to do anything that might undermine central bank independence, which has delivered the low and stable inflation that we have all benefited from. A massive fiscal expansion and a collapsing pound just make the BoE’s job harder and will mean that interest rates have to rise even more to control prices.