After an earthquake, it’s worth taking time to draw up solid reconstruction plans. Panicked jerry-building is not the answer. That’s the message that new Chancellor of the Exchequer Phillip Hammond and Bank of England Governor Mark Carney are sending as they survey the rubble of Brexit.
Britain faces a long and bumpy transition to life outside the EU. Recession is not inevitable, but difficult adjustments are. In Hammond and Carney, business and markets can at least take comfort that the controls of the economy are in safer, more predictable hands than, say, the Foreign Office.
Hammond, apparently known to some Tory MPs as ‘Spreadsheet Phil’ for his dry manner, has wasted no time in abandoning his predecessor George Osborne’s plans for an emergency budget in the event of a vote to leave. This is wise. Instant historians have decided that Osborne helped drive the undecided into the Brexiteers’ arms by threatening them with higher taxes and spending cuts if they voted to quit. Perhaps the tactics of Project Fear were wrong. But Hammond will almost certainly face pressure to raise more revenue at some point. Before he was sacked, Osborne had the common sense to abandon his fetish for achieving a budget surplus by 2020, a stance that Theresa May reaffirmed even before she was anointed premier. However, one of the messages of the referendum is that voters want more doctors, schools and housing. Unless Hammond, a fiscal hawk, is willing to risk a surge in the budget deficit, that can only mean an increase in taxes.
Now, though, is not the moment to compound the shock of Brexit by advertising higher taxes. Consumer and business confidence has fallen sharply, according to the Bank of England, while potential buyers are deserting the property market. So Hammond was right to play for time until his maiden Autumn Statement.
The BoE was right, too, to do nothing on Thursday. Financial markets had built in an 80 percent probability of a reduction in the bank’s base rate, which has been at a record low 0.5 percent since 2009. But economists were pretty evenly split, so there was little chance of triggering a panic by sitting tight, especially as share prices have been remarkably buoyant since the referendum. In any case, traders won’t have to wait long for their latest fix of cheap money. The BoE’s Monetary Policy Committee all but promised to unveil a stimulus package when it next gathers early next month; members went over the combination of easing options at this week’s meeting and said they expected to loosen monetary policy in August. By then the MPC will have updated growth and inflation forecasts. They are unlikely to be comforting. In Thursday’s statement the BoE said growth could be significantly lower – and inflation higher – than it had judged in May. It said then that Brexit could have ‘material implications’ for the economy.
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Cutting interest rates by a quarter or a half of a percentage point can’t do any harm. But lower borrowing costs aren’t going to rescue the economy. It is normally at this advanced stage of the business cycle that companies take the baton of growth from overindebted consumers and ramp up capital spending. But it would be a rash CEO who invests more in the UK when he hasn’t a clue what our new trading arrangements will be with the remainder of the EU; where sterling will settle; and what the May government’s tax and spending priorities will be.
Keep calm and carry on is the British way. It’s an approach that’s working for now for Hammond and Carney. But conditions will not remain benign forever. Winter is still coming.
Edited by Hugo Dixon
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