British Prime Minister Rishi Sunak speaks during Prime Minister's Questions in the House of Commons, in London, on Nov. 9.ANDY BAILEY/AFP/Getty Images
Britain has been in managed – or mismanaged – decline since its costly victory in the Second World War, a quarter-century after the British Empire reached its peak. That decline seems to be accelerating as Brexit, the pandemic, the energy crisis and seemingly endless political turmoil work their dark magic.
Every decade or so since the war ended, a currency or economic crisis or an epically bad political decision has pushed Britain’s economy – and global stature – ever lower. The pound’s devaluation in 1949 ensured the rise, and ultimate dominance, of the U.S. dollar. The chaos of the 1970s – strikes, social unrest, gaping budget deficits, soaring oil prices and inflation – intensified the country’s tribulations and triggered a bailout by the International Monetary Fund.
Then came another currency crisis – “Black Wednesday” of 1992 – that pushed Britain out of the European Exchange Rate Mechanism, which had been designed as the warm-up act to the euro. In 2007, the collapse of mortgage lender Northern Rock was instrumental in launching the global financial crisis a year later. After that, Britain was convulsed by Brexit, nearly flattened by the pandemic and, lately, shocked by the fallout of the war in Ukraine – an energy crisis and another bout of crippling inflation.
If that were not enough, Liz Truss, the country’s fourth prime minister since 2016, took a bad situation and made it worse with a mini-budget anchored by unfunded tax cuts that would have made the rich richer, widened the deficit and stoked inflation. The reaction to her “growth” plan was swift and cruel: the pound tanked, government bond yields soared and the Bank of England responded with emergency government bond purchases to stop pension funds from unloading financial assets at fire-sale prices.
Ms. Truss did not survive the budget catastrophe. After only 44 days in office, she was replaced late last month by Rishi Sunak, who had served as chancellor of the exchequer in the shambolic government of Boris Johnson. Jeremy Hunt, a former health minister, is Mr. Sunak’s Chancellor. They will present the fall economic statement on Nov. 17 – another budget revamp.
Mr. Sunak and Mr. Hunt cannot win with this budget – all the more so since indicators point to a long recession that seems to have started already. On Friday, the Office of National Statistics reported that GDP sank by 0.2 per cent in the three months to September, the first decline since early 2021, when Britain was still under tight pandemic restrictions.
No budget of any shape or form will quickly restore growth, bring down inflation, plug the deficit and heighten investor confidence – Britain is too far gone on those fronts.
There are no attractive options for the government. If the Chancellor unveils an austerity budget to try to slow the financial deterioration, the market will take the view that the economy will never grow, potentially making the country’s debt unsustainable. But a more relaxed budget risks delivering a signal that the government is fiscally irresponsible, again potentially making the debt unsustainable as interest rates rise (the government’s average borrowing costs have climbed to 3.8 per cent from 1.1 per cent at the start of the year). Ms. Truss’s fatal budget will spook chancellors for years.
A compromise that pleases no one will probably emerge, a mixture of light tax increases and spending cuts designed to prevent the £50-billion-plus budget hole from getting horribly deeper during the recession. At the same time, the budget authors will have to say how they will bring the debt burden down once the recession ends.
They will find little consolation in knowing that their dilemma is not unique. Government finances everywhere are deteriorating as growth stalls, tax revenues fall, borrowing costs rise and subsidies for families and businesses with crushing energy bills need to be funded.
Britain has no wiggle room – the government has effectively run out of money as the deficit deepens and most economic indicators point in the wrong direction. The Economist magazine recently compared Britain’s economy with Italy’s, an unflattering analysis but one that was undeniably valid.
Italy has always been held back by a lack of investment and poor productivity growth. Real per-capita GDP has not climbed since 2000, a remarkable non-achievement for a G7 and G20 country known for its manufacturing and design prowess. Italy is also burdened by the dead hand of excessive regulation and a rapidly aging population.
Britain’s growth is better, but not by much, and is falling behind that of Germany and the United States. Since the financial crisis of 2007-08, the economy has expanded at an average annual rate of 0.9 per cent, one-third the precrisis level. Only Italy’s growth rate is lower among G7 countries. Investment and productivity growth are almost as poor as Italy’s.
It is no exaggeration to say that Britain, lauded in the pre-Brexit years as one of the most innovative, freewheeling and entrepreneurial economies in Europe, is in crisis. Next week’s budget might be able to put a small bandage on the open wound, nothing more. The Conservatives are on a Titanic run in the polls, with the opposition Labour Party on course to dismantle Mr. Sunak’s government in the next election, scheduled for 2024, though it could happen earlier. He and Mr. Hunt may decide that a bold budget is not worth the effort: why not let Labour endure the pain of lifting Britain out of recession and filling the budget hole?