Mr Brightside: Growth Pains

 

“When I grow up

I’ll be stable”

 

Politicians today love soundbites, slogans; our new PM, Sir Kier Starmer, is no different: “change” was his promise.

 
However, are we going to see that change simply comprising new faces in ministerial offices, while the reality for most people could be the more things change they more are the same. Put another way, a new dog with the same fleas!

For example, inflation increased by 2.2% last month. The increase might be at the lower end of analysts’ expectations, but high prices, especially for essential groceries, will define the public mood. The cost of living crisis that was a major factor in bringing down the Tories is now Labour’s problem.

The other factor that is often overlooked is that the government and the BoE focus on consumer prices index (CPI) which excludes housing costs such as rent and mortgage costs.

As mortgage interest bills have increased for many people and rents are rising at a record level this gives a distorted and misleading guide to how people are actually coping with inflation.

This increase in inflation wasn’t unexpected, and this was catered for in a manifesto that counselled caution and warned of a hard slog to turn the economy around. This was supported the chancellor, Rachel Reeves, making a great show of exposing the £22bn “black hole” in public finances bequeathed to her by Jeremy Hunt, as a way of buying time and gaining credit for undertaking the remedial work.

As a strategy, it is both rational and founded on truth. Basically, Labour told the electorate that the Tories had been incompetent in managing the public finances, running the NHS and managing migration.

Whilst restoring competence is a precondition for things improving, in today’s world the electorate is impatient, largely because the majority have lost faith in politicians.
 

‘the electorate is impatient, largely because the majority have lost faith in politicians’

 
Unlike Johnson, who was an orator with little, perhaps no, substance, Starmer is more an administrator, who wants to be judged by results, not promises. Clearly this is a better trait for a PM to have, but with a hostile media and well-resourced opposition politicians they will be quick to seize on mis-steps and setbacks.

Labour can only do so much finger pointing before sceptical voters begin demanding reasons to be optimistic about the future.

This is reflected in recent polls as Starmer approaches the end of his first 50 days in office:
 

• 24% feel more positive about Labour since it won the election,
• 29% feel more negative.
• Labour has lost some ground on the economy, where its lead is down to four points, and health, where its lead is down three points since the election.

 
On a personal level Starmer’s ratings, which spiked after his election win, have fallen back to their negative pre-election levels. His net approval rating is -7%, down 10 points from the beginning of August and down 26 points from his first approval rating as prime minister.

Public sector pay rises were seen as the biggest net win for the new government, with 19% saying they thought Starmer handled this best of the early issues he has faced. Chancellor Rachel Reeves’ cutting of public spending was seen as the biggest negative.

The economy appears to be more robust than expected. Official figures show a rise of 0.6% in the second quarter and 0.7% increase in the first three months of the year, pushing the growth rate above the 1% mark. As a result the chancellor might have the advantage of higher tax receipts as she prepares for her first budget.

An another inheritance for the new government is the fact that the UK economy had been underperforming for years, not only as the result of successive global crises, but also self-inflicted shocks including austerity and Brexit.
 

‘Labour can only do so much finger pointing before sceptical voters begin demanding reasons to be optimistic about the future’

 
As mentioned earlier growth was better than predicted in H1, but under the bonnet there are still issues: business investment fell, while progress to raise the productivity of the economy went into reverse.

The advent of Thatcherism saw a rise in free-market economics neoliberalism, often referred to as “supply-side reform”, which focused on boosting the supply of goods and services, as opposed to stimulating

To achieve these reforms there was economic policy was based on cutting taxes and regulation to tempt business investment, rolling back the state to avoid “crowding out” the private sector.

Prior to this, economic policies targeting demand involve governments spending to influence household consumption and business investment as a method of stimulating demand.

Chancellor Reeves appears to be continuing the practise of supply-side economics, To fix the lack of investment and falling productivity Reeves has turned to a theory in the ascendancy on both sides of the Atlantic: modern supply-side economics. Championed by the US Treasury secretary, Janet Yellen, the concept involves using the tools of the state to manufacture an investment boom, while also tackling inequality. The aim is to expand and upskill the workforce, while encouraging employers to use the latest technologies to boost productivity.
 

‘expand and upskill the workforce, while encouraging employers to use the latest technologies to boost productivity’

 
The concept that stronger economic growth is created by investing, rather than waiting for outside developments to do the work isn’t new. State activism through tax and spending is a tried and tested tactic of successive Labour governments. This time, however, there are also comparisons with ideas typically linked to the political right.

An example of supply-side reform is Labour’s plans to roll back planning regulation to incentivise a housing boom, spearheaded by private sector builders.

There are however clear differences between current plans and Thatcher’s reforms. In her Mais lecture earlier this year, Reeves pointed out that “the state simply getting out of the way, to leave markets to their own devices” was “no longer enough”. Using state spending and regulation, through stronger public services, was vital to the bedrock of a dynamic market economy, she said.

Instead, Reeves intends to use the levers of the state to “crowd in” the private sector, including through targeted spending, alongside the government’s regulatory changes, to get businesses spending again.

The £22bn blackhole left by the Tories will clearly inhibit what Reeves is able to do, and has led to the axing of funding for several infrastructure projects.
 

“But can you in the UK, within fiscal targets? To borrow to pump prime? That’s the conundrum”

 
Mark Gregory, a professor at Staffordshire University, said the US approach involving billions of taxpayer dollars would help to “pump prime” private sector activity. “But can you in the UK, within fiscal targets? To borrow to pump prime? That’s the conundrum,” he said.

“If you just concentrate on the supply side, you’re only addressing half of what’s important to business. Demand really matters to businesses. Public investment can stimulate private, and you grow the economy by convincing people there are opportunities out there.”

Despite Reeves warning of restraint, the new government has announced a £7.3bn national wealth fund, aiming to leverage £3 of private funds for every £1 of taxpayer cash. Great British Energy, backed by £8.3bn of public money, has a similar role. Both are policies straight from the modern supply-side economics playbook.

However, the party’s manifesto plans also indicate a reduction in public sector investment as a share of GDP over the next five years. Scrapping funding for road, rail and hospital rebuilding projects within the first month also sends a conflicting message.
 

‘Make UK said the chancellor urgently needed to commit to long-term infrastructure projects to ensure the UK is attractive for international businesses and investors’

 
Complicating the issue is the decade of decline in national infrastructure which further restricts economic growth.

A survey of 390 manufacturing firms by the industry group Make UK said that the country’s national road infrastructure had deteriorated in the last 10 years, making it slower and more expensive to build and export British products.

75% thought good road networks were important to supply chains, while 57% of disagreed with the former PM’s decision to axe the northern leg of HS2, rising to 61% in the north of England.

Make UK said the chancellor urgently needed to commit to long-term infrastructure projects to ensure the UK is attractive for international businesses and investors.

Stephen Phipson, the chief executive of Make UK, said: “Following years of underinvestment, this new government now needs to be bold on its infrastructure investment and realise the productivity improvements of doing so.”

As a summary, Mark Gregory succinctly said, “It’s a big ask. Leadership and better policy is part of the story. But it’s a long game.”
 

‘Mussolini My mother, who avidly digests the Daily Mail and GB News is already describing Labour as “frightening”, and telling me “they will bankrupt the country”’

 
We finish this week with education, as last weeks “A” level results were among the highest for decades. Unfortunately, there are growing regional differences, with the north lagging far behind the SE. Private schools also continued to outperform state schools.

In London and the SE >30% of their A-level entries were awarded A* or A grades. But those in the East Midlands saw top grades creep up by just 0.2 percentage points to 22.5%.

The gap between university application rates from London and the NE, which had the lowest application rate, has also widened further. As a result, while more than half of school leavers in London go on to higher education, only one in three do so from the north-east.

Lee Elliot Major, professor of social mobility at the University of Exeter, said: “When it comes to A-level results, we effectively have a two-tier system: London and the south-east versus the rest of the country.

“Of course these patterns reflect the differing levels of child poverty across the country but we need to do more to understand the specific obstacles to education in different parts of the country.”

Clearly there is much for Labour to do. As was of said during the last days of the Tory government, nothing works, everything seems broke.

Labour’s problem is simply; they need time. My fear is that they wont be allowed that luxury. The electorate is increasingly disillusioned with politicians, and will be quick to vent their spleen. Added to that is the Tory-centric media who are already stoking he fires of discontent. Mussolini My mother, who avidly digest the Daily Mail and GB News is already describing Labour as “frightening”, and telling me “they will bankrupt the country.”

If a little knowledge is dangerous, none at all is terrifying!
 

“Sure I get a little bit

Afraid sometimes”

 

‘As the new government passes through the first 50-days we consider the challenges ahead.

Personally, I am pleased to see them embrace a “modern version” of supply-side economics, which involves using state spending and regulation. If the GFC and Covid taught us anything, it is that state intervention and support is a necessary part of economic stimulus.

My worry is that a disillusioned electorate and right-wing orientated media don’t give Labour a chance before they put the boot-in. Starmer might get a break in parliament as the Tories contemplate their navel and new leader, which leaves the LibDems and Reform.

A week can’t go by without mention of Farage who is our highest-earning MP, having made almost £1.2m a year from GB News.

Farage also revealed that his visit to the US on 17 July – in the aftermath of the assassination attempt on Donald Trump – cost £32,000 and was funded by Christopher Harborne, a Thailand-based crypto investor who previously gave millions to the Brexit party. The purpose was recorded as “to support a friend who was almost killed and to represent Clacton on the world stage”.

“….represent Clacton on the world stage”: words fail me.

A further £9,250 trip to the National Conservatism Conference in Brussels in April was funded by George Cottrell, an unofficial aide to Farage.

Cottrell, a high-profile figure in Farage’s entourage, spent eight months in an American jail in 2017 after being convicted of offering money-laundering services on the dark web. The crime was committed in 2014, before Cottrell worked for either the anti-EU party or Farage.

On the subject of Reform I return briefly to the riots of recent weeks. In last week’s “Reflections”, I wrote; “It isn’t the one throwing the bricks who are the long-term problem, it is those standing-by we need to worry about.”

It seems I was right to worry, as the  latest poll findings also pose a challenge for Reform UK about how they approach the issue of social unrest and the role of the far right. Reform voters are evenly split on Tommy Robinson, the far-right activist who spread the idea of “two-tier” policing of the riots. 29% of Reform voters approve of Robinson, while the same proportion disapprove.

But, there is hope as “Rock Against Racism” is set to return. One of the highlights of 1978 was the gig in Victoria Park, east London, headlined by the Clash and Steel Pulse

Today this goes under the headline, “Love Music Hate Racism” (LMHR). Artists including Idles, Nadine Shah and Fontaines DC have backed an LMHR open letter calling for a “united cultural movement which will ward off the threat of the far right and strengthen communities damaged by the corrosive effects of racism”.

In memory of that great day in 1978 following is the Clash with “London’s Burnin’ and “White Riot”

Lyrically, we follow-up on the new government’s growing pains with “When I Grow Up” by Garbage. We end with “Law (Earthlings on Fire)” by David Bowie.

Enjoy!

Philip.

 

@coldwarsteve
 

        

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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