A contender for the greatest of financial commentary cliches is the idea that markets don’t like uncertainty.
Here’s a twist: Businesses don’t like drama. This, like its market ancestors, is obvious. But it’s worth saying given that British politics since the Brexit vote has had more theatrical twists and turns than your average episode of The only way is Essex.
The latest is a real humdinger. Chancellor Kwasi Kwarteng’s ‘budget event’ was meant to be a break with consensus, designed to shake a sluggish economy from its slumber. Instead, the currency has tumbled, gilt yields are soaring, markets are increasingly betting on emergency central bank action, and the main debates are about what kind of carnage this could unleash. on the real estate market and the similarities between the United Kingdom and an emerging country. market.
I think it’s fair to say that it doesn’t help Kwarteng’s end goal: to boost the UK’s economic growth rate, largely through ‘unlocking’ policies – to use the phrase dotted throughout the document — business investment.
There is a broad consensus, left and right, that Britain’s growth problem is rooted in troubled investment, something Resolution Foundation calls it a “recipe for relative decline”. Investment by private companies accounted for only 10% of gross domestic product in 2019, behind France, Germany and the United States with 13%. This explains most of the productivity gap between the UK and its near neighbours. It has stagnated since 2016 and has worsened: while other economic activities have rebounded from the pandemic, business investment remains well below the pre-Covid peak.
Few truly believe that tax cuts, for corporations or the wealthy, are enough to reverse this dismal trend. Neither did the government, really: behind the budget profligacy that caused market panic, Kwarteng’s no-budget included sweeping promises about the kinds of supply-side reforms that could make a real difference: on the immigration, planning, infrastructure and skills. As unlikely as it may seem, many business people love this stuff even more than they love tax cuts.
However, they are not ready to bet on it. In the short term, there is a whiff of chaos in the air: rapidly rising interest rates make it easier to keep money in the bank, rather than risking a complex investment project that is now more expensive to finance. The costs of imported goods or raw materials increase, as the pound sterling collapses. The idea that there will be a vibrant end market in terms of demand for whatever you invest in building or producing seems rather dubious.
But the UK government has a particular credibility problem. This is partly because its commitments lacked detail. This is partly because relaxing immigration rules or liberalizing planning is politically heavy on the Conservative party. And that’s partly because these are long-term commitments after years of John Van Reenen in the LSE’s Innovation and Diffusion Program calls it “policy attention deficit disorder”.
After all, the country is suffering a boost after its third drastic change in direction and ideology in six years. The government remains unable to recognize that erecting the highest possible barriers to trade with our most important partner has hurt the productive capacity of the economy.
The new administration also promises to combine free-market, small-state ideology with policies that require a heavy dose of government direction to succeed. Investment zones can simply displace existing activity or give tax breaks for what happens anyway: force them to go where incentives or lighter regulation can ease the real constraints, says a policy expert , and “we don’t know if the government has the power”. endurance or attention to detail”.
One way to alleviate these concerns is to create independent bodies to cut political noise and assess progress: such as the Office of Budget Accountability, which has not been tasked with assessing the impact of this budget fiasco, or the Industrial Strategy Council, which was bluntly abolished after only two years.
Another is to build a case for a sensible, well-designed policy that actually makes headlines. Instead, the Chancellor went bankrupt on tax cuts, with few details about what changes might generate the growth to pay for them. You can’t blame the companies for upping their ‘dramatic discount’ when considering UK investment plans.