So the Bank of England (BoE) didn’t cut interest rates last week, as I – and many others – had predicted, and will wait another month to see how markets settle. That was just one of the many surprises in a seemingly endless chain of surprises, many of which, starting with the Brexit vote, have blindsided the markets.
Just as astonishing was the speed at which Britain’s ruling Conservative Party closed ranks and appointed a new leader and prime minister, Theresa May, who had a few surprises of her own. The first was to appoint Boris Johnson as foreign secretary, a role many had predicted would be given to George Osborne. Not a bit of it. Mr Osborne didn’t even get a job in the new cabinet, ignominiously leaving through the back door of Number 10 after a terse interview with the new prime minister on Thursday. He has disappeared from public life, probably never to return. Although we all thought that about Mr Johnson a week ago.
The new chancellor, Philip Hammond, is regarded as a safe pair of hands, not the reformer Mr Osborne aspired to be (but never actually was), but just the man to take control of the economy at one of its most uncertain times for many years. He has come to the job in a circuitous way, via transport secretary, then defence and finally foreign office. But before the coalition government came to power in 2010, he was shadow chief secretary to the treasury, the No 2 job to the chancellor and a cabinet role in its own right. So he knows what he is doing – or at least we hope so.
His appointment was greeted with approval in the City, which likes him and sees him as more of a reassuring figure rather than a financial dynamo. Mrs May has already made it clear that she intends to set the economic agenda from Downing Street, which means the treasury’s role will be less dominant than it was under Gordon Brown or Mr Osborne. The new prime minister felt that it was time for the treasury, which has called most of the shots for the past 20 years, to have its wings clipped, which would have been impossible if Mr Osborne had stayed in place.
The plus side of Mr Osborne’s legacy as chancellor is that he has left the economy in a much better state than he found it in – the strongest of the G7 countries, with the highest growth rate in the past three years and employment at record levels. Never in Britain’s history has there been a higher proportion of 16 to 64-year-olds in work (74.2 per cent), which is a huge achievement when one looks at what is happening in Spain, Portugal, Greece or France (we won’t mention Italy, which is brewing up for a banking crisis of massive proportions).
The UK taxes have come down, inequality has fallen and Mr Osborne’s parting gift was to introduce a national minimum wage, an initiative the last Labour government chickened out of during its 13 years in power.
But he was also, in the words of one commentator, a “very messy chancellor”, forced to eat his own words after three of his last five budgets backfired. In the uproar that followed his last budget, he had to abandon two of his main proposals – to cut disability benefits and convert all state schools into academies – within days. He also left some of his biggest ambitions unfulfilled, particularly turning the huge budget deficit he inherited – 10 per cent of GDP – into a surplus by 2019 to 2020. There is no hope of that now, and the government is expected to borrow about £34 billion (Dh165.29bn) in that year, compared with Mr Osborne’s pre-referendum projection of a £10.1bn surplus.
Mr Osborne’s plans to rebalance the economy by reviving the manufacturing sector have also gone awry. British industry is actually smaller now than it was before the financial crisis. And his ambition to double exports by 2020 is seen as a hollow dream, as is his plan to recreate the great “northern powerhouse” as an antidote to the overwhelming power of London.
Brexit has altered everything, particularly economic policy, and the treasury and the BoE are frantically working on a package of measures due to be announced before autumn. There is little doubt it will include a cut in interest rates, maybe to zero, and a continuation of quantitative easing by the BoE. But it is also expected to include fiscal measures to restimulate the construction industry, which has had seven seriously bad months in a row, revive exports and encourage the banks to step up their lending. It may also bring forward the sale of its remaining Lloyds shares, currently trading at 55 pence compared to their bailout cost of 73.4p a share.
There is never an easy time for a new chancellor to take over. But this must be one of the most testing in recent times – even tougher than the circumstances in 2010, when the new treasury secretary David Laws found a note in his desk drawer, left by the outgoing minister Liam Byrne, which simply said: “I’m afraid there’s no money”.
Ivan Fallon is a former business editor of The Sunday Times.
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