Here are my answers to this year’s survey, which can also be accessed here.
UK economy: Will the UK economy outpace or lag behind other developed economies in 2023 and how will it feel for households?
I don’t expect the UK to either outperform or lag other major western countries over the next year. That is because the challenges confronting the UK are similar to those faced elsewhere. In terms of the main macroeconomic variables such as growth, jobs and inflation the UK’s relative performance is likely be in the middle of the pack when compared with the other major western European economies. It will be a tough year for household incomes, for similar reasons to those we have already seen during 2022. In fact, 2023 may prove to be the year of the good, the bad and the uncertain for the UK. The good is that inflation has peaked and looks set to decelerate significantly, the bad that growth will be weak with recession likely and the uncertain being how fragile or resilient the jobs, financial and property markets prove to be.
Monetary policy: How tough will the Bank of England need to be in 2023 to curb inflation?
The BoE may not need to be too tough as inflation has peaked, the economy is slowing, monetary policy tightening over the last year is still feeding through, and further quantitative tightening has already been announced. Because central banks globally — including the BoE — were too complacent two years ago, wrongly believing inflation would be transitory when it was clear at the time that it would persist, there is a danger that they may be too aggressive now and tighten too much. Although the question relates to the cycle, the broader issue is a more structural one: the need for the economy to adjust to the end of cheap money. Since 2008, monetary policy has become the shock absorber for the economy, with low policy rates and excessive quantitative easing, contributing to asset price inflation, to markets not pricing properly for risk, leading to an inefficient allocation of capital and allowing the recent bout of inflation to take hold.
Fiscal policy: Will the government need to announce further tax raises in 2023 to maintain sound public finances?
No. There is no need for fiscal policy to be tightened any further in 2023. The best way to maintain sound public finances in 2023 is for policy to help ensure the downturn, or recession, is as short and shallow as possible. This points to neither repeating the failed years of austerity or further tax increases. The tax take, already high, is set to rise further, with the income tax system not being indexed to take account of inflation. Also, the rate of corporation tax is set to rise from 19 per cent to 25 per cent. Previously when this rate fell, the tax base widened. Now, this higher rate will apply across a wider base, hitting business competitiveness, especially when included with the UK’s unattractive investment incentives.
Reasons to be cheerful: Will we see green shoots of recovery starting by the end of 2023?
Yes. As inflation decelerates sharply this should allow scope for a recovery in real incomes and in consumption as the year progresses. This too should improve expectations about the policy environment in 2024. If talk of a resolution on the Northern Ireland protocol materialises, this too will help wider business sentiment.
In perspective: What is the best historical comparison for the downturn the UK faces in the year ahead?
Naturally the 1970s, given the havoc caused by high inflation, and the need to address stagnation. But there are also important lessons to take from other periods, too.
The danger is the UK may experience a triple deficit problem. We have been used to a twin deficit problem — a high budget deficit alongside a trade, or current account, deficit. Now, the challenge is: what happens to the private sector’s balance sheet? This is critical. Thus there are lessons from the [Nigel] Lawson boom and bust of the late 1980s. For instance, in the late 1980s the economic consensus and the markets were very upbeat with chancellor Lawson’s boom, because of the great shape of public finances — with a budget surplus. As was clear at that time, not enough attention was being focused on the huge build-up of the private sector’s liabilities. Then, there was a large rise in private sector debt, including consumer credit and mortgage equity withdrawal.
Likewise, what happens to the private sector balance sheet now will be critical. Also, the post-second world war era is relevant in terms of misplaced current concerns about public finances. Then the ratio of public debt to GDP was high, and the lesson from then is the crucial need for sustained economic growth to bring the public finances into shape.