The economic clouds are forming and the Conservatives should fix the roof while the sun still shines

26 May 2017

 The Conservative manifesto launch was not about promises, but about who is fit to lead the country. Theresa May, setting out her stall as the ‘Strong and Stable’ leader the country needs, made relatively few commitments in the party manifesto, but has successfully positioned herself as a safe pair of hands ahead of the immense task that is a successful Brexit.

 

While the so-called Dementia Tax has drawn the eyes of the media, the party has quietly dropped its target for deficit elimination by the end of the decade. Instead, the deficit will now be eliminated by 2026 – almost two decades after the banking crisis of 2007-08. This should cause concern for the economically literate.

 

The UK is perilously heading towards a major economic crash. This crash has the potential to become one of the worst recessions Britain has seen, with a huge shock to stock markets followed by the possibility of defaults on corporate bonds, a hit to business, an increase in unemployment and a subsequent shock to the housing market.

 

This crash will have nothing to do with Brexit. In fact the economic shock facing us will have no relationship towards Britain’s withdrawal from the Bloc, which could potentially shield us from being compelled into bailing out any banks on the continent which find themselves engulfed in turmoil of the global markets.

 

Recessions and economic shocks are nothing new, in fact throughout history they occur cyclically on average every eight to ten years. Later this year the UK will soon enter its ninth year since the last recession. In other words, we are overdue a recession or economic crash. The warning lights are already flashing around the world, which has gradually accumulated massive debt since the banking crisis, spurring economic growth with borrowing and ultra-low interest rates.

 

In the US, the credit to GDP level is now the same as it was just before the 2007-08 banking crisis, when the world’s banking system almost collapsed, and the subsequent credit crunch ensued. Most financial commentators now agree the US stock market is overvalued, and well overdue a significant price correction. The market already looks shaky, with events unfolding around Trump’s presidency causing substantial spikes and dips.

 

Any market correction in the US has the potential to proliferate across the globe. In fact, both Western economies and emerging markets look vulnerable. The problem is that there is no fiscal weaponry left in the arsenal of Her Majesty’s Treasury to combat any economic shock in the UK.

 

Following financial crises, central banks - like the Bank of England - have the option to induce economic recovery by reducing interest rates and printing more money (quantative easing) to get the economy moving. However, as in most western countries, the British economy is still in recovery mode. In Britain, interest rates remain ultra-low, with the base rate stuck at 0.25 per cent and quantitive easing has only just begun to dwindle from the last economic crash. The country’s structural deficit remains at more than £50bn per year.

 

This time there won’t be the option of reducing interest rates without turning them negative. In the US, the federal reserve has begun a staged process of continually raising interest rates, to tighten borrowing and retain some firepower incase of a crash. However, in terms of economic cycles, it is late in the day. And in European countries like Britain, this process hasn’t even begun. 

 

The only way Britain will be able to combat any economic turmoil will be to borrow more to induce spending. However, bearing in mind the significant debt of the British economy and the continued existence of the deficit, the country is in no way to carry out a massive spending programme. There are other western countries in a worse state, yes, however this is a legacy of a Conservative policy, which, from 2010, made substantial cuts to public spending.

 

It was the right thing to do then and it is the right thing to do now, however, pressure from the left has forced two Chancellors into gradually softening the austerity programme. The policies of Jeremy Corbyn and Tim Farron would make the country less well-equipped to face the challenge of Brexit and the inevitable economic shock which is fast approaching.

 

 The next Conservative Government should take tough decisions to the benefit of the country and move quickly to find further spending reductions. The Foreign Aid budget may be one place to look, but there are other departments where some fat should be trimmed to halt further government borrowing. We don’t know exactly when this next economic crash will come, however, I believe we will be lucky to make it to the end of the decade before it is upon us.

 

The policy of tackling the deficit robustly and quickly is essential for the economic integrity of the country. As George Osborne repeatedly said as Chancellor, the Conservatives are the party who “fix the roof while the sun is still shining”.

 

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