23 March 2022

Don’t let the Treasury sugarcoat it: we are about to undergo global economic shock

Do Rishi Sunak’s invocations of “resilience” really rise to the moment?

Illustration by Otto Dettmer / Ikon Images

What if Vladimir Putin has made a good bet? His short-term gamble on the progress of a quick invasion of Ukraine has gone wrong. But what about his underlying, bigger bet: that the democracies, including Britain, don’t have the stamina or resilience to combat his imperial ambitions?

Looking West from the Kremlin, he might well still believe our consumerist societies, cheerfully prepared to be penetrated by Russian money and led by politicians obsessed by the always-looming next election, will refuse to absorb the pain of a long-drawn-out conflict with the modern autocracies. He may well think that voters will, as fuel and food bills soar, force their leaders to back down.

He may be right. It is possible that Britain, for one, is no longer tough enough, well-organised enough and resilient enough for a confrontation that will brutally challenge many old assumptions. Eventually our short attention spans and the primacy of consumerism will persuade us, yawning, to let Ukraine go. This thought echoes in subdued conversations around Whitehall, though no politician that I’m aware of has so far talked about it in public.

Of course, it may be that a peace deal is agreed soon, or that Putin becomes suddenly unwell and retires or is putsched, or that Ukraine collapses… And that somehow this catastrophe recedes like a nightmare when the sun comes up.

Most of us seem almost programmed to believe that tomorrow will be much like yesterday and to carry on living as if that’s so. We seem to be able to brush aside even threats as big as climate change. So the base assumption that we do not face an existential challenge from Russia and China is unsurprising. After all, in the late 1930s most people preferred to assume that Hitler wasn’t really a threat.

But it is safer to look squarely at what’s coming down the road. If we are to be sufficiently resilient to survive in a world of hostile powers more dangerous than the one we thought we lived in, then the first thing we need is a step change in the quality of political leadership. Which takes us to the mini Budget delivered on 23 March.

Later this year there may be unbearable inflationary pressure, driven by fuel, food and mortgage costs, on lower-income and middle-class families. There was a lot of talk from the Chancellor about fuel, but food prices may well be the next crisis. In February, it was announced on 23 March, inflation hit 6.2 per cent, the highest level for 30 years. It will be interesting to see whether universal backing for brave Ukraine survives the can’t-pay-my-bills months.

Anaesthetising some of the coming pain and “resilience” were the themes of Rishi Sunak’s Spring Statement. Higher tax receipts and a revision in public borrowing had given him some £30bn more headroom than expected; rabbits out of fiscal hats were being widely predicted. But despite his bold Covid measures, Sunak remains essentially a fiscal conservative in an age of economic revolution. The Westminster mantra about him is that “he’ll do more than predicted and less than we hoped”.

To be fair, he couldn’t possibly afford to cancel all the possible inflationary pressures, and the small-sounding stuff on thresholds and fuel duty is what matters to voters. People are already economically exhausted. We are still stumbling out of the demoralising pandemic years.

But does the recent economic conversation – on any side – really rise to the moment? If ministers believe that Western democracy faces an existential and urgent threat, military but also economic, where is the big-picture, imaginative, “action this day” response?

Social cohesion in the face of a genuine threat requires making generous guarantees to struggling families. It means getting away from the piffling, silly, divisive politics of Brexit-equals-Ukraine, of partisan jibes about white flags. If we are going to stand together, we need to stand together.

The military threat means a bigger budget for the armed forces – if only to replace the weaponry sent to Ukraine – despite Treasury cavilling. Energy security means more money to start developing new nuclear power stations, the speedy opening up of onshore as well as offshore wind, and heavy investment in new technologies such as carbon capture and battery storage. Labour’s proposals on this would cost £28bn; but none of the new resilience agenda is cheap.

It goes far beyond the “headroom” of this spring. If the Treasury feels constrained on further orthodox borrowing, perhaps it needs to think differently. In previous crises public borrowing was extended by the use of patriotically marketed bonds. Perhaps, in the pro-Ukraine fervour, a defence and security bond would attract the surplus savings still in the British economy post-Covid; bonds are being hotly discussed in the EU and they are, after all, the oldest way of issuing debt.

You may think all this sounds a little hysterical. But doesn’t focusing on the need for tax cuts by the time of the next election sound like out-of-date thinking? Other departments are already muttering about the timidity of Treasury orthodoxy. Tensions between the department and No 10 have not gone away.

Against this, you might argue that, in the first stage of the conflict, the UK has already proved its determination and resilience. But if you look at the big initiatives – sending abroad anti-tank weapons, which most people didn’t know we had; sanctioning, slowly, Londongrad grandees; and leading on economic sanctions such as Swift, barely understood by most voters until the past fortnight – then you’d have to conclude that none of them is exactly politically difficult. They don’t show Putin tough-minded national resilience. Not really.

What does look difficult is persuading broader-shouldered voters to accept pain to keep the pressure on Russia. That’s hard. That requires explanation, good political storytelling. Where is it? This is quite urgent. There are many tougher days ahead.

That is not a coded warning of nuclear war. One fragment of good news from recent weeks is that the hotline between Washington and the Kremlin, often assumed to be a vanished relic of the Cold War, is still busily operating, and allowing the Americans to reassure the Russians about escalation.

[See also: Leader: The return of stagflation]

Rather, it’s that we must assume the economic blockade of Russia continues and that the war in Ukraine grinds horribly on. The global economic shock will reverberate everywhere – food riots in the Middle East and Africa, the closure of factories in China – and for us may mean fewer shiny disposable electronic toys and the end of the era of cheap energy, with all the consequences for the way we live our lives. Who is talking about that yet?

For perspective, I have been going back to one of the last great reporter-poets, Louis MacNeice, and his Autumn Journal of 1938. He describes a time like ours. Anxious people tear evening papers out of newsboys’ hands to get the latest from the Continent – what we would call “doom-scrolling” – and there’s a general disbelief about how the world is changing: “Today they were building in Oxford Street, the mortar/Pleasant to smell/ But now it seems futility, imbecility,/To be building shops when nobody can tell/What will happen next.”

But MacNeice finds a new seriousness as interwar society confronts itself, and a sense of events accelerating. He hears a train, “and I wonder what the morning/Paper will say,/And decide to go quickly to sleep for the morning already/Is with us, the day is today.”

I have thoroughly enjoyed our introverted, materialistic, heedless society. But if we want to defend the liberties and the peace we have come to take for granted, then there are changes coming – far bigger than this mini Budget presaged. The day is, indeed, today.