The Guardian view on the UK economy: stuck in a rut of low growth, and politics is to blame

A remarkable speech from a senior rate-setter at the Bank of England lays bare the terrible predicament the UK is in

One of the big battles likely to be fought at Westminster this autumn will be over interest rates. This may seem an odd subject for a political row. Didn’t Gordon Brown remove interest rates from government control more than two decades ago? Isn’t Threadneedle Street the other side of London from the House of Commons? Yes and yes – and yet that hasn’t stopped monetary policy featuring in every economic debate since the 1990s, from the loss of industry to the austerity years. This time around, the worry is over inflation and whether the Bank of England is too relaxed about rising prices.

Last month, a House of Lords committee castigated the bank for its “addiction” to creating money through its £895bn quantitative-easing programme which, it claimed, could push prices up further. MPs on the right of the Conservative party are also starting to worry about inflation and what happens if the bank has to raise interest rates.

Two separate issues are at work here. The first is that prices are going up as the economy thaws out from the deep freeze in which it was placed at the start of the pandemic. There are also shortages of both material and workers, in a country dealing with the twin issues of Brexit and Covid. All this probably means inflation will remain higher than the bank’s 2% target. What there is little sign of yet is significantly rising wages. As the furlough scheme winds down, joblessness is bound to rise and the fact that Boris Johnson even dared to offer nurses a 1% pay rise after their year from hell says a lot about the relative powerlessness of the average British employee.

Set aside the sugar rush of spending by consumers largely shut away for 14 months and the frenzy in the housing market, and the economy remains in a very fragile state. The factors driving this go far beyond any pandemic or issue at the Northern Ireland border, as has been made clear by a senior economist at the Bank of England. Gertjan Vlieghe was appointed to the bank’s rate-setting committee by then-chancellor George Osborne and has proved a thoughtful commentator on the UK economy. On the verge of stepping down, his valedictory speech made last week is remarkable for going beyond the usual banker’s fare.

The great weakness of the UK, he says, lies in the policies it has followed for decades. “The low tax, low regulation regime combined with globalisation ended up widening income disparities in a way that not only hurt those at the bottom of the income distribution, but ended up having adverse macroeconomic effects.” Those effects include very high levels of debt held predominantly by households and low levels of workplace productivity, which is the result of businesses not investing. Add all those together, Mr Vlieghe suggests, and the UK is stuck in a deep rut of low growth and low rates. In other words, the exact hue of Conservative most worried about low rates has been a cheerleader for the very policies that mean we are stuck with low rates. To fix this situation, the central banker proposes stronger trade unions, much tougher rules on competition and higher taxes. Such policies are not in the bank’s gift but the government’s. Will Boris Johnson implement them? If he did, he might legitimately call them “levelling up”.

Contributor

Editorial

The GuardianTramp

Related Content

Article image
The Guardian view on government debt: sensible, not spendthrift | Editorial
Editorial: The response to the pandemic must not lead to a renewal of austerity. Shrinking the state has contributed to this crisis

Editorial

14, May, 2020 @6:23 PM

Article image
The Guardian view on economic predictions: no time to bank on a recovery
Editorial: When Andrew Haldane claims post-Covid UK is ‘poised like a coiled spring’, he does no favours to either his reputation or the debate over the future.

Editorial

17, Feb, 2021 @6:11 PM

Article image
The Guardian view on Boris Johnson's plan: levelling down, not up | Editorial
Editorial: The prime minister should be ditching the economic doctrine that is causing so much misery. Instead, he is using Brexit to supercharge it

Editorial

18, Jan, 2021 @7:12 PM

Article image
The Guardian view on Britain out of the EU: a treasure island for rentiers | Editorial
Editorial: There’s no sign that ministers will use the twin shocks of the pandemic and Brexit to fix a broken system that is failing too many people

Editorial

27, Dec, 2020 @3:23 PM

Article image
The Guardian view on the UK economy: before Brexit, rescue it from austerity | Editorial
Editorial: The public want the government to spend more, yet the Tories cannot grasp how this makes economic and political sense

Editorial

11, Feb, 2019 @6:30 PM

Article image
The Guardian view on the UK economy: deep depression and a huge bill ahead | Editorial
Editorial: The pandemic is pushing the UK into a historic slump. The government is now the spender of last resort

Editorial

13, May, 2020 @6:20 PM

Article image
The Guardian view on Brexit and the economy: storm clouds on the horizon | Editorial
Editorial: It falls to a former chancellor to speak blunt truths from the backbenches because Boris Johnson employs only those willing to embrace denial and deceit

Editorial

14, Aug, 2019 @5:30 PM

Article image
The Guardian view on Covid and the north-south divide: inequality kills | Editorial
Editorial: Boris Johnson won a landslide promising to ‘level up’ the UK. Yet the pandemic threatens to level down the country

Editorial

11, Nov, 2020 @7:20 PM

Article image
The Guardian view on Boris Johnson's role: laundering the Tory brand | Editorial
Editorial: The prime minister has pledged to ‘level up’ the red wall and green the country with a model that has failed Britain for decades

Editorial

15, Feb, 2021 @7:02 PM

Article image
The Guardian view on the global economy: opportunities wasted | Editorial
Editorial: The G7 summit in Biarritz this weekend will fail to rise to any of its urgent challenges

Editorial

23, Aug, 2019 @5:30 PM