It’s hard to see how interest rate cut will make a difference
Recently I wrote in The National about Holyrood’s financial limbo as we wait for the UK Government’s autumn budget statement. Till then the Scottish Government cannot publish its spending plans for next year, so the committees which cover spending areas cannot yet know what will happen to the public finances. This situation is made even more complex and unhelpful given the additional powers coming to Holyrood; undertaking those changes in a period of financial uncertainty could prove very problematic.
But it’s not just the Scottish Parliament and other public bodies which are in this limbo. The Bank of England too is being forced to make critical decisions without any clarity about UK Government policy.
Economic forecasting is rarely seen as an easy business. Many people would dismiss it as no more reliable than reading tealeaves. Political parties perform faux outrage at one another when the forecasts they relied upon prove to be unsound, but the truth is that any party in power must make judgements without the advantage of a crystal ball. We all remember how roundly the Scottish Government was blamed for its 2014 assumptions about oil prices for example, but in fact neither the UK Government nor any opposition party had the power of foreknowledge at the time, and all were working from assumptions that proved faulty.
But the Bank of England is now having to make its judgements about the likely future performance of the UK economy and about its use of measures such as super-low interest rates and extra quantitative easing, without even knowing what the new Chancellor’s economic policies are going to be. The Bank’s job is to make such judgements on the assumption that Government policy will be followed (which is why it produced no Brexit forecasts; UK policy at the time was at least nominally for Remain), so what exactly is it supposed to do when no policy has yet been set?
That autumn budget statement which the Scottish Government is waiting for is also the opportunity for Philip Hammond to set out a new fiscal policy. It’s worth remembering here that “autumn” in political terms can be a very long season – we don’t know whether it will happen by October, November or even December. Whenever it comes, it still won’t settle everything. The UK Government also needs to establish its negotiating stance for the Brexit process, something which will be hugely difficult to do if Theresa May is serious (spoiler: she isn’t) about achieving a consensus approach involving the Scottish, Welsh and Northern Irish administrations too.
Even once that stance is clear, it will still be months longer before we know how many of their objectives will be achievable in the negotiations.
So the UK’s central bank is left in the realm of sheer guesswork about current UK monetary policy, and about the UK’s future economic relationship with Europe and the level of access it will get to the single market. All this at a time when the pound has been weakened by the referendum decision itself, which will inevitably push inflation beyond the threshold the Bank is required to aim for. Businesses which rely on imports are seeing rising costs, and it’s not clear if there will be much benefit on the export side, even for those businesses which do sell overseas. It’s not an environment in which those with reserves are tempted to invest for the future.
The new, historically low base interest rate is supposed to create incentives for that investment by making saving less attractive, while also putting a bit more spare cash in the pockets of consumers – many people with mortgages will see their household finances a little better off. But after more than seven years of consistently low rates, it’s hard to see that this cut will make a huge difference, and there’s not much lower that they can go.
If you’re a National reader, it’s probably safe to say you’re already thinking that we’d be better off out of this mess. It’s certainly good to see many more pro-independence voices coming round to the idea that if and when Scotland votes again on its future it must be on the basis of a stronger proposition than currency union which would leave many of our macroeconomic decisions still resting with the Bank of England.
But until that time we still have responsibility for the choices which we do control. So when that Scottish budget finally does come up for scrutiny, it must be one which protects investment in the real economy and looks after everyone; not just those who own property and are benefiting from cheaper mortgages. Raising revenue from more progressive taxation won’t fix everything, but it’s increasingly clear that it must play a key role.
This article first appeared in the National