Olivier de Berranger


The situation the United Kingdom has just come through looks an awful lot like an economic episode from the 1970s known as the Barber Boom. Edward Heath’s Conservative government was caught up in the turbulence of weak growth, with early signs of inflation showing and social unrest to boot, as jobless numbers tipped across the symbolic one million threshold for the first time since 1940. Up to that point, the government’s policy had been deregulation plus fiscal and budgetary discipline.

Amid the political difficulty of that stagflation environment, a decision was made by the Prime Minister and his Chancellor of the Exchequer Anthony Barber to completely reverse course and adopt an expansionist policy, with the aim of hiking Britain’s growth rate up to 10% for 1972 and 1973, slashing individual and corporate income tax rates, lowering indirect taxes (including the newly created VAT down from 10% to 8%) and more.

The policy soon came up against the first oil shock, market distrust and the pound’s collapse. Indeed, the pound lost nearly 40% against the dollar between the spring of 1972 and the end of 1976, inflation jumped to 25% and the Bank of England’s rates soared from 5% to 15%.

It is not hard to see why the budget presented by Liz Truss’ Finance Minister Kwasi Kwarteng set the financial markets on fire. In many respects, it looked like Barber’s. It featured tax cuts of 100-200 billion pounds which, as a percentage of GDP, reached levels not seen since the Barber Boom: buying hypothetical growth with even more credit. The pound lost 10% in the span of a few days and UK 30-year bond yields soared by 200 basis points in a month, threatening to implode the British pension system and forcing the BoE to step in.

Soon enough the Truss government was out and the Sunak-Hunt tandem was in. And doing another 180, as Britons find themselves being fitted for a fiscal hair shirt: “It is inevitable that everybody would need to contribute more in tax in the years ahead.” At the same time, echoing the ‘70s, the Bank of England raised its rates by 75bp as November began, the biggest move in 33 years even as British inflation hit 12.6% in September.

While all the impoverished states – with many European countries in the front ranks – would do well to watch out for their yawning deficits and endless debt, it seems that, for the moment, the dreams of Singapore-on-Thames1 promised by Brexit supporters in 2016 are flying away as fast as the tax rates to be announced at the end of the month.

1Look to Singapore as a model, Philip Hammond, Chancellor of the Exchequer, January 2017
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