Emergency Budget Announcement: Expert Reaction To New UK Chancellor's Attempt To Calm Financial Markets - The real economy

18th October 2022

Professor Brian Scott-Quinn, Emeritus Professor of Finance, ICMA Centre, University of Reading.

Many politicians have referred to the "magic money tree" in recent years. In 2017, then-prime minister Theresa May warned nurses: "There isn't a magic money tree that we can shake that suddenly provides for everything that people want." More recently, Labour leader Keir Starmer has promised there will be "no magic money tree economics" if his party gets into power.

It's good news then that this “magic money tree” has been well and truly cut down by the new chancellor of the exchequer, Jeremy Hunt. By trying to increase spending substantially without increasing taxes, the UK government was losing credibility - and fast - in recent weeks. So Hunt is really only accepting the reality that slowing growth around world at the moment is making everyone, everywhere poorer. He is facing reality, which means ensuring that the UK remains creditworthy, even while the world becomes poorer.

So, where do we stand now? Central banks like the Bank of England must raise interest rates to damp down the economy and try to stop inflation getting of control and causing financial instability. On the other hand, governments want interest rates to be low to achieve their growth targets. But growth is not determined by interest rates so much as by a stable and low risk economic environment. This gives companies the opportunity to develop new products and provides households with access to new skills to supply such firms with appropriate labour.

A focus on the real economy (and today that would apply with even more force to clean energy asset growth), would be a much better policy than the tug-of-war over interest rates that has recently led to instability and loss of confidence by buyers of gilts, investors, industrialists and consumers. These are the people that matter when trying to achieve a growth target.

Note
This is part of an article from the conversation web site.
See it in full HERE