UK akin to a “badly functioning emerging market”

London Business School's Professor Richard Portes appeared on Bloomberg Daybreak (Friday 21 October) to discuss the continuing turmoil in the UK economy caused by a series of political upheavals, and in the wake of former chancellor Kwasi Kwarteng’s mini-budget released and then largely eventually retracted by outgoing British Prime Minister, Liz Truss.

Professor Portes was asked what he made of recent events concerning the seemingly endless political and economic turmoil in the United Kingdom. Can there be a “quick fix” to the damage that has been done to the UK’s reputation?

Portes acknowledged that Britain’s standing in the world had been “much diminished” by recent events. "We have what so many people have called a ‘moron risk premium’, or a moron risk premium in our gilts; that is to say in our long-term government securities, although the yields are higher than they should be. Consumer confidence is terrible, consumer finances are terrible, investment is beset by political uncertainty although there is a bright side in the labour market as unemployment is still low, and there is no sign of a wage price spiral building up. However, the picture is not great,” said Portes.

With regard to what economic policies might be introduced by the new administration to address these ills in the economy, Professor Portes said that it was hard to say as the next British Prime Minister has still to win the latest Tory leadership contest.

“We do however know who will be the Chancellor of the Exchequer, the UK’s chief financial official, and that is the individual who is currently in place, Jeremy Hunt. I expect that what we will see from him is substantial fiscal tightening. On the other hand with regard to the Bank of England, monetary tightening might not go as far the markets might seem to expect.”

Professor Portes was asked by CNN, ‘Is this a political crises, or an economic crisis, or can the two be separated? “The two cannot be separated,” replied Portes. “The political uncertainty has had an impact on investment behaviours, in particular, what risks investors are prepared to take, especially at this time when everything is so unclear. At the same time, the constraints on fiscal and monetary policy are so severe that whoever comes in as the UK’s Prime Minister is not going to have much wiggle room.”

Portes was asked what can be done in terms of getting fiscal policy back in order in the UK, and to bring back some form of credibility for voters and for markets. “A little bit of political stability would be welcome. A little cohesion in the governing party. If you can’t have that then you really ought to go to a General Election. If they continue to fight among each other, whoever they choose as Prime Minister then that Prime Minister is not going to have much authority and you will find that in each and every vote in the House of Commons, whatever policies come forward, there is going to a dissenting group. If that group becomes allied with the British Labour Party then whatever it is won’t get through.”

‘Are people in the UK clamouring for a change?’ Portes said that he believed that there is a very substantial groundswell of people saying, ‘come on, this is enough, how many Prime Ministers do we need to have that aren’t elected? It is time for a general election.’

“Of course, the Conservative MPs looking at that equation, and looking at the polls are saying ‘we don’t want to go to the country now’. The polls are so very heavily against the Conservatives. There is however a very substantial body of people – and I am not speaking for myself - who would like to have a general election.”

‘Where does all this crisis of confidence leave the UK on the world’s stage?’ “We are much diminished,” said Portes. “Not just because we left the European Union, but because we behaved so badly since we left the EU. It will take a very serious Prime Minister, and serious policies to restore some degree of credibility. At the present, we look a little too much like a badly functioning emerging market.”