Quick Carney leads the way for Phillip Hammond as swift policy decisions prove best for Britain
Economist Gerrard Lyons reveals the long-term plan that will help to put the country back on track
SHORT-TERM pain. Long-term gain. That might be one way to view the economic consequences of our vote for Brexit.
There is far too much pessimism about the outlook for the economy.
Provided we don’t panic and that we make the right policy decisions, the short-term pain should be limited and short-lived and the long-term gains would then be seen sooner rather than later.
Last Thursday the Bank of England threw everything including the kitchen sink at the economy. They cut interest rates to 0.25 per cent.
And they backed this up with other measures. These were aimed at ensuring banks pass on the benefits of lower interest rates to borrowers. In the past this has not always happened.
This time it should, helping those with mortgages and many small firms.
In addition the Bank of England is printing more money — through quantitative easing.
The aim of all of these measures is to boost confidence as well as to encourage more lending and investment.
The Bank of England did the right thing. These measures should provide the stability we need.
Yes, savers will suffer. But if the economy starts to grow more strongly as a result then everyone, including savers, should then benefit.
The Bank’s actions once again focused attention on the referendum result and its impact on the economy. I supported the case for Brexit and I was absolutely clear that it is in the long-term best interests of the country.
We can return sovereignty from Brussels to Westminster. We can have a sensible policy on migration. We can spend better the money we currently give to the EU.
And we can position the country better to succeed in the future.
Even though I supported Brexit I said that voting for it would trigger an economic shock. Such shocks can hit confidence and demand and that is what we are seeing. The impact on the economy is like a Nike swoosh, down then up.
It doesn’t mean that we go into a recession, and I don’t think we will. Neither does the Bank of England. But in the near term growth may slow.
Because of uncertainty about policy and what lies ahead, confidence has suffered. In the past uncertainty has not caused recessions. It is usually recessions that trigger uncertainty.
Yet uncertainty can have an impact if it is prolonged and if it dents confidence enough to hit spending and investment.
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Hence it was important that the Bank of England acted swiftly. Better safe than sorry seems to be their thinking.
The biggest danger is that we talk ourselves into a self-feeding downward spiral. It was the former US President Roosevelt who said we have nothing to fear but fear itself. And that is in some respects where we are now.
The UK has one of the world’s most flexible economies so we are better suited than most to cope with big economic changes. But we do have issues.
In recent weeks there has been more awareness of these — not least the need to invest more, low productivity and too many low-paid jobs. Hence I applaud the leadership shown by Bank of England Governor Mark Carney.
We should now expect something similar from Chancellor Philip Hammond. In October he is likely to announce his Autumn Statement.
In this he can update the Government’s economic vision and announce spending plans.
Last Thursday a delegation representing small businesses visited Downing Street and one would expect their needs to be high on the agenda.
Temporary cuts in VAT and freezing fuel duties are already talked about. Stamp duty on property should also be cut. He should also aim to take advantage of the fact that since the referendum the UK Government can now borrow at its lowest rate ever.
Government borrowing rates around much of the world have fallen. And the important thing is that the UK has not been discriminated against because of Brexit.
It may seem strange to talk about borrowing when the budget deficit is so high. It’s like the difference between borrowing to pay off a credit card — which is not ideal — versus borrowing for a mortgage — which is usually good.
Likewise the Government needs to control its spending but if it can borrow at next-to-nothing interest rates to invest in infrastructure, such as roads or in housing, then it should.
There is every likelihood that the Chancellor will provide an additional kick-start to the economy this autumn. Alongside the boost to exporters from a weaker pound and lower interest rates this will help the economy.
As we move towards year-end, greater clarity on our policy for Brexit should help further reduce uncertainty.
A “hard Brexit” is needed to return power over laws, borders and the economy to the UK. It is that hard Brexit which means leaving as quickly as we can, getting out of the single market, enabling us to trade freely on a global basis which will deliver the true long-term economic benefits.
With that, we will prosper in the long-term and I am confident in the Government and Bank of England’s ability to manage these short-term issues.
Dr Gerard Lyons is an independent economist and co-founder of Economists for Brexit.