What Chancellor John Healey Must Do to Revive the UK Economy

Will Britain’s new Chancellor follow through on his words? Addressing Treasury officials on Tuesday, John Healey put fiscal discipline at the top of his agenda, arguing that “fiscal credibility is the bedrock of economic stability and national security.”

The hope must be that he means it — and not simply as a slogan. There are three compelling reasons why, two of them immediately apparent and a third that is easier to overlook.

The first is the urgent need to keep the cost of servicing Britain’s national debt under control. Debt interest payments are expected to reach at least £110billion this year, ranking as the Government’s third-biggest spending commitment behind social services, including pensions, and the NHS.

Yields on ten-year gilts — the Government bonds used to borrow money — have climbed above 5 per cent. Apart from a short-lived spike last November, that is the highest level seen since the financial crisis era in 2008.

Some of that rise reflects wider global market pressures, especially renewed inflation concerns following the latest jump in oil and gas prices. Interest rates in the United States have also moved higher.

But those international explanations offer little reassurance to UK taxpayers, who will ultimately shoulder the heavier interest burden in one form or another. Nor will they comfort homebuyers facing the prospect of mortgage costs rising once again.

Second, he has to maintain confidence in sterling as a stronger pound holds down the cost of imports, including oil and gas, and that in turn pushes down inflation. The pound is trading at $1.33. 

It ought to be around $1.50 if prices here were to be similar to those in the US. That is the so-called purchasing-power-parity rate calculated by the International Monetary Fund.

So if there was a bit more confidence among international investors, who by the way hold nearly a third of the national debt, not only could we cut the cost of borrowing; we could cut inflation too. 

That’s why ‘fiscal credibility’ matters and why Healey was right to go upfront on the subject.

There is, however, a third reason to hope the new Chancellor will be better than his predecessor. This is all to do with who owns British quoted companies.

We are a bargain-basement at the moment for canny overseas investors who can spot real value. 

Our Government has been pretty useless; our firms, or at least many of them, are pretty good.

The combination of having low share prices – the FTSE 100 is on a prospective price/earnings ratio of about 13 versus 21 for America’s S&P 500 – and an undervalued pound means investors can buy British companies for between half and two-thirds of the price of a similar US one.

So, surprise, surprise, there has been a tidal wave of bids for some of our best enterprises.

This year we have seen three Footsie companies taken over – insurer Beazley, wealth manager Schroders and quality assurance service Intertek – and there are bids for London-quoted energy distributor DCC and warehouse operator Segro. 

Former Footsie members Tate & Lyle and easyJet have received offers too and both look like they are going.

And there are lots more smaller companies that have gone, usually for huge premiums over their market value.

This is a disaster on several levels. One is that the pool of companies easily available for the bulk of UK investors to hold is shrinking. 

So most of us are denied a share in the growing wealth of our most vibrant enterprises, for only sophisticated investors can find some way of maintaining an interest, and often not even that.

A second is that decision-making is moved offshore. The buyers may go through the motions of saying they will protect jobs here, or that the UK management team will have a key voice in the wider enterprise, or similar guff.

But we all know the reality. If they need to save money it’s the UK factories that get the chop.

A third is that there is a huge incentive for entrepreneurs to start their business abroad where capital is cheaper and more available. 

This isn’t the place to get into the reasons for the decline of share trading in London – we’ve had 30 years of crass and at times wilfully destructive policies.

But one measure of the success or otherwise of this new Chancellor will be whether he can rebuild global confidence in UK plc.

There’s a lot to be done and I doubt this Government has any idea of how to go about it. But to put the nation’s finances on a sound basis would be a start.