What Is Macroeconomics and How Has It Influenced The Autumn Statement?

Economists try very hard to make their area of expertise feel the same as physics, chemistry or mathematics. They use big numbers, complex equations and confusing terminology that all sounds very ‘sciency’.

The truth is that they’re very, very different.

The law of gravity is absolute, at least on our planet. Every action has a predictable and consistent reaction. If you drop a glass from high enough, it will smash. If you throw a ball in the air, it will come back down.

Economics and the global financial system are not the same. We can look at history and gain some insight as to what might happen, but we can’t predict it with the certainty of the hard sciences.

It’s why we get such differing opinions on the best course of action, often from two sides with equally as impressive qualifications and educational resumes. It’s why we had two candidates for Prime Minister, Liz Truss and Rishi Sunak, with polar opposite views on what’s best for the UK economy.

So in this article we’re going to cover the Autumn Statement (sort of), but we’re not going to waste your time with regurgitating the new thresholds and initiatives. You’ve already heard all that, and at Rosecut, we like to offer perspectives you don’t find everywhere else.

Instead, we’re going to give a quick crash course on the two sides of the macroeconomic (Don’t know what that is? Keep reading.) debate, which will hopefully allow you to feel more informed about how and why the decisions are being made in Westminster. Because let’s be honest, they don’t always seem to make a great deal of sense.

What is macro economics?

Macro = big. Macroeconomics = Big view of the economy. So if we’re taking a ‘macro’ view, we’re looking at how the national or global economy works. 

We’re not interested in how a 2-for-1 Tuesday promotion impacts the revenue of your local pizza shop (that’s microeconomics), but instead how a change in interest rates might impact demand for all fast food across the whole of the UK.

Whenever we’re talking about the decisions made at the national government level, they’re almost always made with the macroeconomic view in mind. They are decisions and funding choices which impact the whole country, not just specific parts of it.

While there are sometimes individual policies or plans which are specific to certain geographical areas (such as free ports, for example), these are generally done with the entire country in mind. 

A new rail link might only directly impact the people served by it, but better transport can raise the value of an area and make businesses in the region more likely to prosper. Over the long term, this economic improvement can mean more tax revenue for the government and less spending on welfare, which benefits the whole country. 

So, the decisions made by the Prime Minister and the Chancellor are generally macroeconomic ones. It’s no secret that the UK is in a tough economic spot right now, and both Sunak and Truss had very different ideas about how to get us out of it.

Where are we now?

Before we get into the specifics of this, let's quickly recap why both sides believe that major interventions are needed.

The UK as a country has struggled to generate substantial economic growth, going back as far as the 2008 financial crisis. From 2011 until 2021, the UK averaged annual economic growth of just 1.4%. That’s significantly below the government's long term target of 2.5% growth. 

Not only that, but public services have been stretched under many years of austerity and the government's debt ratio is high among G20 nations. The UK’s debt to GDP ratio in 2021 was estimated to be 86.4%. That’s significantly higher than other countries such as Sweden (32.4%), the Netherlands (47.5%), Germany (62.6%) and Ireland (49.2%).

Add in high inflation off the back of the covid pandemic, and the quality of life for many British people is noticeably declining.

The Truss “Growth” Approach

Liz Truss ran her bid for leadership of the Tories (and therefore the country) on what she called a ‘Growth Agenda’. She even went so far as to call those who discredited her ideas as being part of an ‘anti-growth coalition.’

In economic terms, Truss’ plan is what’s known as supply-side economics. This is an economic theory which suggests that the economy is best able to prosper through incentives to make it grow, without worrying so much about government spending or government debt.

The idea behind it is that if the government incentivizes increased spending within the economy, there is a multiplier effect which means the economy grows at a greater rate than the costs incurred.

Really quick example. Say we’re looking at a shoe store. They’re doing fine, getting a reasonable number of sales and they pay around £30,000 in overall tax each year between income tax, dividend tax, NI and various other smaller taxes. Supply side economics says that if the government were to cut taxes by 50%, that would mean that the shoe store owners now have an extra £15,000 to spend.

Maybe they pocket the extra and buy themselves a new car. Maybe they decide to rent out the space next door and expand their shoe range. Maybe they decide to cut their own working hours and hire another staff member.

The theory says that this £15,000 will go towards more spending, more jobs and more economic growth, which lifts government tax revenue. The perfect world scenario is that even though government revenue might go down as a percentage, it goes up in pounds and pence as the economy grows.

This is the general fundamental economic basis for much of the world’s right wing politics. Low taxes, low government expenditure and limited regulation (to create fewer impediments to growth).

Government spending on things like infrastructure in order to improve productivity is a component of supply-side economics. Where Truss drew the ire of the world financial markets was her plan to supercharge this theory. 

She wasn't just planning to cut taxes, she was also planning to increase government spending. The wrinkle was that Truss planned to fund much of this government spending through borrowed money.  Sure, it might have paid off in the end. But it would have been a gamble. 

The markets responded loud and clear. They felt she and Kwasi Kwarteng were playing chicken with the UK economy and that their plan was irresponsible. It’s why confidence in the UK bond market collapsed and required emergency support from the Bank of England.

There are many vocal opponents to the supply side economic theory. There are suggestions that it worsens economic inequality, with higher earners more likely to benefit from lower taxation.

In the UK, the most famous example of these sorts of policies was Margaret Thatcher, who sought to drastically cut regulation, reduce regular government spending and bring down taxes. Her US contemporary at the time, Ronald Reagan, brought in a swathe of tax cuts under similar reasoning, in a policy which became known as ‘Reaganomics’.

In more recent years, the Bush tax cuts and Trump tax cuts in the US were made along similar lines, though the theory hasn’t found more recent popularity in the UK until Liz Truss’s attempt.

The Sunak “Austerity” Approach

So while supply side economics involves cutting taxes in a bid to stimulate the economy, Rishi Sunak’s austerity measures look to increase taxes and cut spending to balance the books. The expectation here is that it would eventually put the government in a better position to stimulate the economy in the future.

Sunak and Hunt have been very careful not to use the A (austerity) word, but that’s what it is. Economic growth is low, there’s a massive amount of Covid government intervention to pay for, revenue is down and they’re looking to minimize the budget deficit.

The idea behind this theory is that once the government’s budget position is improved, they can then look to implement tax cuts and spending increases from a more stable position. 

It leaves Sunak in an unusual situation, apparently being referred to as ‘Red Rishi’ by some within his party, as a reference to socialist policies due to his proposed increases to taxation. This goes against the fundamental tenet of right wing politics, which is low taxes.

While austerity may seem like the ‘sensible’ approach to a country in a financial pickle (and the bond market definitely seems to agree), it’s important to note that this too is an economic theory without a consensus view.

In 2012, the International Monetary Fund announced that countries who had implemented austerity programs with spending cuts and tax hikes, such as Greece between 2010 - 2018 and Italy from 2011 - 2013, had done more damage than countries which had undertaken growth policies instead.

2001 Nobel Prize for Economics winner, Joseph Stiglitz, has also stated in 2015 that, “Austerity had failed repeatedly from its early use under US president Herbert Hoover, which turned the stock-market crash into the Great Depression.”

Where to from here?

The truth is that nobody knows. Maybe Liz Truss’s plan would have worked in the end. We’ll never know. Maybe Rishi Sunak’s will be a disaster, it remains to be seen. The fundamental takeaway from this is that even those at the very top making the decisions don’t really know how their plans will play out.

At the end of the day, every new policy is a social experiment which could mean our quality of life improves or worsens, because economics is not an exact science.

So what’s the answer for you?

The only constant is that you need to be in control of your own financial future. Maybe the government will help, maybe they won’t. Either way, relying on the government to provide financial security for you and your family is something that none of us should be doing.

By taking control of your own financial circumstances, you can ensure that you and your family have a prosperous, happy and healthy life, regardless of the decisions being made in Westminster.

If you want to talk about what a prosperous future looks like for you, and how to make sure you achieve it, we can help. Book in a call today.

Please note that this is not a financial advice and it does not take into account individual circumstances. Please also contact a professional advisor prior to any decision making.

The value of an investment and the income from it can go down as well as up and investors may not get back the amount invested. This may be partly the result of exchange rate fluctuations in investments which have an exposure to foreign currencies. You should be aware that past performance is no guarantee of future performance.

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