Postwar britains economic recovery was based on

Getting back into the black was the great Tory promise of the past decade.

After years of budget deficits followed by a borrowing blowout in the financial crisis, then-Chancellor George Osborne’s pledge in his 2010 emergency budget was to get back to an annual surplus by 2014-15.

Earlier that month Osborne had warned “our national debt has doubled and is set to double again in the space of just five years.”

It risked serious consequences for the nation, he said: “Countries that cannot live within their means face higher interest rates, greater economic shocks and larger debt interest bills.”

At the time the national debt was just over £1 trillion. Now, after 12 years of Conservative chancellors, it has doubled to just over £2 trillion.

That is not the way it was supposed to go. The pandemic clearly played a big role – £425bn has been added to the mountain since March 2020 – but in no year did the Government manage to reduce its debt as had been hoped when the mighty deficit reduction battle began.

With the economy sitting under piles of debt, the future is not looking great either.

Rishi Sunak, Osborne’s successor-but-two, has stressed the need to keep a tight hold on the purse strings – yet the finances risk running away from him anyway.

That is because the Chancellor only has partial control over the money he spends, and much less over the revenues he raises.

At the time of his Spring Statement in March, the Office for Budget Responsibility (OBR) expected the economic recovery would help boost tax revenues and drag borrowing down sharply from £127.8bn last financial year to £99.1bn this year – still a large sum, but a remarkable turnaround from the pandemic-year’s borrowing of more than £320bn.

Yet just two months into the new financial year, that picture is fraying at the edges.

Borrowing for April and May has come in at £35.9bn, more than one-fifth above the £29.5bn anticipated by the OBR. Michal Stelmach at KPMG expects borrowing to end up around £20bn above the OBR’s forecast.

Tax receipts are up on the year, reflecting the extent of the economic recovery compared with May 2021 when the economy was still suffering from assorted Covid restrictions, as well as hikes on levies such as the national insurance raid on workers and employers.

Spending is down, as furlough and other subsidy schemes have been dropped.

The big risks, however, come from inflation – for three reasons.

The cost of living crisis is sending the economic recovery into reverse, pressuring the Chancellor to spend more, driving up index-linked costs including debt interest and pensions.

The situation threatens to add to borrowing, piling on the debt and in turn making the problem worse.

First, the downturn.

Already, the economy shrank in March and April and the Bank of England expects it to shrink in the second quarter as a whole. It had already forecast a contraction in the final quarter of the year once the cap on household energy bills rises another 40pc in October.

That will leave the economy 0.25pc smaller next year, compared to this year, the Bank predicts, in a painful contrast with the OBR’s March forecast that foresaw a 1.5pc expansion in 2023.

That imperils tax receipts, as the money households spend on energy bills is taxed at 5pc. It means families can no longer spend as much money on other goods and services which typically incur VAT of 20pc, so the Government’s coffers suffer.

Second comes the Chancellor’s response.

Usually he only sets out big tax and spending plans in the Spring Statement and the Budget, but so far this year Sunak has already dished out extra support on bills, in February and again in May.

The Chancellor has put the total at £37bn, a significant extra expense just as he is trying to get borrowing back under control.

Much of the aid comes in the form of payments aimed at lowering energy bills next winter, so he hopes no extra packages will need to be announced.

But pressure is building. The Bank has upgraded its forecast for the peak in inflation to more than 11pc, raising more demands for extra cash handouts or tax cuts.

Sunak also faces growing demands for higher public sector pay awards.

State sector workers’ earnings in April were up 1.5pc on the year, even as prices climbed 9pc. Pay packets among their counterparts in the private sector rose by an average of 6.8pc – still not matching inflation, but not as far off.

So much for the payments over which the Chancellor has control.

He has much less of a say on the third category of costs: index-linked spending.

State pensions are going to rise by around 10pc next year, as the triple lock is back in force, which means April 2023’s increase will match this September’s rise in prices.

A range of benefits, including child benefit and universal credit are also linked to inflation as measured by the consumer price index (CPI).

Yet the biggest unexpected extra bill in May’s public finances figures came from debt interest.

Around one-quarter of the national debt is linked to inflation, using the retail price index – an outdated measure which tends to come in higher than the CPI figure favoured by the Bank. By that measure, inflation hit 11.7pc in May.

The debt interest bill jumped to £7.6bn for the month, up by more than £3bn compared with last May. Debt interest now soaks up 6.1pc of Government revenues, more than double the 2.4pc it snaffled a year ago.

This is the steepest debt interest ratio since September 2012, when Osborne was not long into his campaign to get the deficit down.

It indicates that the long years of falling market interest rates, which helped Britain sustain its ever-growing national debt, are coming to an end, with potentially painful consequences as debt never stopped rising.

That leaves Sunak with less fiscal wiggle room to deliver the tax cuts the Chancellor says he wants to offer, even as inflation-pressed families and businesses need all the help they can get.

A corrosive and essentially false story of British economic failure is taking hold in the public mind. The claims are being pushed by a large part of the Westminster media, echoed and amplified across the world.

It is becoming an article of faith that the UK has underperformed ruinously since the referendum, lagging under every key metric and plagued by a collapse of trade, investment, and sterling.

The narrative is coming from assorted think tanks and is being weaponised by the pro-Brussels establishment in an attempt to bounce Britain into the EU single market, and therefore to insert this country into an unworkable half-way house — in the EU without voting rights —  to prepare the ground for a rejoiner campaign in the future.

The economic assertions are going largely unchallenged. Parts of the Government are behaving almost as if they believe the worst.

The most irritating headline — since the most demonstrably false — is that the pound is spiraling into crisis and has become an emerging market currency. A certain analyst at a large US bank has been pushing this line with messianic zeal for at least a year.

The Bank of England’s sterling exchange rate index has actually risen slightly over the last five years. The pound and the euro have mostly moved in tandem since 2017. The real story in the exchange markets is the exorbitant strength of the dollar, soaring to a 20-year high against almost every non-pegged currency.

It is more or less accepted as a given in this country and across Europe that the UK economy did particularly badly during the pandemic, especially since the episode coincided with the start of Brexit in tooth and claw. But the story is not even close to being true.

A study for the House of Common Library by Daniel Harari concluded that real GDP was 0.7pc above pre-pandemic levels in the UK at the end of the first quarter, compared to 0.3pc in France, zero in Italy, minus 0.6pc in Japan, and minus 0.9pc in Germany.

Many would think that the fairest way to judge relative performance since the Referendum is to compare the UK with Western Europe’s Big Four. I totted up the annual growth figures for each economy from 2016 through to the end of 2021 (IMF data), adding the first quarter of 2022. It is quick and dirty. The growth is not compounded. But it gives you a rough idea.

The accumulated growth totals are: UK (6.8pc), France (6.2pc), Germany (5.5pc), Spain (5pc), and Italy (2.1pc). What strikes one immediately looking at the IMF tables is that there is no visible effect from Brexit, unlike the eurozone debt crisis, which really did lead to calamitous losses across southern Europe from 2011 to 2014.

I expected greater trauma from the initial upheaval in trade, confidence and investment. It is remarkable that the jobs have continued to grow in the City of London even though the EU offered zilch on service access in exchange for keeping its full access to the UK market for goods, where it has a fat trade surplus. Only 7,000 jobs were lost to EU financial centres, far from the Gothic warnings of up to 200,000.

So what does the Centre for European Reform do to conjure a disaster from the post-Brexit data? It uses a Doppelgänger algorithm of economies around the world said to match the UK but which have done better over the last five years. It then extrapolates the findings to conclude that 5.2pc of GDP has been shaved off UK economic growth since the Referendum (not all due to Brexit anyway, if you read it closely)

The headline figure of 5.2pc has been irresistible for Twitter and has spread through the European press and beyond. Le Monde ran a story on Thursday entitled “Brexit: Six Years of British Economic Decay” that was based on the claim.

In the same genre, the New York Times says Boris Johnson’s Britain is “Finally Sinking Giggling into the Sea”, though what it describes as chronic failure could equally apply to most of Western democracies facing a cost crisis and broken medical systems. France’s parliamentary elections on Sunday were a primordial scream against just such ‘failures’.

The CER’s top weight in the Doppelgänger basket is the US (31pc), which happens to be at the tail end of a colossal fiscal experiment, funded dollar for dollar by an obliging Federal Reserve. Washington let rip under Trump and doubled the dose under Biden. As the world’s largest producer of both oil and gas, the US economy is shielded from the energy shock. It is hardly a relevant benchmark for a UK linked to the EU’s energy system.

Several others such as New Zealand (14pc), Norway (8pc) or Australia (5pc) are commodity exporters and therefore beneficiaries of sky-high raw materials prices.

The Office for Budget Responsibility thinks Brexit might shave 4pc off GDP over a ten-year period. That is plausible but little more than a guess. Roughly half the putative damage comes from trade barriers, but as Lord Frost told UK in a Changing Europe on Thursday the models used to calculate such gains and losses rely on studies of ex-Communist and autarkic basket cases suddenly enjoying windfall gains from opening up. That is hardly relevant.

The other half is imputed from lower productivity due to less immigration, but the UK is not in fact restricting immigration that much, and the opposite theoretical case can be made in any case. Singapore is limiting inflows of workers under its ‘lean labour policy’ in order to raise productivity.

Let me be clear. There are many aspects of Brexit that cause me heartburn, not least the state of union, the intractable conflict over the Ulster Protocol, and Downing Street’s assault on the non-EU Court of Human Rights (which we should uphold). But the macroeconomic consequence of the Referendum is not one of them, which is not to belittle specific headaches faced by individual exporters.

The UK may well have a horrible year ahead as we grapple with the global inflation shock , but it is hard to see how the eurozone will do any better. It faces the same energy shock — or worse — and is already prey to an incipient sovereign debt crisis as the European Central Bank winds down bond purchases. The old pathologies of a dysfunctional split-tier currency union are resurfacing.

The latest spate of stories on the costs of Brexit mostly contain the same tropes. One is that goods trade has shrivelled by 13.6pc. Yet a slice of this commerce had no value added for the economy. Many containers of clothes, toys, or electronics from East Asia used to go to UK ports for warehousing before reshipment to the Continent. They now go to EU ports directly. The trade loss is a statistical illusion.

Supply chains have been rationalised to avoid the multiple criss-crossing of manufacturing components. The tiny marginal gain that encouraged much of the cross-Channel back and forth  — to the detriment of CO2 emissions and clogged roads — has been eliminated by customs frictions. Is Britain a net loser or a net winner when German car companies in the Midlands switch to local subtractors under import substitution?

The worst trope is to quote forecasts by a body such as the OECD that has misread the effects of Brexit and the relative performance of the UK every year with heroic regularity, and to present the claim as a fait accompli .

The OECD now says the UK will be the G7’s zero-growth laggard in 2023. Perhaps it will be, given that Rishi Sunak’s fiscal austerity leads the pack. But remember that the OECD said the same thing during the pandemic, forecasting that the UK would trail in bottom place as the developed world recovered in 2021.

In the end the UK was the G7’s star performer with growth of 7.4pc, viz 2.8pc in Germany and 1.6pc in Japan. The OECD entirely missed Andy Haldane’s ‘coiled spring’ rebound.

As for rejoining the single market, such a move would scarcely nudge the macroeconomic needle. What it would do is to place this country back under an unaccountable and unsackable government in Brussels, perpetuating Britain’s civil war on Brexit. Those Tory ministers toying with such a notion are out of their minds.