Opinion: A fiscal reckoning is heading our way

Remember Life on Mars – the television series about a police officer who woke up after being hit by a car to find himself transported back to the mid-1970s? Named after the David Bowie single, it was cult viewing around the time of the last financial crisis.

Scan the headlines these days and Life on Mars seems to be happening, as it were, in real life. The emerging parallels between contemporary British trends and those weird, dysfunctional years of my early childhood are stark.

The economy looks shaky and society is becoming more fractious, as during the mid-1970s. Inflation is rising, state debt is piling up and increasingly stroppy workers are pushing hard for higher wages – echoing the industrial unrest of my youth.

After a historic referendum, Britain is trying to redefine its place in Europe – a mirror image of five decades ago. And there’s similar geopolitical upheaval too, with the chaotic withdrawal from Afghanistan evoking the humiliation of America’s 1975 retreat from Saigon.

What happened after the mid-1970s is that life in Britain – for many ordinary workers and businesses – got considerably worse before it got better. Despite my natural optimism, I’m concerned a similar trend could play out over the next few years.

Back in the mid-1970s, annual inflation accelerated, briefly topping 20pc, driven in part by sky-rocketing oil prices. While that spike was linked to specific events – not least the Arab oil embargo following US support for Israel in the 1973 Yom Kippur war – energy prices, and inflation more generally, are both now clearly on the up.

Over recent months, the annual rise in the Consumer Prices Index surged from just 0.4pc in February to 2.5pc in June – above the Bank of England’s 2pc target. While inflation slowed to 2pc in July, that reflected the jump in prices in the same month last year, as the UK economy emerged from the first coronavirus lockdown.

Far more telling were signs of supply-chain price pressures in the last month’s data, as shown in prices paid and charged by factories. “Output costs” rose 4.9pc in annual terms in July, the most in 10 years, while “input costs” were a huge 10pc higher than in July 2020 – both figures pointing to future rises in consumer prices.

That’s why the Bank of England capitulated, moving its year-end CPI inflation forecast up to 4pc – the highest in 10 years – reflecting the views of other independent forecasters.

Despite that, the Bank is sticking to its line that recent inflation increases will prove “transitory”. It’s certainly true prices pressures in Britain and elsewhere are in part the result of economies emerging from lockdown, causing a surge of demand, as previously shuttered factories and other businesses struggle to respond.

Ongoing global shipping problems, tight supplies of semiconductors and shortages of other goods such as motor vehicles – trends linked to lockdown – have driven prices up in various countries.

Yet there are clear signs of inflation stemming from wage increases – which are unlikely to be reversed. Wages soared no less than 7.4pc between April and June, adding to fears of prolonged price pressures as companies pass on higher costs to consumers. That’s why economists previously predicting the Bank won’t start raising interest rates from today’s ultra-low 0.1pc until the end of next year have been bringing forward their forecasts.

High UK job vacancies – a record 953,000 on average over the three months to July – also point to sustained inflation. Britain’s construction, manufacturing and food preparation industries, among others, are pushing economy-wide wages higher due to a shortage of workers to fill available jobs. Oil prices remain well below their mid-70s level in inflation-adjusted terms, at around $70 a barrel – yet crude still costs around 65pc more than a year ago.

While cheap Chinese exports helped contain global inflation as we recovered from the 2008 financial crisis, China is today driving inflation elsewhere higher. The People’s Republic is now by far the world’s largest energy importer, its daily oil use soaring over the last decade.

The internal combustion engine will be with us for some time – and while it is, Chinese oil demand will generate upward price pressure. Yes, more can be pumped in the US – but “shale oil” is expensive to extract. And, as we move to electric vehicles, the costs of the copper and “rare earth” elements such products require will combine with oil to drive inflation, just as we saw in the 1970s.

Back in 1974, a time of widespread strike action, Edward Heath, the Tory prime minister, failed to gain re-election after campaigning on the slogan “Who Governs Britain?” While trade union membership has fallen from over half the workforce in the 1970s to under a quarter today, serious industrial strife could yet make a comeback.

If you ask “Who Governs Britain?” now, our increasingly bolshy and self-serving teacher and doctor unions would be high on the list. They’ve cowed ministers and exerted huge control over government policy during this pandemic, just as unions did as in the 1970s – although their collars this time are white instead of blue.

And last week the UK’s biggest union, Unite, elected the preferred choice of Labour’s Trotskyist fringe as General Secretary. With Keir Starmer’s more moderate candidate coming third, who says UK industrial relations aren’t about to get much spikier?

In 1976, after years of high government borrowing, a near bankrupt Britain ended up going “cap in hand” to the International Monetary Fund. Although another bailout seems unlikely, after years of high borrowing and mass money-printing, trends accelerated by Covid, a fiscal reckoning of some sort seems inevitable.

Three years after the IMF debacle came the “Winter of Discontent” – when a combination of high inflation, intensifying strike action and administrative chaos sparked a political earthquake, as Margaret Thatcher swept to power and set about implementing radical reforms – much needed but, for many communities, undoubtedly painful.

“History doesn’t repeat, but it often rhymes” – a quotation often attributed to Mark Twain, although I’ve never found a definitive reference. No matter – because, to my mind at least, when I compare the UK today with Britain in the mid-1970s, that sentiment makes sense.

About the Author: Liam Halligan is a reporter for The Telegraph

First published in The Telegraph