Economics
Trump versus Ricardo – there can only be one winner The International Monetary Fund has declared that the economic system of the past 80 years is being ‘reset’. This is a polite way of putting things. Responding to the Trump tariffs, Australian Prime Minister felt “This is not the act of a friend”, the Spanish Prime Minister thought that “it’s against everyone and everything”, while Richard Branson was more philosophical, suggesting “It’s just such a pity because everything was going so bloody well up to about three months ago”. The IMF expects weaker growth and higher inflation as a result. For an economist it is particularly fascinating to see Trump not only take on the entire world but a fundamental principle of economics: Ricardo’s comparative advantage. The US might have a deficit in merchandise goods trade against the rest of the world, but it also has a surplus in services trade. This is not a coincidence: the US is relatively better in services than in manufacturing, allowing it to take full advantage of what globalisation has to offer. At least up to now. It might take a while, but we are confident that basic economics will prevail.
Sticking to the rules – for now Chancellor Rachel Reeves defended her fiscal rules in the 2025 Spring Statement keeping markets happy and borrowing cost down. Catherine Connolly of economicsense discussed the challenging economic and fiscal backdrop to the statement with the Office for Budget Responsibility for the Society of Professional Economists (SPE). Since then the situation has become even more challenging: not only are the public finances in worse shape than forecast, growth will also be weaker than previously predicted. With even Germany dropping its famous debt brake faced with unprecedented challenges, is it time to change gear? We must wait for the Autumn Budget to find out whether Reeves will continue to stick to her rules or change them. In the meantime, eyes will be on the Spending Review, concluding in June.
Reforming the planning system to support growth Faced with limited fiscal space, the government is turning to planning and permitting reforms and launched its flagship Planning and Infrastructure Bill in March. Perhaps the government is on to something? In a recent SPE podcast, Sam Bowman presented some interesting ideas on what was holding back UK growth. Stimulating growth through new homes and infrastructure while decarbonising the economy and protecting nature is no tall order. The government’s suggested Nature Restoration Fund sounds interesting but has already received plenty of pushback. This will not be plain sailing for the government.
Should public utilities be regulated or state owned? The answer to this perennial question seems to be shifting again to state ownership and operations. By 2028 the Labour government wants to return all train services into public ownership and operations, marking the end of a 30-year experiment with the private sector. The rail network, a natural monopoly, has always been owned and maintained by the state but the train services is now also being returned to the public sector. This question is not only pertinent for rail operators. The government has asked Sir Jon Cunliffe, former deputy governor of the Bank of England, to lead a review into the regulation of the UK water industry, which has been hit by numerous high-level crises. To quote Sir John from a recent speech ‘something has clearly gone wrong when the largest water company in England is struggling close to insolvency, when there are criminal enforcement cases in train against pretty much all water companies, when a number of companies’ debt is rated at below investment grade’. We expect that Sir Cunliffe’s review will lead to some major policy changes. Meanwhile, British Steel, while not a regulated utility but of strategic importance, has been brought under government control, with nationalisation possibly to follow.
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