The UK is in recession - and that makes a dodgy Sunak budget even more likely

The UK is officially in a recession. We have qualified under the most-used definition of one by suffering through six months of a declining economy.

The last three months’ figures were also much worse than predicted. The economy shrank by 0.3% and not the 0.1% expected. So all in all, the prime minister’s promise to get the economy growing has been an abject failure.

Furthermore, this is a recession in the middle of a long period of weak or non-existent growth. The British economy is smaller than a year ago and excluding Covid, this is the worst performance since the credit crunch.

Where is the sustained period of high growth that makes recessions just about bearable? The UK hasn’t seen one for years and there is very little sign that one will appear in the next couple of years.

The one bright, if rather dim, light on the horizon for Sunak’s government is that the Bank of England’s Monetary Policy Committee will decide that recession means that high interest rates are working better than expected, and therefore decide that they can come down faster and perhaps deeper than they previously thought.

Even so, a cut in rates is still probably a couple of months away – so Sunak must hope against hope that the next set of GDP figures show the UK with any kind of growth, pulling us out of recession. He will then grasp onto the first cut in interest rates like a drowning man grasping at a straw, telling everyone that this shows his plan is finally working.

A general election cannot be far behind those two events, but in between Jeremy Hunt will have to have a budget. Given that the chancellor, the PM and their government are so ideologically driven, so stupid and so desperate to stay in power; their preferred option will be to slash spending even further to fund tax cuts. Hunt has said as much this morning in a series of media briefings.

As I have said often enough, there is no proof that cutting taxes boosts growth. But there is a greater risk to what Hunt and Sunak seem to be planning.

Even the current pencilled-in spending cuts are reckless. No one thinks they are manageable or feasible. The Office for Budget Responsibility, the Institute for Fiscal Studies and the International Monetary Fund have all said that in one form or another. More will stretch cuts credibility to breaking point.

Remember what happened when Liz Truss thought she could announce huge unfunded tax cuts? The market woke up and paid attention. She was out of office in a couple of weeks, but the damage lingers on, as does the markets’ memory.

The government is therefore in the unfortunate position of finding itself with a narrowing window of opportunity.

A deeper recession means quicker cuts in interest rates, but although falling interest rates will boost its popularity, a deep recession will hurt its re-election hopes, as would a market crisis caused by a completely impractical and risky vote-chasing, tax-cutting budget.

Of course, they could do what is best for the country instead. But why break the habit of a lifetime?

You can read more from Jonty Bloom on Substack