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“UK business activity contracted for the first time in more than a year, according to a closely watched survey, as the private sector warned that confidence in the Labor government had been badly damaged by last month's Budget.” This was the opening of A story Which appeared in the Financial Times on November 22, 2024. It raises an important question about whether “trust” even matters to economic performance.
To answer this question, one needs to distinguish between the concept of trust and the direct influence of policy. Thus, in this story, S&P Global's Chris Williamson is quoted as saying that “businesses are giving a clear no-no to the policies announced in the Budget (on 30 October 2024), particularly the planned increase in employers' National Insurance contributions.”
However, this may have little to do with loss of confidence. This may mean that companies were fairly confident that increasing taxes on labor would lead to higher costs, higher prices, lower employment rates, and lower profits, and if so, would almost certainly be deflationary, in the absence of any compensation. strong. One compensation may have been lower borrowing costs as taxes rose. In practice, As the Office for Budget Responsibility noted at the timePotential borrowing increased. It is no surprise, then, that yields on 10-year government bond costs rose by 268 basis points from pre-budget to December 19, a greater rise than any rise in any G7 member except the United States.
However, trust may still be important. In fact, it certainly does. After all, as Nobel laureates George Akerlof and Robert Shiller pointed out in their 2009 book Animal spiritsPeople are not rational calculators. We are intensely emotional.
However, more often than not, we can still analyze the economy as if this is not a problem. A relatively automated analysis of what tax increases – such as those set out in the autumn budget – would do will be good enough. However, there are crucial exceptions. This mostly occurs whenRadical uncertainty“, the title of a 2020 book by two British economists, John Kay and Mervyn King, becomes the key issue. Moreover, there are two circumstances where this uncertainty becomes dominant in determining what will happen: the first is characterized by extreme instability at the macroeconomic level , such as the financial crisis; the second is weak long-term growth.
In both cases, the crucial variable is what John Maynard Keynes called the “propensity to invest.” Investing is where the “animal instincts” should emerge. Ultimately, any investment decision constitutes a bet on an uncertain long-term future. The past two decades have shown how unpredictable this future is. It seems no less predictable today. Just think about what might happen politically, geopolitically, strategically, economically or environmentally.
Moreover, as Keynes emphasized, investment would likely decline for years if the economy fell into recession. This is why, I believe, post-financial crisis fiscal austerity was a mistake. This is part of the reason why growth in the UK and most other European economies has been weak since then.
But now, above all in the United Kingdom, where, as you pointed out November January 25 Net investment is exceptionally low, and the depressed animal spirit threatens the investment on which future economic growth depends. Unfortunately, the data suggests that confidence is fairly low. A noteworthy example is the “Economic Confidence Index” published by the Institute of Directors Early this month, which shows business confidence at levels close to those it was in 2020, at the height of the Covid pandemic, or immediately after the full Russian invasion of Ukraine in 2022. According to the Confederation of British Industry On December 2, 2024, private sector companies expected activity to decline in the three months to February 2025. . This is the first time this year that growth expectations are negative.”
The danger, then, is that the government's measures to raise taxes and tighten regulations, especially in the labor market, will not only increase uncertainty about the future, but worse, actually increase certainty that the economy will continue to stagnate. Both of these effects are bound to undermine confidence in the future. This thus threatens to trigger a vicious downward spiral, where weak confidence undermines animal instincts, weakens investment, slows demand, undermines creativity, and thus reduces the growth of productive capacity.
At the rhetorical level, the government emphasizes the priority of economic growth. It is right to do so. Nothing will work without it. But it must understand that growth depends on the business sector's confidence in this growth. It is this confidence that is most likely to motivate companies to seize risky opportunities. Therefore, in every decision it makes, the government must ask itself this question: Will it make companies believe more strongly in a better future, or not?
