It is hard to concentrate on other issues while the disastrous war continues in Ukraine. Many previously pressing preoccupations fall away in the face of vivid images of human suffering. But we cannot ignore the impact on the economy. It is certain that in the months to come we will be focused on the rise in energy prices, which were already high before the conflict began. We were expecting a severe squeeze on living standards. We can now upgrade that rating of “severe” to “extreme”.
In the short term, the Chancellor will need to respond in some way, especially to help those on low incomes. That will push government borrowing higher, which is a more worrying prospect as interest rates are on the rise. The government has benefited from low rates in recent years. Even with the huge rise in borrowing to respond to the pandemic, the debt interest line in the government accounts has moved little.
These short-term problems are baked in, but in the medium term the solution has to be growth. Without an increase in the UK’s sustainable growth rate, we may be trapped in a painful 21st-century version of 1970s stagflation. Yet most economic forecasters believe that we are likely to revert to growth below 2%, after the post-Covid boost to consumer spending wears off.