I am confused by the calm coverage of the recent radical shift in economic policy – described by the BBC as “bid to boost growth”.  This type of reporting does not make clear whether we are talking short-term growth or long-term potential, and how these policies impact each of them in very different ways.  From conversations with friends, much of the analysis does not investigate this and ultimately reveal just how dangerous and radical this new set of policies is. 

Potential Output – what is it?

Truss has justified her policy changes economically citing improvements in the UK’s long-term growth potential i.e. increasing potential output

Potential output is the starting point for thinking about how much the country can produce ie it is the maximum sustainable level of output. 

If we are below, then this is called a negative output gap and we see things like unemployment rates being high and inflation likely falling. 

The OBR does a great job on this and their website is very clear

Potential Output – how can we improve it?

Everyone wants to improve potential output and there is a clear left vs right divide on how best to achieve it.

Truss is firmly in the right-wing supply-side movement of “trickle-down” i.e. give tax breaks to rich people and everyone will be better off because somehow this leads to greater potential output.  Reagan was the most prominent exponent of this view but we are still waiting for any evidence that it works.

Potential Output – will it work?

I think best to simply summarise that there is no evidence that cutting taxes has any positive effect on potential output.

OK – so if Trussonomics does not improve potential output, what does it do?

It does a LOT

The most obvious and direct impact is of course on inequality.  She is delivering a massive cash handout to rich people.  The richer you are the more you get. 

The part that is getting less attention is the impact on

  1. Fiscal vs interest rate policy mix
  2. Debt sustainability
  1. Fiscal vs interest rate policy mix

This policy choice has been perhaps at the heart of the political battle of the past decades and is commonly misunderstood.  This is a shame as a simple quadrant model does a good job of providing a framework to compare the options clearly. (Fiscal policy is the mix of tax and spending with high spending/low tax being loose fiscal policy)

Tight fiscal -tight monetary         When you are committed to fighting inflation above other policy goals.  For example, the 1980s or commonly after an economic crisis when trying to rebuild confidence in the currency and debt.  If used inappropriately looking at the 1930s Great Depression.

Tight fiscal – loose monetary     This is the Cameron years.  There is of course a debate over how tight fiscal policy should have been and on how the mix of tax and spending was managed.  But it is a consistent policy mix

Loose fiscal – loose monetary    This was at its maximum during the pandemic i.e. for a short term huge negative shock.  If used long term it just leads to economic catastrophe.

Where are we now?

We are currently in the loose/loose box.  Taking the unemployment rate as a simple measure of the output gap, you can see from the chart below we are at record lows.  This is also clear to anyone trying to hire at the moment and all the reports of staff shortages.  Which makes it odd that Truss talks about “boosting growth” as there is no prospect of lower unemployment from here.

UK Unemployment at record lows

The other factor that makes going for growth an odd policy goal is that inflation is high and rising.  This does not have an easy solution and economic pain is unavoidable.  Trying to avoid it, leads to even greater pain later.

UK Inflation at 30-year highs

What happens next?

The Bank of England will be forced to raise interest rates by huge amounts.  At the start of this year the market expected interest rates to stay at around 1% though 2022 and 2023.  Now the market expects rates to be 4% by the end of this year and 5.5% by the end of next year- with rate expectations for next year shifting 3% since the start of August. 

What does this mean for people?

Well rich people have had a large tax cut and will be fine – I know you are all relieved to hear this.

Anyone on a regular income has had a small tax cut but this will be dwarfed by the rise in the mortgage payments coming soon.

What does it mean for the economy?

I predict a very bumpy path and hard landing for the economy but difficult to say when.  The policy mix of vast fiscal expansion at a time of low unemployment and high inflation to be offset by rapid interest rate rises is a chaotic mix.  I think the economy will stay strong and then crash hard. 

  1. Debt sustainability

This is getting some attention but is being dismissed by Truss.  The fact that they did not let the OBR produce a forecast tells us a lot about how they have contempt for this constraint on policy.  An Office of Budget Responsibility is not what the Chancellor wants to hear from!

But the bond market still exists, and long-term government borrowing is getting hammered.  30-year Gilt yields have risen from under 1% at the start of the year to 4% as I write this.

The tax cuts and extra spending increases the budget deficit.  The rise in interest rates increased the cost of servicing the debt, further increasing the budget deficit.  This can become an exponentially explosive mix with the major accelerator being a currency crisis as the value of sterling falls.


The Trussonomics experiment is radical and dangerous.  I expect high inflation, high interest rates and a weak currency leading to economic crisis.  Politically I expect her to start to blame the Bank of England as though the rise in interest rates was not a direct result of her policies.  The Bank of England may be independent of the government, but they are not independent of economic reality.

Truss has spoken of her disdain for “abacus economics” and she does not believe things need to add up.  I think economic reality exists and her magical money tree fantasy will fail. 

What does the fuel crisis tell us about Brexit?

We have learned a lot about what Brexit means since the days of “Brexit means Brexit. A key consequence of Brexit has been to put pressure on supply chains and make the UK more vulnerable when it comes to dealing with shocks.  Covid has also caused huge supply chain issues across the globe.  The combination of these two huge shocks has resulted in much more acute disruption here in the UK, especially compared to our European neighbours.

I think the current petrol crisis is a good example to understand the approach of the government to managing the country under Brexit.

Why is there a fuel crisis?

The current fuel crisis is being driven by a lack of HGV drivers in the UK. 
This has structural roots across Europe before any of the recent crises, but Brexit and the pandemic have made it worse as follows:

Structural issue
HGV driver is simply an unattractive job.  Regulation is poor and poorly enforced so pay and working conditions are awful.  Few people are entering the profession and the aging driver population is retiring and not being replaced.

Pandemic issue
An interruption to testing of HVG drivers means even fewer new drivers and accelerates the decline in drivers across the EU.

Brexit issues
1. EU drivers working in the UK leave due to visa issues. 
2. Previously in times of a surge in demand, extra drivers come from the EU, but now they cannot due to visa issues.

The trigger has been a sudden, general awareness that fuel supply is close to breaking point after BP announced that they could not supply all of their petrol stations.  This implies that, even operating at full capacity, we cannot supply the current demand.  This sparks a rational desire to stockpile, which cannot be quickly met by increasing supply as the system is already failing to meet demand.

It is the combination of these factors which creates a major crisis. 

How long will this fuel crisis last?

Some key numbers

High Demand for petrol

8,000 – Number of petrol stations in the UK

4,000 – Daily tanker deliveries to petrol stations

13,000 – Number of tankers of fuel needed to add ¼ of a tank of fuel to every car in the country to meet an estimate of stockpiling demand.

Any extra supply?

We were already on the margin of being unable to supply petrol stations before.  After all, that is what caused the “panic” buying – although why is it “panic” when it is rational?  This would mean that at the moment some people have more fuel than they normally have, and others have less than they normally have.  Anecdotally this feels quite accurate.  The way this system gets back in balance is very slow with a combination of long queues and higher prices reducing the amount of driving and making stockpiling more expensive so only the people that are highly motivated get the fuel.

Government action

I think the extra visas, coming next month, will have very little impact on the fuel crisis but may help to reduce the risks around Christmas supply disasters.

The government has also excitedly announced the recruitment of 150 army tanker drivers.  If they each do 3 deliveries each a day, it would take them a month to supply the extra fuel needed.  My guess is that it would be quicker than that, as perhaps my estimate of the average car having ¼ more fuel is too high, perhaps people driving less will help and perhaps if fuel starts to be delivered, the desire to stockpile will reduce. 


The fuel crisis is important in itself but it also tells us a lot about the UK’s vulnerability to supply chain problems and our approach to dealing with them.

Supporters of Brexit point to the non-Brexit causes above but ignore that we would not be having this crisis without the Brexit factor.  After all, no-one in the single market has this problem, including N Ireland. 

It is also worth noting that these types of Brexit issues are not unanticipated or unintended.  In fact, this can be seen as one of the main points of Brexit- to stop EU labour working in the UK. 


The approach is clearly for the UK to sort it out itself and not use EU drivers as before.  This is clearly consistent with Brexit and can be seen as one of the main objectives.  A small number of visas for a limited period is a clear intent not to go back to the previous way of managing supply issues. 

Laissez Faire

A “left-wing Brexit” and the “laissez-faire” approach of the government seek to resolve the issue of more drivers in different ways.

A “left-wing Brexit” sees the removal of low-wage labour as an opportunity to increase the pay and conditions of HGV drivers.  Increased regulation leads to better working conditions such as bathrooms and rest breaks.  Unionisation of the drivers leads to higher wages.  State intervention leads to apprenticeships and training programs. 

A “laissez-faire” Brexit leaves it all to the market, the government has no role.  The industry is allowed to remain fragmented with faith in “market forces” to solve all problems.  They might argue that the market leads to the same outcome as the interventionist approach, as the reduced supply of EU workers leads to wages rising and conditions improving for UK drivers.  Unfortunately, all evidence is that this is a libertarian fairy tale and that without regulation, market failures are commonplace.  Or even without market failures, we might have outcomes we do not like.  For example, the current shortage of fuel has a very simple economic answer.  Higher prices.  Petrol stations should simply increase the price of fuel until demand reduces.  As any first-year economics undergrad is taught, rationing is not efficient.  The extra profits can also be used to pay for more drivers and so the outcome is one where there is more supply and higher prices. 

What happens next?

Since I cannot find an answer to the question of how much extra fuel is being delivered at the moment, I cannot give a sensible guess as to when this crisis ends.

What I am more confident of is that supply chain crises are an important part of the Brexit plan.  Gove would call them “speedbumps”.  We should expect to see more of them.

Trump – Biden what to watch for tonight

Here are the possible outcomes tonight

  1. Biden big win (70%)
  2. Biden moderate to narrow win (20%)
  3. Trump narrow win (10%)

Below is the election forecast from Nate Silver’s 538 website. He helpfully produces a snake of all of the States in order of the current polling – deep red for Trump and deep blue for Biden.

The tipping point state is Pennsylvania and polls show Biden ahead not only there but in many more states than he needs to simply win. This is why the most likely outcome is a big win for Biden.

Some simplifying observations:

  • For Biden to win he needs to win the Rust Belt i.e. Pennsylvania, Michigan, Wisconsin
  • For Trump to win he needs some of the Rust Belt but also ALL of the Sun Belt i.e. Texas, Georgia, N Carolina, Florida, Arizona
  • If Biden picks up some of the Sun Belt then he is heading for a big win.

By coincidence these States also split neatly in these categories by how they are processing votes. See below for a nice summary from the FT.

We will know the results tonight from the Sun Belt but the Rust Belt may be less clear, especially if it is close.

Drawing it together:

  • If Biden wins some of the Sun Belt – then we know he has won big and the delay in the Rust Belt does not matter
  • If Trump wins all the Sun Belt – then the election looks closer than the polls suggested. It’s likely the Rust Belt will also be closer meaning that we will genuinely have to wait until all the Mail-in ballots are counted. Even if Biden is still the winner this will be enough for Trump to contest the election and we may have prolonged chaos and conflict.

What to watch for

Florida will release results around 8pm ET / 1am UK time. If Biden is a clear winner then I think it is all over. If Trump wins then it could be a long night/week/month.

Brexit – what is Boris’ next U-turn?

If there is one behaviour which has characterised Boris as Prime Minister, is the frequency of U-turns. The major one last year was giving in to the EU on Ireland so he could get a Withdrawal Agreement passed. This year they have mainly been on Covid and exams for schools but I am now wondering what his Brexit U-Turn could look like.

Current Brexit situation

Without an agreement on the terms of a trading relationship, we will have a no-deal Brexit at the end of this year. This is not as serious as a no-deal Brexit would have been last year because now we have the Withdrawal Agreement. While we would not have trade agreements with the EU or any of the countries with whom we trade under EU’s trade agreements, we would also not be a rogue state reneging on our international obligations and agreements.

Pervious Brexit negotiations

The UK is acting like there can be a last-minute deal and the way to get there is brinksmanship. This was the case last year with the Withdrawal Agreement which the EU had already drafted. Talks were taken to the brink requiring either the EU to back down, the UK to back down or we go over the cliff edge. In this instance it was the UK that caved in, agreeing to a border in the Irish Sea and some commitment to EU’s level playing field rules in any future trade agreement. The EU had a draft we could sign, and Boris eventually signed it claiming victory and that the EU backed down.

Can the UK just cave-in again?

One path that many think likely is that Boris takes negotiations to the brink, then at the last-minute U-turns, agrees with the EU’s position, signs an agreement and claims victory.

But there is a serious problem with this idea. In contrast to the Withdrawal Agreement, there is nothing to agree to. There is no such draft of a trade agreement and there is not going to be one. The negotiations are the method by which the draft can be written, and these are not happening.

Why are talks making no progress?

The sticking point is the level playing field rules.

The UK signed up to them in principle in the political declaration of the Withdrawal Agreement but is now saying that they did not really mean it. The EU takes the declaration seriously and has based its negotiating position with it as a starting point.

Another way to think about this is that the UK and EU want to have very different types of agreement. The EU wants an overall governance structure into which all the detailed issues can be placed and resolved. The UK wants piecemeal agreements with much less overall governance or enforcement structure.

What deals are possible?

The table below lays out how I think the EU sees the options:


  • Status quo is the one they want to negotiate. Zero tariffs, zero impediments to trade (such as regulatory and standards barriers) with a full level-playing field agreement.
  • No Deal is another simple option on the table, without level-playing field agreement, and the UK operates as a 3rd party country under WTO rules.
  • Canada-style agreement with some level-playing field provisions and some reduction in tariffs and barriers to trade is another option. The EU’s position is, given the geographical proximity of the UK, the level-playing field provisions would need to be more stringent that they are with Canada. The process of negotiating such a mixed deal is very complicated with many technical issues and perhaps even more complex political ones. For example, the Canada deal negotiations with the EU started in 2009 and are only recently being finally ratified. This timeframe is common for this type of deals as we saw with the Trans-Pacific Partnership deal which started in 2008, was agreed in 2015 and then Trump withdrew the US before it was implemented.

What does the UK appear to want?

The UK’s position appears to be zero tariff, zero impediments to trade and zero level-playing field.
(The ‘have cake and eat it’ option)
This is not something the EU is willing to entertain which is why the negotiations are stuck.

Which way will Boris jump?

If Boris is going to do another U-turn and agree to the EU’s framework then he needs to do it soon. This is not something that can be drafted and ratified in December. By all accounts Boris is not focusing on this issue and in this regard no-deal looks the most likely outcome.