We shouldn’t be where we are. But we are. So what should the new Prime Minister seek to do?
Although the international security situation is perilous, as things currently stand, the economic and financial position is paramount. Whoever takes over must have a sound grasp of economic and financial reality. And there is no scope for the PM to be following a different agenda from the Chancellor. They must act as one.
There is a good deal to be said for the current Chancellor staying in post until the next election - and ideally beyond it, if this is not wandering off into the realms of fantasy.
Nigel Lawson was chancellor for six years, Gordon Brown for 10 years and George Osborne for six years. Managing the economy is not best done in fits and starts. It requires continuity and an overarching vision.
The task facing the Chancellor can be divided into three phases, although to some extent these will be overlapping. In phase one, the immediate task is to consolidate the recent recovery in financial market confidence. Stability isn’t a sufficient condition for economic success but it is a necessary one.
This means implementing the tax agenda that Jeremy Hunt laid out, and announcing a programme of stringency for public spending. Nor can this just be a series of pious hopes loosely tied together with aggregate numbers. It must be clear what things are being cut or trimmed and when.
This should allow the Office for Budget Responsibility (OBR) to produce some fiscal forecasts that show the public finances on a sustainable path even on the doubtless pessimistic economic assumptions that it will feel bound to make. As Liz Truss's government discovered so painfully, there is no point in trying to fight such pessimism or ignoring it. If the OBR turns out to have been too pessimistic, then there will be a fiscal dividend to be enjoyed – by somebody – in future years.
Phase two should be about making a series of small improvements to the supply-side that do not cost much money. This is where the role of the Prime Minister will be critical. Much of this agenda falls outside the normal Treasury bailiwick. Moreover, some of the measures will encounter stiff opposition, not only from those affected but also from within the Conservative Party, and even within the Cabinet, as well as in the country at large. So the PM has to set out the vision, co-ordinate the measures and drive things through.
The prime focus should be on the labour market. Tweaking the tax treatment of pension pots will be critical in dissuading many doctors and other professionals from retiring early. That should be comparatively easy. Harder will be the tightening up of criteria governing eligibility for in-work benefits. Harder still will be pushing through legislation to make it more difficult for key groups of workers to strike.
But the Government must not be under any illusions, as Truss's cabinet undoubtedly was, that supply-side reforms will yield large immediate results. Things are even worse now. Who is going to respond to an incentive that may only last a few weeks? And which companies are going to respond to encouragement to increase investment when this Government and its economic programme may last two years at most - and conceivably far less?
Nevertheless, a programme of supply-side reform is critical, not least to phase three. This is about developing a programme on which to fight the next election. Believe it or not, it will be possible by 2024 to hold out the prospect of a programme of tax cuts, judiciously costed and sitting comfortably within a fiscal plan based on sound foundations. The scope for this will be all the greater if supply-side reforms have increased the likelihood of faster economic growth.
I am frequently asked whether I have ever known a situation as bad as the present. The truth is I have. Admittedly, perhaps not an equal degree of rank incompetence and political chaos. But the economic situation has been worse. The mid 1970s were dire and the “winter of discontent” in 1978/9 was awful. And there was then a similar sense of things being out of control. Then, as now, people spoke of the country sliding into banana republic status – without the bananas.
Yes, things are extremely difficult economically. But this is not the Great Depression or anything like it. My forecast is that the economy is likely to shrink by about 2pc, but this is on the pessimistic side compared to most forecasters. And it compares with falls in GDP of 6.7pc in 1930-31 (the Great Depression); 5.4pc in the 1973-4 (the first oil shock); 5.5pc in 1979-80; 6.3pc in 2008-9; and over 23pc during the Covid crisis of 2020.
And there is plenty of scope for things to turn out much better than is currently widely believed. Energy prices have already fallen back and they may continue to do so. By the end of next year, inflation should be well down from its peak. Indeed, real earnings may be increasing again. Having risen to something like 5pc, the Bank of England's interest rate may also be on the way down.
I am always looking for guidance from history. In 69 AD the Roman Empire was in chaos. This was the year of four emperors. The last of them, Vespasian, ruled for ten years and restored stability. Prosperity came later under his eventual successor, Trajan. We will soon be on “only” our third Prime Minister in a matter of a few months. That may be the end of it. But, dare I say it, a fourth is not impossible, particularly if the current chaos leads to an early general election.
Yet, however many PMs we have this year, in contrast to all the current gloom and doom, stability and prosperity can still be wrenched out of this dreadful situation. Just about.
Roger Bootle is chairman of Capital Economics
Tax cuts will still be possible in the years ahead
Decisive action by the new Prime Minister now will allow the Tories to promise lower taxes come the next election