Spare us the politicians’ quick fixes, says HAMISH MCRAE

Politics make the headlines, but it’s interest rates that change the economy. That is the conclusion we can draw in recent days.

Even the least observant among us will be aware that a general election is coming up, and there seems to be quite a bit of political stuff going on in America as well.

But what roiled markets last week was the prospect that interest rates could fall slightly more slowly than previously expected.

When you think about it, it’s ridiculous that it matters whether central banks make two or three rate cuts this year, or whether they have to start in June or September.

On the other hand, it matters a lot which politicians ultimately take charge. So what’s up?

The first part of the explanation is that politics generally affects the economy in the very long term, while the cost of money has an immediate impact on it.

You see that in Great Britain.

The market reforms of successive Margaret Thatcher governments boosted economic performance up to and including the 2008-2009 banking crisis, but in the early years of that period the costs were as evident as the benefits.

The negative impact of Gordon Brown’s tax raid on pension funds and the changes in pension regulations did not really become apparent for a decade or more.

However, when central banks failed to raise rates quickly enough in early 2021, it was only a matter of months before the world experienced the worst burst of inflation in four decades.

But it is not simply a matter of short term versus long term. It is also true that politics is local, while the price of money is global.

So another government in Britain could tamper with taxes and spending and introduce other regulations.

But the country cannot change the interest rate it must pay to finance its national debt, because that is determined by global markets.

At best, she can have a modest influence on this, by following the policies that the market favors – or the opposite, as Liz Truss tried to do. It can’t do much about mortgage rates or export demand.

British growth appears to be picking up considerably this year, but that is partly due to a broader global recovery and partly to falling inflation worldwide.

The similarities between the different economic regions are much greater than the differences.

The best way to see this is to look at inflation. Indeed, the UK peak of 11.1 percent was slightly above the US at 9.1 percent and the eurozone at 10.6 percent.

But all were catastrophically higher than the 2 percent target, and our latest figure of 2.3 percent is 3.4 percent below the US and 2.6 percent in Europe.

It is the difficulty of getting inflation back on track that is making central banks hesitant to cut interest rates. We are all in the same boat.

That said, there are reasons to believe that the next three to four years will be modestly successful for the economy.

There is a global cycle from which we cannot escape. But, and this is important, we are in the middle of the growth phase of that cycle.

The pandemic disrupted everything and turned what was likely to be a mild downturn into a chaotic period.

But since then there has been a decent recovery, albeit one disrupted by the sharp rise in inflation.

There was a lull here and in parts of Europe last year, but hiccups like this happen often. The US economy has been doing very well, but growth has slowed recently and could fall further.

Every economic cycle is different. Remember that. But if you stick to the details, there’s a good chance the global economy will continue to grow until the late 2020s.

The task of the next government is to take advantage of this period of growth to put public finances in order, simplify regulations, encourage personal saving, improve its own services, and so on.

More competence please, and less ideology.