This is what the Queen's Speech means for the economy

Sometimes governments do need to take unpopular measures, but Brexit apart, this one doesn’t

The Queen's Speech concentrated largely on Brexit (PA)

The business and financial communities are supposed to like strong government, so they know where they stand and can plan for it. But in the past couple of weeks, and especially now after the Queen’s Speech, they have been swinging round to the view that weak government might be rather good news. A government that cannot be sure that it can get legislation through Parliament is one that will not fiddle about with unpopular policies or inessential legislation, and will instead focus on things that really need to be done.

So what is interesting about the Queen’s Speech is what is not in it. It seems unlikely that there will be any significant tax reform measures in the next two years. That is helpful because there have been huge changes in recent years – for example, in pension legislation. Business needs time to settle down. Huge swathes of unpopular measures set out in the Conservative manifesto have been dropped. That is good. Sometimes governments do need to take unpopular measures, but Brexit apart – and we’ll come back to that in a moment – this one doesn’t.

To see why, look at the two other pieces of economic information yesterday. One was the government accounts for May; the other a speech by Andy Haldane, chief economist at the Bank of England.

We are now two months into the new financial year. Not only are the borrowing numbers for the past financial year £5bn lower than was thought a couple of months ago, but this year they seem to be holding steady instead of getting worse. You don’t want to make a huge deal of two months’ figures, and we are still running a deficit nearly £50bn a year. But the basic point really matters, and it is that public finances are coming right. On my quick tally the deficit last year was just under 2.5 per cent of GDP, too high for this point of the economic cycle, but not outrageously so. The squeeze can be eased a little if that is what political expediency demands.

The Andy Haldane remarks pushed the pound up by a cent against the dollar. Why? Well, he is seen as the intellectual leader of Bank of England thinking on the economy and he said that he was close to calling for a rise in interest rates. He had been regarded as the Monetary Policy Committee’s chief dove, pressing for a long period of ultra-low rates, echoing the view of Mark Carney, the Governor. If he receives support on the MPC, and I think he will, the start of the long climb in UK interest rates comes much closer. That will push up government borrowing costs, but it will be another sign that wages are recovering, that the authorities are prepared to admit that inflation is rising, and that the economy can stand slightly higher interest rates.

Put these two points – fiscal and monetary – together and this is an appreciably more favourable background for Philip Hammond as Chancellor (and who knows, maybe soon Prime Minister) than he expected at the time of the Budget three months ago. Now look at the implications for Brexit.

The general interpretation of the speech is that it is business-friendly and that the UK will prioritise the economy and business in its negotiations. That seems sensible. There is a growing appreciation of two things.

One is that this is a process, not a deal. So the disengagement from Europe will be gradual, with some sort of holding operation keeping economic relations going before the whole business is settled in six or more years’ time. But it won’t even be settled then, because there will be other negotiations about other issues we cannot imagine now. Ultimately, how far the UK economy diverges from Europe will be driven by economics rather than politics.

The other is that the key variable is not what we want but what Europe wants.

“My Government will seek to maintain a deep and special partnership with European allies and to forge new trading relationships across the globe,” are the words in the speech. Presumably the EU will want to have a deep and special partnership with the UK. Will it also be happy to see the UK forge new trading relationships? Well, why not? If the UK can successfully do this, the EU benefits too, just as the EU benefits from Switzerland’s status as being only a partial member of the single market and not a member of the customs union.

The good news, for business and finance, is that the UK’s weak Government looks more ready to seek an economy-friendly deal with the EU than had appeared likely when it thought it would have a large majority.