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IFS - We are in uncharted waters without a compass

As we set sail into uncharted economic waters, it is worth asking not just where we are going but where we start from. For while we start from a better place than we were at in 2010, the truth is we don’t even really understand what that place is, let alone where we are headed.

Of course we know the numbers. Government borrowing is well down from its 2010 high of more than 10 per cent of national income. Employment is riding high; there are two million more in work than there were in 2007 before the recession. Income inequality has fallen since Mr Cameron became prime minister, and is at its lowest level since 1990. These are undoubted achievements.

On the other hand, the national debt, at more than £1.5 trillion, is more than 80 per cent of national income and not yet falling. Average weekly earnings remain below their pre-recession levels — an unprecedented decade without earnings growth. That is largely because productivity has barely risen, again unprecedented.

Income inequality between rich and poor has diminished but we have entered an era of unprecedented intergenerational inequality.

As well as owning most of the nation’s wealth, pensioners for the first time have incomes that are on average greater than those of non-pensioners.

Unprecedented could also refer to the Bank of England base rate at half a per cent — its lowest in history — for the past seven years. Or the £375 billion of quantitative easing. Or the UK’s current account deficit with the rest of the world. Or the scale of public spending cuts.

What that means is that while the economy has dragged itself from the depths of recession it is still fragile. The levers available to the Bank of England are close to full stretch. And frankly, we don’t quite know why it is taking so long for the economy to return to normal.

Now of course there is an additional dollop of the unknown and unprecedented to layer on top of all that.

The fall in the value of the pound, and of stock markets across the world, are testament to that.

So what matters next? Well, above all the two things that mattered most for the referendum campaign. What deal will we come to with Europe on trade and access to the single market? And what will our immigration policy be?

The problem is that the best economic outcome is likely to be undeliverable. The rest of the EU is unlikely to allow us to have it on a basis that would be acceptable to an electorate that voted to leave the EU.

The best economic outcome would clearly be one giving us access to the single market, for goods and services, on as similar a basis as possible to that we currently have.

But anything close to current access will most likely require us to accept free movement of labour, some EU regulations and financial contributions to the EU.

The period of charting a course without a functioning compass has been extended, probably by quite some time.

This article was first published in The Times and is reproduced here in full with permission.

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