I am misquoting Clinton, but the markets rule and don’t you forget it. But goodness me a couple of people appeared to have forgotten that maxim. You really wonder why.
What were Truss and Kamakwarsi Kwarteng thinking? Did they think that they, mere politicians, could trump (excuse that word) the international financial markets. Apparently yes. So, what spurred them on?
Let’s go back a bit. What are the ‘markets’ that have ‘spoken’. I am no economist (got my degree in International Relations not economics ) but financial markets are places and systems where buyers and sellers trade financial instruments such as bonds, equities, and currencies. Over the years these transactions now take place in an environment hedged around with rules and regulations that protect these markets from political interference, and money and other entities move around the world in vast and colossal volumes and at the speed of light. It is a global phenomenon, and its influence is felt by all nations so much so that every move of every politician within each and every nation is judged by the market (which is of course, ‘unconscious and spontaneous, according to Hayek. The irony!) as to whether policies are right and fitting for said ‘market’.
And what has caused the markets to ‘speak’. It is Kwarteng’s so-called mini-budget, which included amongst other points:
Help with energy bills (which was good), and then:
- The 45% rate of income tax to be abolished for the highest earners (withdrawn 3 October)
- A cut in the basic rate of income tax to 19% from April 2023
- Reversal of the 1.25% rise in National Insurance
- Scrapping the increase of corporation tax (withdrawn 17 October)
- People on Universal Credit to be asked to look for work or face sanctions (how cruel)
- Tax-relief for investors
- The limit on bankers’ bonuses scrapped
- Stamp-duty threshold raised
And so on and so on – see here for the full list.
Can you see the theme? The entire budget was all about giving more money to the very rich and hoping this will lead to what Liz Truss and Kwasi Kwarteng were hoping for: Growth, Growth, Growth. But note that this tax-cutting budget was un-costed with a huge gap between what it promised and the practical point of how it was to be funded. Not only that, but the in-house Office of Budget Responsibility, set up by George Osborne in the Cameron years no less, was ignored and a very experienced Treasury Secretary sacked.
The markets and its institutions including the IMF did not like this scenario one bit. Sterling went right down to near parity with the dollar, the cost of borrowing went up and the Bank of England had to step in to buy bonds to help our pension funds from disastrous penury.
What is going on? Why have the Conservatives of all people, trashed their reputation for well, conservatism, and why sacrifice the nation’s reputation for being sound and prudent. Why follow this mad economic path?
Apparently, it is all there in Kwarteng and Truss’ book, Britannia Unchained, Global Lessons for Growth and Prosperity published in 2012. I cannot bring myself to buy that book and read their arrogant nonsense, although in the interests of research, I should, and if I see it in a charity shop, maybe I would buy it, so I can only go by the reading I’ve done elsewhere. But note that in this book the authors (Truss and Kwarteng) believe that the UK is a bloated state, with high taxes and too many regulations. Moreover, they apparently think the people within this country are the worse idlers in the world.
I expect there is more to it than that, but I detect a lot of arrogance. When listening to Kwarteng (yes, I know he’s gone) close your eyes and listen to him. All I can hear is Johnson’s voice, it’s the same timbre. It is Eton Speaking.
OK, setting aside the arrogance of the shortest serving Chancellor of all time, what else is going on?
You could think that this budget, naively, was deliberate, that they wanted to create chaos so that huge public spending cuts would be the answer. Because after all public spending leads to lazy, idle workers. They wanted interest rates to rise, and never mind the cost to ordinary mortgage payers, because this will ultimately remodel and restructure the UK’s way of life.
Liz Truss and Kwasi Kwarteng are old friends, they go back a long way, but do you not get a sense they have been in a small intellectual bubble of ideas? One of which is that capitalism is evolutionary and that there need to be periods of crisis to get rid of inefficiency in all its forms, be it businesses, technologies and don’t forget, the welfare state, which is at the route of all our troubles in the UK what with it protecting the poor, the vulnerable and don’t forget, the sick. Apparently, I have to read Hayek to understand this school of thought, but I think I’ll give that a miss, thank you!
The end version of these ideas is not particularly compatible with the electorate, and with one fell swoop, Truss has catapulted Labour into a huge lead in the polls. If there was an election today, the Conservatives would be wiped out. But as much as one wants an election it is unlikely to happen, the Conservatives would not vote for annihilation.
Furthermore, you can still feel the aftermath of Brexit in this. Whatever you feel about Brexit, (and you know I voted Remain) after the vote in 2016, we had the worst kind of leadership culminating in Johnson’s antics in proroguing Parliament and his treatment of Northern Ireland. And don’t forget the issue of ‘sovereignty and going it alone without the EU’s legal trappings and regulations. This budget echoes that disruptive disregard for convention. Did Truss and Kwarteng think they could ignore the market, obviously they did.
On the other hand, there is the point that the UK when you measure productivity and GDP the UK isn’t doing all that well and hasn’t for some time. Maybe Truss and Kwarteng genuinely wanted to address this issue., but oh so very quickly they found that you can’t outsmart the ‘market’. It spontaneously reacted!
I take note of William Davies article in the LRB (see reference below) where he points to an article by Colin Hay that sees Gramsci’s term, ‘catastrophic equilibrium’ of simultaneous failure and stability as describing the UK’s economic situation. With our nation never being in too bad a situation because it is so stable, yet at the same time having to continue muddling along with low growth. Did Truss and Kwarteng want to break out of this? Well to a certain extent they have. Catastrophically so. The equilibrium is no more, where once we were both a failure and stable, we are only one of those.
So, where are we now? Kwarteng was sacked on Friday and Jeremy Hunt brought in to calm the markets. The same Jeremy Hunt who was such a popular Secretary of State for Health – not. And we await the fate of Liz Truss, who will probably go. But what a mess.
Penny Kocher, 17th October 2022
P.S. The breaking news (Monday 17th midday) is that Hunt has reversed practically the entire mini-budget including help for energy bills reduced to just six months. This apparently brings in some revenue, but there is still a huge gap. Spending cuts in public services are still expected. Meanwhile Truss hangs on although severely weakened by this announcement. Pundits argue that she may not go immediately as Conservative politicians will wait see how the markets react and anyway how will they replace her. That is the key question!
Further reading:
William Davies, Madman Economics. London Review of Books, Volume 44 Number 20 20 October 2022
Thank you. Very clear summary of the chaos. Particularly enjoyed your statement, « The equilibrium is no more, where once we were a failure and stable, we are only one of these. »
Thanks Pierrette. We’re all so appalled by the antics of this government. Hunt has given Truss some time, but really she is finished. As for our nation…..we will recover but the government needs to be voted out. The question is when – we could continue to have this shower until 2025!
The pantomime that is this government is beyond belief. You really could not make it up.
what a shower!
I think all governments have ‘best before’ and ‘use by’ dates and this one has gone way beyond those dates. It’s run out of ideas and good people. What I didn’t put in this piece and probably will in the next one is how much the party has changed and how far right it has gone – Brexit hastened this process.
We certainly live in ‘interesting times’. Wonder what’s next. Trish S.
Indeed! I expect there is a lot of whispering and plotting going on. Interesting!
I have been following this closely Penny as you might expect! I thought I read this morning that the removal of the cap on bankers bonuses is to stay because it will bring in higher tax receipts. When you look at the ways in which wealthy people can avoid the highest taxes, which are on earned income, by, for example, setting up a company which can make tax-efficient loans to the sole shareholder – you – it beggars belief. Company directors pay themselves dividends rather than salaries to save tax. We could lower taxes for most people if we stopped all these accountancy tricks and ‘vehicles’ through which people avoid their responsibilities to society & feel proud that they can. As to the energy subsidy, I -amazingly –agree that before extending it for the full 2 years the need for it as a universal benefit should be reviewed. I understand that this is the current Labour policy. There are many people who don’t need the money & there are so many worthier recipients of taxpayers help, especially now interest rates are rising. I’m not a great fan of Jeremy Hunt; he was not well liked by the NHS but he did at least retain the poisoned chalice longer than most. Denise Coffey does not inspire confidence either. During The PMs party speech she told us all the (impossible) things that her Health Secretary was going to do. It remined me of those Hindu gods with many pairs or arms, she’s certainly got her hands full!
This is very short reply Lynda as anything I say will be out of date within hours! Off to write another post for this blog – on guess what – the Boris factor. If he was voted back I’d be beyond angry!
When are the government going to stop having these beauty contests and start governing?