Rishi Sunak said it was fairytale economics. That was one thing he got right | Will Hutton
Britain is on the cusp of a financial crisis. On Friday, the prime minister, Liz Truss, and the chancellor, Kwasi Kwarteng, comically parading false claims of their toughness, elected for the softest of economic options.
In a “mini-budget” – an obvious misnaming to avoid presenting elementary fiscal arithmetic required by law for a proper budget – they pretended to shrink the state’s financial claims while launching an unprecedented extra £411bn of public borrowing over the next five years as a “plan for growth”. Never in British public life has the gap between rhetoric and reality been so gaping.
If the borrowing had been targeted on lifting public investment and improving Britain’s stressed public services, it would have been much more justifiable, especially to counter a coming recession. Although even then, the sheer scale of, and lack of plan to deal with, such a mountain of new debt would have risked condemnation by the financial markets. As it is, the markets, observing an unwarranted record £45bn of tax cuts disproportionately and grotesquely gifted to the southern rich for no good purpose, were offered a one-way bet which they seized.
The pound plunged by 3% against the dollar in hours – it has devalued 17.5% this year. As worrying and with implications no less profound was the price of 10-year government bonds falling by 5%, to complete a near-record one-week fall of 11%. The public debt markets are terrified by the prospect of never-ending flows of government bonds in an economy with double-digit inflation and a currency undermined by an enormous structural balance-of-payments deficit.
In such circumstances, you had best design any economic stimulus carefully so that it is credible, otherwise the whole exercise becomes self-defeating. But not for Truss and Kwarteng, who, in sacrificing that credibility, are fatally wounded politicians just two weeks into office.
Kwarteng’s recklessness has provoked a doubling in interest rates on benchmark 10-year government bonds, to close to 4%, in less than two months, while the markets expect the Bank of England’s base rate to hit 5% next year. No British budget in recent times has received such a devastating negative verdict. The cost of servicing government debt may be soaring, but that has implications beyond the public finances: the higher bond yields rise, the higher target rates of return on business investment also go, so depressing any desired buoyancy in investment intentions. Equally, with mortgage rates set to rise to 7% in 2023, the property market is destined for a sharp retrenchment as up to a third of fixed-rate mortgages unwind. Two growth engines are thus firmly spiked.
Yes, levels of demand are rising, fuelled by extra public debt, so that the coming recession will be shallower than it would otherwise have been; and the £60bn energy package will protect consumers and businesses from Vladimir Putin’s gas shock, reducing peak inflation by as much as 5%. But, like the wider “plan for growth”, the energy package is singularly badly designed and unsustainable. It is not targeted on the most needy and no attempt has been made to further tax energy companies to provide some of the funding. Fairness and the acceptance of the case for taxation and financial sustainability are not in this government’s lexicon.
Why? First, the Truss cabal genuinely believes in the cant of libertarianism – that the intrusive, coercive state necessarily shackles something nebulously called “wealth generation”, which is driven solely by individualistic entrepreneurship – framing a childlike understanding of economics and business around it. “Trickle down” economics works, they believe, especially if supplemented by “supply side” reforms – code for lowering standards. Second, six years after the referendum, Brexit is being indissolubly linked in the popular mind with stagnation, frozen household incomes and lies.
Restoring growth to 2.5%, based on an economic model independent of the EU, is crucial to save the reputation of Brexit – and to any chance of winning a 2024 general election. Hence the gamble.
But who thinks that restoring national insurance rates to 2021 levels and cancelling the planned increase in corporation tax is going to unleash more growth? Despite Truss and Kwarteng’s overconfident claims, there is not a scintilla of evidence that tax cuts “trickle down” to impart economic dynamism, extra effort or enterprise. Growth instead comes from the application of inventiveness, via the efforts of thousands of firms and millions of people using the gifts the gods gave them, to make the world better – and from which profits flow. Economic growth, as I argue in one of a collection of 18 essays, The Change We Need, on Monday, is the product of complex economic and social organisations marshalling these impulses around a shared purpose. It is purposeful firms that bind their stakeholders into a common cause and drive growth.
Britain has too few. “Supply-side reforms” that focus on further deregulating an already very deregulated economy are beside the point – the focus should be on reforming how firms are owned, managed and governed. Only thus can other crucial ingredients of growth – increased public investment, boosted R&D and full access to our biggest market, the EU, via rejoining the customs union and single market – catch fire.
No economy has grown without increased investment and trade: trade-curbing Brexit is a ball and chain. Imagining that 38 new regulation-light “investment zones” will change these immutable laws is for the birds. They will not, as matters stand, create one single great new company but simply move economic activity around.
Leaving an era of ultra-low interest rates was always going to be economically hazardous: Putin and Kwarteng have combined to make the rise greater and more traumatic. As the financial crisis deepens, with the former US Treasury secretary Larry Summers forecasting sterling’s fall to below dollar parity, and stagflation becomes entrenched, Rishi Sunak’s condemnation of it all as fairytale economics will seem ominously prescient and deepen the poisonous ruptures that so divide the political right.
Meanwhile, Keir Starmer should redefine Labour in his speech to the party conference this week as One Nation Labour, committed to fiscal credibility, fairness, trade and growth, built on a remodelled capitalism – all abandoned by Truss and Kwarteng.
According to the Resolution Foundation, another 3 million people will be living in absolute poverty in the UK over the two years to early 2024. The Tories have lost the confidence of the financial markets. They deserve to lose the confidence of the people.