Despite spending the past week poring over reams of spreadsheets and briefings, Rishi Sunak faces an inescapable truth: success is already out of his reach. Sunak may have delayed today’s Halloween Budget to November 17, but that changes little. When it comes to saving Britain’s economy, he has set himself up to fail.
On the one hand, he is expected to address the numerous economic problems afflicting Britain — the highest inflation rate in 40 years, an energy and cost-of-living crisis, a slow-motion housing market crash, strained public services, and growing industrial and civil unrest — while simultaneously boosting investment and economic growth. On the other, he’s expected to do all this while “restoring the confidence of the markets” by “fixing the country’s finances” — that is, reducing the government deficit and debt through higher taxes and/or spending.
These two objectives can’t be reconciled. Addressing the economic and social crisis, as well as mobilising the investment needed to boost growth, requires more spending, not less, which can’t realistically be offset through higher taxes. Meanwhile, attempting to balance the budget — which would mean allowing millions of households to slide into poverty, letting businesses go bust, and pushing public services to the brink of collapse — would likely make Sunak the third Prime Minister to be kicked out of Downing Street in as many months.
The good news for Sunak is that this is a false dilemma. The UK’s public finances don’t need “fixing”. As a currency-issuing nation, Britain can never “run out of money” or become insolvent on its public debt. I’m inclined to think that Sunak is aware of this; after all, he personally oversaw a massive increase in the deficit during the pandemic, which he paid for by having the Bank of England print the necessary pounds, essentially bypassing financial markets (and the issuance of bonds itself). The resulting debt is entirely owned by the Bank of England, and technically doesn’t even need to be repaid. There’s no reason he couldn’t do the same now.
The bad news — for Sunak and the country as a whole — is that the new prime minister can’t allow himself to acknowledge this simple truth. Not only has he long pushed the argument that his own pandemic support measures have created “huge challenges for our public finances” that now need fixing; even more crucially, in his rush to replace Truss, he fully embraced the mainstream narrative about the reason for her downfall: that she was punished by the markets for a fiscally irresponsible budget that almost destroyed the British economy — and that it’s now his job to correct her mistakes.
This narrative is profoundly misleading. As Narayana Kocherlakota, former president of the Federal Reserve Bank of Minneapolis, recently noted: “Markets didn’t oust Truss, the Bank of England did.” He points to the fact that the fall in the value of the pound was, in the grand scheme of things, rather negligible, while the gilt sell-off was largely caused by problems inherent within Britain’s over-financialised pension funds — itself a result of regulatory failure by the Bank of England — and then exacerbated by the announcement that the Bank’s bond market intervention would be short-lived.
“[It’s] easy to see how [this] contributed to the government’s demise,” writes Kocherlakota. “She was thwarted not by markets, but by a hole in financial regulation — a hole that the Bank of England proved strangely unwilling to plug.” In other words, if the Bank of England had played ball with the government — as any central bank should be expected to, if one believes that policies should be decided by elected politicians, not unelected technocrats — there would have been no “mini-budget crisis”.
The accounts that are emerging about the “advice” that Truss received from the Treasury and other departments are even more concerning. According to a new book on her downfall, Treasury chiefs told Truss the UK risked plunging to the status of a “Third-World country”, unable to sell its debt on global bond markets, with the City “reduced to rubble”. “They scared the shit out of her,” one insider states. If true, Truss wasn’t just sabotaged by the Bank of England — but by the government’s own unelected officials as well.
Now, it may have seemed like a good strategy to Sunak to gloss over these uncomfortable truths in his bid for the party leadership. But in the coming months, he may come to regret reinforcing the regressive, and fundamentally false, narrative about the disastrous fate that allegedly awaits any government that dares to stray from the fiscal orthodoxy. With mainstream pundits on both the Left and Right, and even opposition politicians, trotting out ridiculous tropes about the urgent need to “fill the fiscal black hole”, Sunak has no choice but to engage in some degree of austerity.
This, of course, may have been his plan all along. As the underlying message of his victory speech made clear, Britain faces a “profound economic challenge” and “difficult decisions [are] to come”. Even more worryingly, it has been reported that Jeremy Hunt has been holding talks with Osborne, the architect of the devastating austerity drive of the 2010s. What might all this mean? According to some reports, Sunak and Hunt are exploring tax increases and public spending cuts worth up to £50 billion — the amount needed to balance the budget.
It doesn’t take a PhD in Economics for one to say with some certainty that this is not going to happen: Sunak and Hunt are perfectly aware that attempting to balance the budget at a time of recession would be crazy — especially considering that there’s really “no fat left to trim” from existing public services, many of which are still feeling the effects of a decade of spending restraint and more recent pandemic pressures. Even Whitehall and Treasury officials have warned against the risk of going too far in cutting public spending or raising taxes, which is probably why Sunak has confirmed Truss’s decision not to raise the National Insurance levy by 1.25%, and why even Hunt is saying that “I don’t think we’re going to have anything like [the austerity of the 2010s]”. So, we’re unlikely to see hardcore austerity. The problem is that even austerity-lite would be damaging at a time when more spending is needed, not less.
Meanwhile, Sunak will also have to contend with the Bank of England’s commitment to raise interest rates. This won’t reduce inflation that is entirely driven by supply-side factors, but will almost certainly cause huge pain to the economy, especially to the housing market, which is already in trouble. To some extent, however, having the Bank of England play the bad cop might actually benefit Sunak, providing him with a temporary scapegoat. But, further down the road, when he may find himself having to issue more bonds to prevent the economy from tanking and public services from collapsing, Sunak may regret having empowered the myth of central bank independence. We consider it normal that crucial decisions about every area of economic policymaking should be taken by unaccountable men in grey suits. But there’s nothing normal about it — it’s just another attempt to shackle democracy.
Of course, as economist Richard Murphy noted, Sunak could tell the Bank of England to stop raising interest rates and start buying the new bonds issued by the government to cover the cost of its commitments to the British people. But that won’t happen, given Sunak repeatedly attacked Truss precisely for wanting to curb the Bank of England’s independence. To put it simply, it’s hard to see how Sunak could ever succeed given the constraints that he has, to a large degree, imposed upon himself. By feeding the myths that ultimately brought down Truss, he’s boxed himself in.
And yet, for now at least, he can always count on the “L factor” to turn his fortunes around — the fact that Labour is even more terrified of markets and wedded to those myths than the Tories. In fact, the political contest now seems to have become who can enforce the most austerity, with Labour now presenting itself as the party of “sound money” and as an antidote to irresponsible Tory spending. It’s the depressing paradox of the current era: in the midst of the worst social and economic crisis in decades, both parties have been hijacked by representatives of the establishment. The populist window that had opened with Johnson and Corbyn has now been firmly closed. But as Sunak could soon find out, it won’t stay shut forever.