October 18, 2022 - 3:47pm
It’s hard to describe the sacking of Kwasi Kwarteng and his replacement by arch-technocrat Jeremy Hunt — or “Jeremy Draghi” as his fans have dubbed him — as anything less than a bloodless coup. Now that the dust has settled over the mini-budget, it has become increasingly clear why there was such an overreaction.
Yes, the tax cuts were bad from a distributional perspective, but since when did financial markets, the IMF and neoliberal economists worry about inequality? The notion that the cuts threatened Britain’s “fiscal sustainability” was equally ridiculous: from a macroeconomic perspective, they were absolutely trivial.
The real sin committed by Truss and Kwarteng was to challenge the orthodoxy by approving a large deficit-financed stimulus plan. This revolved primarily around a two-year energy price guarantee (not around tax cuts, which were marginal), and by implying that the Bank of England’s role should be to enable the government’s policies without making too much of a fuss.
This went against two pillars of the economic orthodoxy. The first of these is that the UK has racked up too much debt and now has to “balance the books” (or pursue austerity, in other words) because it is “running out of money”. The second is that elected politicians should never dare to challenge the wisdom and supposed independence of the technocrats, namely the Bank of England and the Office of Budget Responsibility, when it comes to economic policies.
The mini-budget challenged both assumptions and, at least on those grounds, it should have been defended. Indeed, shattering the myths surrounding the alleged financial constraints of governments, and reaffirming the primacy of politics over technocracy, are preconditions for the pursuit of truly democratic policies. That is especially the case when they threaten powerful vested interests in society.
With this in mind, the Left’s joining in on the Kwarteng-bashing — by paying lip service to the mainstream narrative about the mini-budget’s threat to “financial stability” — was highly peculiar. Labour even presented itself as the party of “sound money”, contra irresponsible Tory spending. Did progressives not realise that, by siding with the financial markets and orthodox economists, they weren’t actually fighting the tax cuts, but instead empowering the technocrats and paving the way to austerity? Clearly not.
In any case, with everyone from the Bank of England to financial markets to international institutions to the mainstream media colluding to bring him down, Kwarteng was destined to fall. Neither he nor Truss possessed the intellectual and political tools to stand up to the onslaught. Leftists might have relished the beating, but the project they were actually supporting should already be apparent: the return of austerity.
It’s not at all surprising that Hunt’s first decision was to completely overhaul the mini-budget’s main proposal — the energy price freeze — by reducing the measure’s duration from two years to six months. He reasoned that “it would not be responsible to continue exposing public finances to unlimited volatility in international gas prices,” while announcing more budget cuts in the near future.
The decision to support this “coup” will come back to haunt Labour, as Tim Stanley rightly noted in the Telegraph:
One would be hard-pressed to find a better example of what Lenin called “useful idiots”.
Thomas Fazi is an UnHerd columnist and translator. His latest book is The Covid Consensus, co-authored with Toby Green.
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SubscribeI’m not an economist but isn’t it the case that in order for the economy to grow there has to be a deficit. In other words zero deficit is a bad thing, not a good thing.
I’m convinced that George Osbornes austerity program back in the day did more harm than good.
Also wasn’t there a note left by the departing labour government in the treasury – “Sorry but there isn’t any money”.
You are correct. The Government’s deficit is the non-Government’s surplus. If people and businesses want to accumulate savings rather than taking on debt then they need the Government to take less out of the economy in taxes than they issue into it in spending.
I like your clarity of thought here. But I think the problem is practice is that the accumulated savings are not held by UK people and business, but by overseas investors. Which makes the UK hugely dependent on the confidence of overseas investors and also the exchange rate.
None of this should be a surprise. We’ve been borrowing and living beyond our means as a country for at least 2 decades.
In Zimbabwe we also have a deficit, and I can assure you it does not produce growth. There is a case for some degree of deficit, but the question really is, what dose, and for how long?
Perhaps the problem is that a deficit is not sufficient on it’s own to drive growth. You need other things too. That’s probably the problem with the UK too.
There wasnt full scale austerity under Osborne!! Government spending overall continued to grow. His smart trick was to sound hard and strong and so make sweet music for the bond markets. But austerity simply did not happen here as in Greece or Ireland. Now – several mega State bailouts later – it looks like the Zero Rate Technocracy have finally lost their grip. Austerity is just one of the horrors their various twisted Orthodoxies – from Net Zero & QE to mass migration and EU regulatory suffocation – have gifted us for 2022/3, a year of Reckoning.
No, it isn’t the case. That is just the idiot fantasy of leftist bloggers.
And anyway, the left has just trashed the notion of deficit-fuelled growth. In a short time they will realise yet again the price of not being able to see beyond the end of their nose. And it won’t help knowing that a whole load of Tories can’t either.
I think, understandably, this writer is confusing Labour rhetoric with the reality of their politics.
Starmer is a Blairite. Ask yourself how many of your property owning friends became millionaires while New Labour was in office. Meanwhile wages were deliberately squeezed, rents were inflated and the bankers, well, let’s not go there.
We should never forget that it was Gordon Brown who changed the way that inflation is calculated in order to conceal the impact of his policies on the working poor.
There is nothing ‘left’ about Blairism. It’s a technocratic and elitist movement that exists almost exclusively to promote the interests of the professional classes that live off the state.
Inflation may be tackled through higher interest rates (BoE led) or through financial austerity i.e. government imposed higher taxes/lower public spending. Either could work but the latter is more damaging to earners, savers and those who do not own assets. Financial markets have sent in the receivers to impose a method of responding to inflation which protects the rich and powerful by keeping long term interest rates artificially low, while getting the British public to pick up the tab. The modest reduction in long term gilt rates (from levels not very elevated in historic terms) arising from Hunt’s announcements are not worth the grotesque damage to Britain’s standing the world these u-turns have done, never mind the economic damage of raising taxes, and threatening even higher energy prices, while the country faces in to a recession.
You won’t be able to solve the inflation this way.
The UK is facing a major disruption in its energy supplies. Energy is a base input for almost all forms of production and, of course, needed for things like heating. Such a scenario nourishes inflation in all sectors of the economy. Energy supply-shocks are a “worst case” scenario (absent on-soil war or similar).
No form of monetary policy or fiscal policy or any financialization scheme – however mindlessly-complex such a scheme becomes – can change that.
The only fix is a re-approachment with Russia, however politically-distasteful. Whatever long-term alternatives to Russian energy there are – they will take years to deploy and – due to the higher cost – result in at least a somewhat lower standard of living. It isn’t useful to discuss even that “best case” because the UK simply doesn’t have the time to secure and deploy those arrangements.
Well the latest UK inflation print of 10.1% was not driven by higher fuel prices (which actually fell) but rather by domestically generated inflation across all sectors of the economy. Internationally, inflation is high in countries like the US and New Zealand largely unaffected by Russian gas issues. So clearly inflation is not just the result of high energy costs (although it will be made worse by ending the energy price cap early), but rather also the legacy of excessive QE during the pandemic. The last time inflation was this high, interest rates were in double digits, compressing asset values. Higher interest rates would help curb inflation if only by driving deflation in non-energy costs through rationing the supply of available cash in the economy. But if interest rates were higher, investors would be forced to sell assets at a loss to fund the collateralisation of their out of the money positions. And powerful forces don’t want that. Britain can’t buy Russian gas even if it wanted to, so a unilateral rapprochement with Russia would achieve nothing, as well as being immoral.
How often do we have to re-learn that inflation is always and in all places a monetary phenomenon?
Three ways to reduce inflation
Unemployment (recession being the path there usually)
QT – (Quantitative Tightening, QE in reverse, suck excess money back in)
Real Growth in Productivity.
Workers now days are not going to increase real productivity – they are too worried about what gender they are. QT is too painful, will crash Equities and cause the wrong kind of recession. Which leaves unemployment – I guess this is the one they will choose.
After inflation has done its vile job if taking all the working people’s savings and pensions so they can be harvested by the Elites.
The Tories racked up the debt with their absurd £400bn lockdowns.
The blame is entirely theirs, along with Labour who went along with them.
What exactly does the author mean by austerity? From what I’ve seen over the years it has become “anything that means getting into debt at a slower rate than previously.”
This is why the government is accused of “cuts” even when there are net increases to the thing they are complaining about.
It is dishonest to the extreme. If I spend £300 more than I earn every month and I announce that I am, henceforth, going to be austere, and then go into further debt by £270 the next month – would that really qualify as austere?
I don’t think so, but apparently most voters do.
What Labour will do is the following:
Rinse and repeat.
Leftists aren’t exactly well known for their long term planning.
Err the NHS?
BoE independence?
Perhaps even the Nuclear Deterrence, as it was a pretty left wing Lab govt that secretly invested and got it.
Depends though a bit on what one means by long term planning.
Thanks Thomas. The UK Left have blindly cheered on the MSM in their destruction of Boris (who at least acknowledged the need to level-up the country even if he never did it) and then Liz and Kwasi (who dared to increase the deficit, just as Corbyn would have had to). They’ve supported the attacks from the currency traders that have pushed the Tories back to their old comfort zone of turbocharged austerity. All safely in-line with Article 126 of TFEU (requiring all member States to run a balanced budget or even a surplus), so beloved by Osborne and Hunt.
No. If anything the left has set expectations for the forthcoming victory that has been forced upon them despite their best efforts. If we’re still pretending the whole left/right paradigm is anything but a pantomime to obfuscate centralised elitist decree, that is.
Labour’s strategy – such as it is – is merely to play along with the austerity goons behind the scenes whilst making enough public noise to make sure that the Tories own this disaster.
As for Starmer – his lack of courage is total and well known.
Were Starmer to be named PM tomorrow, his first impulse would be to wonder whether he is a sufficiently-fit man to swim the English Channel…
It troubles me when a self proclaimed socialist uses the language of neoliberalism to promote more nonsense by referring to economists who disagree with them as ‘orthodox ‘.
There is no doubt that after the last 12yrs, the increasing shambles post Brexit culminating in the current administration, means the inheritance for any new Govt will be v challenging.
But the article does seem to assume austerity via even greater public spending cuts the only balancing mechanism. Overall tax burden in the UK remains lower than in Germany/France and hence some headroom there. And of course, should the UK move quickly in the direction of a new trading agreement with the EU the bounce will be considerable, and what’s more the public will be ready for it.
Click on this crazy article’s first link – it is the Amazon book on MMT!
”The Deficit Myth: Modern Monetary Theory and How to Build a Better Economy Hardcover – 9 Jun. 2020”
If this guy is really a MMT believer than he should be smart enough to know MMT = Inflation. That is just a tautology.
Hyper Inflation is the only way to repay MMT. Fact.
Unherd is supposed to air views that don’t make it to the MSM. Economic orthodoxy, as always touted by MSM, has given us financial crashes and falling wages. MMT describes how the economy actually functions for a currency-issuing Government. It is up to that Government how to use that knowledge. MMT itself doesn’t = anything.
People who repeatedly bleat about ‘The MSM’ have become the herd. Apparently unaware that there is a far greater range and availability of views now, than ever. Moreover, their views seem disingenuous, given that they are, unlikely to be regular consumers of a hated product. They also tend to cry about CNN/MSBC (vs Fox)…as if these are the very heights of current thought, where in fact they are TV channels producing bovine fodder.
It will be v difficult for the next Govt, esp if that’s Labour as the Bond markets will almost certainly look to test them. But they could hardly do a worst job than the current shambles.
What’s also worth noting is the overall tax burden in the UK remains lower than in France and Germany, both of whom have problems but better productivity. Furthermore a rapid move to a comprehensive trade agreement with the EU could generate a significant bounce. Whether that’s an immediate re-joining of the Customs Union, or even the Single Market, doubtful but it’ll likely be in that direction and the EU, whilst not wishing to give us back all the advantageous terms we had, will want to facilitate a closer relationship quickly.