News from Nowhere: An Unfortunate Fiscal Event
Now that the country has left the European Union, the latest scapegoat is the British civil service, and specifically the senior staff at the Treasury.
When asked at the end of last month how she could defend her plan to scrap the cap on bankers’ bonuses brought in to prevent a recurrence of the extreme risk-taking that had led to the financial crash of 2008, Liz Truss had insisted that her premiership was about ‘delivering for people’. She might have added that she was particularly intent on delivering for very wealthy people.
Some might suppose that at least these unreconstructed Thatcherites are now being honest about their approach. Gone are the mealy-mouthed hypocrisies of her predecessor. Ms. Truss tells it as it is.
Look after the rich and the poor can take care of themselves.
Or as the Prime Minister herself put it, in defense of her tax-cutting plans, ‘the people at the top of the income distribution pay more tax, so inevitably when you cut taxes you tend to benefit people who are more likely to pay tax.’
Her month-old government has also just announced plans that would result in reductions of benefits for thousands of people unable to secure full-time work.
A few years back, the mantra of the UK’s Tory populists was that the only thing holding Britain back from massive economic growth was Brussels bureaucracy. Now that the country has left the European Union, and the administrative burdens on many businesses trading with Europe have increased exponentially, the latest scapegoat is the British civil service, and specifically the senior staff at the Treasury.
In an unprecedented move, the incoming Prime Minister had immediately fired the Treasury's top official, apparently on the grounds of his alignment with economic orthodoxies which she felt were the only things standing in the way of the nation's manifest destiny as a commercial superpower.
During his term as Prime Minister, Labour’s Gordon Brown had adopted a classically Keynesian solution to the global financial crisis of 2008. He had started to spend his way out of recession, stimulating the economy through a program of major investment in public infrastructure. Other western nations followed Brown's strategy and profited from it; but in 2010, a new Conservative government reversed this policy, trying instead to save the country's way out of national debt. That austerity package only of course extended the period of economic pain.
As an advocate of the supply-side schemes that led to the cycles of boom and bust which characterized the British and American economies of the 1980s, Liz Truss appears to believe that neither investment spending nor austerity saving can help, but that what will do the trick will be to reduce the weight of taxes and regulations upon the country’s wealthiest corporations.
The eccentric and perhaps irrational nature of this belief was what hastened the departure of the Permanent Secretary to the Treasury. As a fellow right-winger had famously declared during the Brexit referendum campaign, the Tories have had enough of experts.
Ten days ago, running shy of a full-on budget – which would have required the inclusion of expert economic projections – Liz Truss' government introduced to parliament what it called a fiscal event.
This mini-budget heralded the most ambitious package of tax cuts for decades, reducing levies on both personal incomes and corporate profits, allowing those with the most money to accumulate even more.
As well as modestly reducing overall rates of income tax, it abolished the highest band of that tax, offering a significant boost to the finances of the best-paid members of society – specifically, those earning more than £150,000 each year, or about five times the average annual salary.
It also doubled the value of share options available to the upper echelons of the corporate workforce. These benefits were, in the words of one BBC correspondent, ‘explicitly and unapologetically channeled towards higher earners’.
At a time when millions of ordinary working people are struggling to feed their families and pay their bills, this will appear to many people to be politically indefensible and morally offensive.
Two days earlier, The Guardian newspaper had noted the American President’s concerns over Ms. Truss’ embrace of such outmoded Reaganite policies, the laissez-faire economics which had led in his own country to increased wealth disparities and periods of economic instability.
By contrast, the Daily Mail – the paper whose support had put Truss into power – announced that she would ‘link economic strength at home with standing up to authoritarian regimes overseas’ as it declared, in a tone of absurd grandiloquence, that ‘freedom begins with tax cuts’.
On the day of the Prime Minister’s self-styled fiscal event, the Mail lauded her massive ‘tax giveaway’ as the key to breaking the British economy's ‘cycle of stagnation’. The Daily Express went even further in parroting the government’s own rhetoric, announcing that these tax cuts would usher in a ‘new era’ for the nation.
With rather more caution, The Times called the move a ‘£50 billion gamble’.
The morning after the fiscal event, headlines in The Times, the Financial Times, and the Daily Telegraph all repeated that it was a gamble. The Guardian denounced it as a ‘budget for the rich’. The Mail hailed it as a ‘true Tory budget’.
Liz Truss had frozen caps on energy bills for both households and businesses – introducing blanket subsidies that will most benefit richer individuals and enterprises.
She had also raised the threshold for taxation on buying a new home. This is again a reform that mostly advantages wealthier members of society.
Meanwhile, she has consistently refused to introduce new windfall levies on the hugely increased profits of the fossil fuel firms. It would however seem churlish to suggest any connection between this and her previous employment in that area of industry or her closeness with people associated with that sector who were linked with the funding of her leadership campaign.
The day before her fiscal event, the Bank of England warned that the country could already have fallen into recession, as it raised interest rates to their highest levels in fourteen years in a bid to counter inflation running at its most rampant for four decades. That day, the pound hit its lowest point against the dollar since 1985.
The UK currency fell even further in the immediate wake of the Chancellor’s announcement of his government’s mini-budget. Within a few days, it had plunged to an all-time low. This would hardly help to mitigate the effects of the cost-of-living crisis.
On the morning of its launch, the BBC’s Justin Webb had supposed this mini-budget to be ‘confusingly as consequential as any budget including an actual budget – which it isn’t’.
If it had been an official budget, it would of course have been accompanied by an official forecast of its impacts from the government’s Office for Budget Responsibility. That would have been the last thing that the Prime Minister wanted.
Her new Chancellor Kwasi Kwarteng had rather pompously declared it was ‘a growth plan for a new era’. His blind optimism and lack of strategy have made the unthinkingly ebullient Boris Johnson look like the lovechild of Sun Tzu and Eeyore.
Whether the period of Ms. Truss’ premiership, however long or short, may eventually qualify to be described so grandly as an ‘era’, or merely as an error, a catastrophic break from the course of economic orthodoxy, currently remains somewhat unclear.
What seems rather clearer is that it will do little to help those who are hurting the most and a lot to advantage those who need its benefits the least. The Institute for Fiscal Studies has observed that half of those benefits will go to the top five percent of earners and that only those earning at least £155,000 stand to make a net gain from this whole sorry situation.
This fiscal plan’s rationale, such as it is, appears to be that, if you incentivize the super-rich to become even richer, then their enhanced affluence will trickle down to raise standards of living for all. The trouble is that you don’t need to encourage the wealthy to make more money and that trickledown theories don’t work.
The leader of the Labour Party dubbed it ‘casino economics gambling the mortgages and finances of every family in the country’. Labour’s Shadow Business Secretary condemned it as ‘a set of tax cuts supporting the wealthiest’ which failed to offer a ‘proper plan for growth’. The satirist Armando Iannucci called it ‘poisonous, cruel and stupid’.
But it wasn’t just those voices on the left of politics that expressed unease. Anxieties also quietly rumbled within the more prudent factions of the Conservative Party’s own ranks. Even the Director-General of the Confederation of British Industry responded that this fiscal announcement didn’t represent the broad-based plan needed to address the challenges facing UK businesses.
If it doesn’t spark the economic miracle that Liz Truss appears to be banking on, then her strategy will most likely spell disaster both for her government and for the vast majority of the people of the UK.
But what could possibly go wrong? We’re surely safe in the hands of these professionals. These are, after all, the same people who’ve been telling us for years that Brexit is going to be fine. As soon as everything else goes right.
This fiscal event has offered the most radical program of tax cuts seen in Britain in exactly fifty years. We may note that the Conservative budget of 1972, which many commentators have invoked in this context, led to soaring inflation and a major economic crisis that endured for the rest of the decade.
Former American Treasury Secretary Larry Summers has supposed that Britain is now ‘pursing the worst macroeconomic policies of any major country in a long time’.
The leader we once ridiculed as ‘Dim Lizzie’ is now promoting a get-rich-quick scheme that almost certainly is, as it looks, too good to be true. It’s a teenager’s dream of how economics should work, in a much simpler world.
It is the daydream of a gung-ho Prime Minister whose ambition has always far outstripped her capacity for intellectual reflection.
It is an act of reckless derring-do, a childish bid to outdo the last guy’s notorious bravado. It is showing off.
It will most probably fuel inflation and prompt further interest rate hikes. If it does so, then ordinary people will feel substantially worse off. This joyless joyride with the livelihoods of millions may even crash the whole economy.
The country’s best-known consumer affairs expert Martin Lewis described the Chancellor’s statement to parliament as ‘staggering’. He said he sincerely hoped it would succeed in turning around Britain’s economy but added that he was really worried about ‘what happens if it doesn’t’.
The entire nation shares that profound concern. It’s a concern to which the Prime Minister appears astonishingly oblivious. She may even be wondering what all the fuss is about.
Well, as they say, it’s the economy, stupid. With, it seems, when we look at this new administration, the emphasis is very much on the ‘stupid’.
Within a week of the fiscal event, the UK was in the grip of its worst economic crisis since the credit crunch. With financial markets in turmoil, even the International Monetary Fund saw fit to issue a public warning. The Bank of England was forced to spend £65 billion in an attempt to shore up the value of government bonds.
If your primary responsibility is to avoid crashing the economy, then it must be somewhat embarrassing when the first thing you do in a new job is to crash the economy. Yet, despite all this, Liz Truss continued last week to insist that her policies were putting Britain on ‘a better trajectory’.
Rumblings of discontent are already growing within her own party. Concerns have been voiced in relation to the new Prime Minister’s intellectual abilities and mental stability. It seems increasingly difficult to see how she and the country can get out of this.
Earlier today, the Chancellor announced that he would reverse his plan to abolish the top rate of income tax for the highest earners. His government had ignored the collapse of the currency and the bond markets, but the massive slump of their party's popularity in the polls had clearly proven too much. What is less clear is whether the Tories will be able to regain that squandered trust.