Rishi Sunak said it was a fairy tale economy. It was one thing he was right | will huton


Britain is on the verge of a financial crisis. On Friday, Prime Minister Liz Truss and Chancellor Kwasi Kwarteng, comically displaying false claims about their tenacity, voted for the softest of economic options.

In a “mini-budget” – an obvious misnomer to avoid presenting the elementary fiscal arithmetic required by law for a proper budget – they purported to reduce the financial claims of the state while launching unprecedented additional public borrowing. of £411 billion over the next five years. “growth plan”. Never in British public life has the gap between rhetoric and reality been so wide.

Had the borrowing been targeted at increasing public investment and improving Britain’s stressed public services, it would have been much more justifiable, particularly to counter a coming recession. Although even then, the scale and lack of a plan to deal with such a mountain of new debt would have risked being condemned by the financial markets. As things stand, markets, eyeing an unwarranted record £45billion in tax cuts disproportionately and preposterously given to the wealthy in the south for no good reason, have been offered a one-sided bet that they seized.

The pound plunged 3% against the dollar in a few hours – it has devalued 17.5% this year. Equally worrying and with no less profound implications, the price of 10-year government bonds fell 5%, to complete a near-record one-week drop of 11%. Public debt markets are terrified of the prospect of relentless flows of government bonds in an economy characterized by double-digit inflation and a currency plagued by a huge structural balance of payments deficit.

In such circumstances, you had better carefully design any economic stimulus so that it is credible, otherwise the whole exercise becomes counterproductive. But not for Truss and Kwarteng, who, by sacrificing that credibility, are mortally wounded politicians barely two weeks into office.

Kwarteng’s recklessness caused interest rates on benchmark 10-year government bonds to double to nearly 4% in less than two months, as markets expect the rate the Bank of England’s base rate will reach 5% next year. No UK budget has recently received such a devastating negative verdict. The cost of servicing public debt may skyrocket, but this has implications beyond public finances: as bond yields rise, target rates of return on corporate investments also rise, reducing any desired boost in investment intentions. Likewise, with mortgage rates expected to hit 7% in 2023, the real estate market is set for a sharp contraction, with up to a third of fixed rate mortgages reabsorbing. Two engines of growth are thus solidly boosted.

Yes, demand levels are rising, fueled by additional government debt, so the coming recession will be shallower than it otherwise would have been; and the £60bn energy package will shield consumers and businesses from Vladimir Putin’s gas shock, reducing peak inflation by up to 5%. But, like the larger “growth plan,” the energy package is singularly poorly designed and unsustainable. It is not targeted at the most needy and no attempt has been made to tax energy companies more to provide part of the funding. Fairness and acceptance of arguments in favor of taxation and financial sustainability are not part of this government’s lexicon.

Why? First, the Cabal Truss sincerely believes in libertarianism – that the intrusive and coercive state necessarily chains what is nebulously called “wealth generation,” which is driven solely by individualistic entrepreneurship – framing a childish understanding of economics. and business around him. In their view, “trickle down” economics works, especially if complemented by “supply-side” reforms – code to lower standards. Second, six years after the referendum, Brexit is inextricably linked in the popular mind to stagnation, freezing household incomes and lies.

Restoring growth to 2.5%, based on an EU-independent economic model, is crucial to salvaging Brexit’s reputation – and any chance of winning the 2024 parliamentary election. Hence the bet.

But who thinks restoring National Insurance rates to 2021 levels and reversing the planned corporate tax hike will unleash more growth? Despite the overconfident claims of Truss and Kwarteng, there is not a shred of evidence that tax cuts “spill over” to economic dynamism, extra effort, or entrepreneurship. Rather, growth comes from the application of inventiveness, through the efforts of thousands of companies and millions of people using the gifts the gods have given them, to make the world a better place – and from which profits flow. Economic growth, as I state in one of 18 essays, The change we need Monday, is the product of complex economic and social organizations bringing these impulses together around a common goal. These are the purposeful companies that bind their stakeholders together in a common cause and drive growth.

Britain has too few. “Supply-side reforms” that focus on further deregulation of an already highly deregulated economy are out of place – the focus should be on reforming the way companies are owned, run and governed . Only then will other crucial ingredients for growth – increased public investment, boosted R&D and full access to our biggest market, the EU, via reintegration into the customs union and the market unique – will catch fire.

No economy has grown without increased investment and trade: trade-stifling Brexit is a chain and chain. Imagining that 38 new regulatory-light “investment zones” will alter these immutable laws is for the birds. As it stands, they won’t create a single big new business, but simply displace economic activity.

Coming out of an era of ultra-low interest rates was always going to be economically dangerous: Putin and Kwarteng combined to make the hike bigger and more traumatic. As the financial crisis deepens, former US Treasury Secretary Larry Summers predicts a fall in the pound sterling below parity to the dollar and stagflation takes root, the condemnation of Rishi Sunak as a fairy tale economy fairies will seem prescient and will deepen the venomous ruptures that divide the political world so much. right.

Meanwhile, Keir Starmer is set to redefine Labor in his speech to the party conference this week as One Nation Labour, committed to fiscal credibility, fairness, trade and growth, built on reshaped capitalism – all abandoned by Truss and Kwarteng.

According to the Resolution Foundation, 3 million more people will live in absolute poverty in the UK in the two years until the start of 2024. The Tories have lost confidence in the financial markets. They deserve to lose the trust of the people.

Will Hutton is an Observer columnist


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