Tories trash economy

Sunak and Hunt: promises of spending cuts engraved in neoliberal economics (Photo: Simon Walker/No 10 Downing Street)

Prem Sikka says we need a radical break from neoliberalism

The last few weeks have seen unprecedented economic and political turmoil in the UK. After 12 years of austerity and stagnation, the Conservative government trumpeted a new economic policy, an extreme version of the failed trickle-down economics. It has been mauled by markets and rebuked by economists, international organisations such as the International Monetary Fund, US President Joe Biden, and even by Conservative MPs and former ministers, resulting in a spectacular retreat and abandonment of a mini-budget without a vote in parliament. This is followed by the appointment of a third prime minister in three months.

How did we get to this?

With disastrous government policies, the UK economy is in a perilous state. It is the only country amongst the G7 nations whose gross domestic product is still smaller than the pre-pandemic level. With the Retail Price Index at 12.3%, the annual rate of inflation is the highest for 40 years. At the official rate of 2.25%, the interest rate is at its highest for 14 years, pushing up the cost of personal, corporate and government debt. Taxes, as a proportion of the gross domestic product, are at their highest level for 70 years.

Since 2010, the Conservative government has imposed austerity policies, cutting real wages and running down public services to break the spirit of the working class and ready the public services for privatisation. Austerity has reduced the disposable income of the masses and weakened people’s ability to rejuvenate the economy. Out of a population of 68 million, some 21 million adults survive on an annual income of less than £12,570, the threshold for payment of income tax.

Anything that stood in the path of the Conservative ideology has been ruthlessly swept aside – parliament was illegally prorogued, Tory MPs who opposed Boris Johnson had their whip withdrawn, judges have been threatened, BBC neutered, Channel 4 threatened with privatisation, trade unions attacked, and noisy protests criminalised.

Despite the disaster of Brexit, economic and political failures, the Conservative government believed in its own hype of invincibility. On 6th September 2022, Liz Truss became the leader of the Conservative Party and replaced Boris Johnson as prime minister. During her leadership campaign she rejected redistribution of income and wealth. Instead, she espoused trickle-down economics, which has often been popularised as the “horse-and-sparrow” economic theory. At its heart is the belief that if you feed the already well-fed horses more oats, something will pass to the roadside to feed the sparrows, which will then magically lay some golden eggs and solve all our problems. Lacking any empirical evidence to back the theory, such economics have been thoroughly debunked.

The second pillar of Truss’s campaign was the Laffer curve, which, in a nutshell, argues that by reducing the headline tax rates for corporations and the rich, governments somehow unleash growth, which in turns increase tax yields. There is little empirical evidence to support such simplistic theories, but they are a good rallying point for right-wing Conservatives. Truss’s claims received little scrutiny from sycophantic media, and influential voices within the party had already been neutered.

The task of presenting the mini-budget, which the Government dubbed its growth plan, fell to Chancellor Kwasi Kwarteng, who went on to set his own record. Kwarteng’s tenure of 38 days, until 14th October 2022, was the second-shortest as a chancellor. Truss and Kwarteng had surrounded themselves with ultra-right-wing think-tanks such as the Institute of Economic Affairs and the Taxpayers’ Alliance.

The growth plan unveiled on 23rd September 2022 included reduction in the promised rate of corporation tax from 25% to 19%, abolition of the 45% band of income tax, a cut in the basic rate of income tax from 20% to 19% and reversal of the 1.25 percentage point hike in national insurance. On 24th September, the Daily Mail extolled the virtues of the budget with its headline “At Last! A True Tory Budget”, but the euphoria soon melted.

The £45bn-a-year tax cuts were to be funded entirely by borrowing. Rather unusually, the Bank of England had not been informed of the government policy, and it hiked the interest rate, which made money more expensive to borrow. The Office for Budget Responsibility (OBR) normally produces an independent analysis of the Budget, but it had been sidelined by the Government. So, the Budget was delivered without any analysis, and crucial organs of the Government had not been involved.

Markets were spooked. In May 2010, public debt stood at just over £1 trillion, and by August 2022, it had ballooned to £2,427.5bn, about 96% of GDP. The additional borrowing – not to invest, but to fund tax cuts – would have increased it even more. Standard & Poor’s and Fitch downgraded UK Government debt from ‘stable’ to ‘negative’.

In the absence of any OBR analysis or a coherent growth plan, the value of the pound plummeted to $1.03, the lowest ever. Some £300bn was wiped off the market value of stock and bond markets. The market price of government bonds declined sharply and the yields increased, i.e. the implied interest rates rose sharply. In early September, mortgages were available at interest rates of 2.25%, but now rose sharply to over 5%. In view of the market turmoil, lenders including HSBC, Santander, Post Office, Skipton Building Society and Virgin Money stopped making new mortgage offers and many already made were withdrawn. A house price crash loomed large.

The decline in gilt prices and related risk-management strategies affected pension funds. Many teetered on the verge of technical insolvency, and their collapse would have imperilled pensions of millions of workers. The Bank of England propped up the market through a £65bn gilt buying spree. The beleaguered prime minister and chancellor now abandoned the abolition of the 45% band of income tax and defended the rest of the uncosted plan, but to no avail.

Then, on 14th October, Chancellor Kwarteng was sacked for implementing Prime Minister Truss’s plan and policies. His Budget was not put to parliamentary vote. Jeremy Hunt became the fourth chancellor in four months. On 17th October, he shredded the Kwarteng Budget, abandoning cuts in corporation and income tax. Liz Truss resigned as prime minister on 20th October after just 45 days, and on 25th October former Chancellor Rishi Sunak became the third prime minister in three months. Chancellor Jeremy Hunt will present a new Budget on Thursday 17th November, and public spending cuts, deeply engraved in neoliberal economics, are being mooted.

The turmoil provides fertile ground for developing new economic policies, but there is little evidence of any new thinking across the political spectrum. Neoliberalism seems to be the only game in town. In the absence of a general election, possibly until 2024, the UK economy is set to drift. There is unlikely to be any economic renaissance. Despite 12 years of low inflation, interest rates and corporate taxes, the UK invested around 16.9% of its GDP in productive assets, the third lowest in the EU investment league. A major reason is that the masses lack good purchasing power to buy goods and services as income and wealth are concentrated in relatively few hands.

The wealthiest 10% of households have 43% of all wealth, and the bottom 50% has only 9%. 42% of the household disposable income goes to the top 20% of the population, and the lowest 20% have only 7%. Redistribution is not on the agenda of any major political party. Workers are fighting back for higher wages, with industrial action on the railways, ports, local councils, hospitals, mail and elsewhere. There may be some gains, but they are unlikely to be sufficient to fuel a consumer-led economic recovery.

The state is the key to economic reconstruction. Historically, private capital has shown little appetite for investing in new or high-risk industries. The state invested in biotechnology, information technology, aerospace, and rebuilt the railways, buses, gas, electricity, water, shipbuilding, steel, mining, engineering and other industries. This resulted in well-paid skilled and semi-skilled jobs. The most prosperous period in the post-Second World war economy coincided with active state involvement in the economy, but that is now positively discouraged by the neoliberal hegemony. Instead of being a creative force, the state has become a guarantor of corporate profits, as demonstrated by the Private Finance Initiative, outsourcing and privatisations.

Change will have to come from the grassroots. The crisis delivered by neoliberal economics has created space for workers, trade unions and civil society to provide leadership and rethink the possibilities of a new economics and emancipatory change. Without that, the UK is likely to remain a low-investment and low-wage economy for the foreseeable future.

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