Britain is in financial turmoil. Over the past week, the pound has crashed and rallied, as has the bond market. Pension funds, at one point, appeared to be on the verge of collapse, prompting an emergency intervention from the Bank of England.
This all follows last week’s now world-famous mini-budget unveiled by Prime Minister Liz Truss and Chancellor Kwasi Kwarteng. While there is no doubt that this inconsistent budget acted as a trigger, it is not the underlying cause of Britain’s woes. It simply exposed the underlying fragilities of the UK economy.
Financial turmoil was always going to erupt at some point, somewhere, especially since central banks around the world began to shift from monetary easing to tightening. For more than a decade now, central banks have turned to ultra-loose monetary policies — ranging from sweeping quantitative easing measures to keeping interest rates near zero — to prop up their struggling economies. This spawned a number of asset bubbles and encouraged the public and private sectors to take on ever more debt. Until this week, this debt had supported a zombie economy – an economy both dependent on debt and crippled by it. This situation could never have lasted indefinitely, without some form of upheaval, big or small.
For now, it is too early to tell whether this week’s financial instabilities could worsen, whether in Britain or even further afield. It is also too early to tell whether further interest rate hikes by the Bank of England, which are now widely expected, could cause debt-dependent businesses to collapse. This would, of course, have wider consequences for jobs, incomes and living standards.
The fragility of the UK financial system goes hand in hand with underlying weaknesses in the UK economy. Productivity has been allowed to stagnate for far too long, after decades of insufficient business investment in technology and innovation. Indeed, loose monetary policy and corporate leverage may have masked the effects of this stagnation, but it was never going to work forever. And while economic sclerosis is certainly not unique to Britain, Britain is at the weaker and more crisis-prone end of advanced industrial nations.
Ironically, Kwarteng’s budget was presented as the solution to precisely these problems. While the title’s emphasis on stimulating economic growth was welcomed, the measures announced fall far short of anything that could actually lead to sustained productivity growth.
For all the hyperbole of its supporters and critics, the package presented was without substance. And its focus on tax cuts and fiscal stimulus has been largely counterproductive. Far from delivering the “drastic policy pause” that had been heralded to promote investment in new businesses and new sectors, it was a continuation of the kind of measures that have long been used to support businesses existing and unproductive, by the chancellors of both of the evenings.
Despite what Kwarteng tried to argue, this budget was primarily about stimulating demand and consumption, not “supply-side” structural reform or change. The government expected him to come up with a substantial change in policy and even some new thinking. He obviously failed to do so.
It seems that Kwarteng was more concerned with making token tax cuts than offering serious measures that would increase growth. Some measures may be clarified in the coming weeks, as Kwarteng suggested, but they were missing from this budget.
Tax cuts – the flagship policy of the mini-budget – are a no-start. Tax cuts simply cannot overcome structural impediments to increased business investment. Bringing national insurance contributions and corporation tax back to about where they were at the start of this year – plus some relatively minor income tax changes – won’t even boost growth in the short term. term, let alone sustainable productivity growth. It is perhaps not surprising that financial institutions, ordinary citizens and even some Conservative MPs were confused or even alarmed by the budget.
Assuming Truss and Kwarteng are serious about reviving productivity growth, what could they do differently? The first thing they need to do is bring ordinary people into the economic discussion. There is no easy or painless solution to Britain’s current economic malaise. A serious and responsible government would start a national conversation both on the underlying causes of Britain’s economic stagnation – in terms of fiscal, monetary and regulatory policies – and on potential solutions. Most politicians may be reluctant to do this when so many of their own politicians are involved. But given Truss’s many promises to break with past economic orthodoxy, an opportunity has been missed here.
Britain’s economic problems are enormous. We cannot simply rely on emergency government interventions to stabilize markets and provide relief to struggling households. We need a fundamental reform of the British economy, and to achieve that, we will need to engage as many people as possible in this conversation.
Phil Mullanit is Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Emerald or Amazon (UK).