A triumph of ideology over economic knowledge

by Sean Rickard

It is a fact of life that politicians will always seek to blame external events for their failures, sometimes with justification.   I had thought that we had reached the depths of this modus operandi in Mr Johnson’s resignation speech but his successor has proved me wrong.   The adverse reaction of financial markets to the breathtakingly incompetent ‘dash for growth’ mini-budget presented to cheering Tory MPs by the newly installed Chancellor is, according to Ms Truss – when she surfaced 6 days into the furore – just a coincidence, the blame lies with Putin.   The reality is that the crisis erupted because the ‘budget’ went beyond energy subsidies to include the biggest package of tax cuts in 50 years and Mr Kwarteng’s refusal to include an OBR’s draft report which was available.   The report undoubtedly said – in appropriate language – that his public finance figures were pure fantasy.    

Mr Kwarteng’s attempt to bamboozle the financial markets and electors failed spectacularly within hours.   Not that our arrogant Chancellor was in any mood to acknowledge his mistake; he vowed to double down on his tax-cutting despite the highly respected Institute for Fiscal Studies projection that his ‘budget’ would increase public borrowing by £379bn over the next five years.   This was a one-way bet for the financial markets; neatly summed-up by hedge fund manager Crispin Odey – Kwarteng’s ex-boss and private dinner companion – whose widely reported bets in response he described as ‘the gifts that keep on giving.’   In the six days following the ‘budget’ the pound fell 6 per cent against the dollar – delivering a cumulative fall of 21 per cent since the start of the year and thereby further upward pressure on inflation.   A more immediate threat was the dramatic collapse of confidence causing a sharp rise in bond yields and forcing the Bank to inject £65bn to stabilise the markets.   The rise in borrowing costs translated into disruption for the real economy when 40 per cent of mortgage products were abruptly withdrawn and the Bank’s chief economist gave a clear hint that interest rates would rise sharply in coming months.   What the Chancellor, if not Ms Truss should have known – surely such advice was offered – was that the ‘budget,’ in going beyond what independent economists and the OBR judged sustainable, would in generating these outcomes prove self-defeating.  

So how did we arrive at this debacle?   The straight answer is that the ‘budget’ in reflecting our new PM’s declared growth policy amounted to the triumph of ideology over economic knowledge, or has she calls it, ‘Treasury orthodoxy.   The mantra that an unorthodox ‘budget’ was necessary to stimulate growth is no substitute for reasoned analysis.   The ‘trickle down’ philosophy on which it is based is long discredited – borrowing to finance tax cuts for the rich is not the source of sustained economic growth.   Worse, it compromised the credibility of the Bank by compelling it to pump liquidity into the financial system to avoid collapse while proclaiming its intention to raise interest rates to counter inflation i.e. reduce liquidity.   The idea that an implausible ‘budget’ would stimulate sustainable growth is not only erroneous but also its effect has been to further weaken the UK’s post Brexit anaemic growth rate.   Ms Truss and her government of zealots have learnt nothing from the Brexit catastrophe – itself a triumph of ideology over economic knowledge. 

The ‘budget’ is only the latest incarnation of Brexit zealotry and its willingness to deny reality.   But six years after the referendum the costs of Brexit – stagnation and zero income growth – are becoming manifest causing increasingly desperate zealots to resort to heterodox economics in the vain search for benefits.   The Party of Brexiters knows it is going to be punished heavily by the voters they wilfully misled if the UK cannot achieve the growth rate of 2.5 per cent it typically achieved within the EU.   But their efforts are doomed to failure.   Not only do we have the evidence of previous ‘dashes for growth’ e.g. the 1971 ‘Barber Boom’ but also Brexit has ensured slower economic growth.    

Investment is critical to economic growth as are appropriate skills and unfettered trade relations.   EU membership and in particular membership of the single market helped deliver these elements.   Multinational investors looked favourably on the British economy attracted by the ability to export freely to Europe and migrants brought enhanced skills and enterprise.   But since the referendum: inward investment has fallen 23 per cent – 27 per cent if we ignore foreign acquisitions facilitated by the weak currency; exports of goods and services to the EU have fallen by 10 per cent; while skill and labour shortages abound.   The result has little if any productivity growth since 1917.   Against this background talk of returning to respectable growth is fantasy and outside the EU the only forlorn option for the zealots is a libertarian revolution.   That is, tax cuts to be paid for by a return to austerity with dire consequences for real spending on schools, hospitals and benefits.  

After 10 years of austerity and the Resolution Foundation’s estimate that another 3mn people will be living in absolute poverty by 2024, Trussian economics will engender social and political revulsion.    This is Labour’s chance; voters will not again fall for the pauperising policies of Brexiters.   Last week Labour revealed the outlines of an industrial partnership between government and business to build a more successful and fairer society economy.   But Labour cannot escape the costs of Brexit.   Success will require unfettered access to the single market including a restoration of alignment with EU rules and regulations alongside readmittance of our universities to the Horizon and Erasmus programmes.   Mr Starmer may studiously avoid the B word but only by reversing Brexit is there any prospect of the exports and investment rising to levels necessary to drive economic growth to pre-Brexit levels.   With a 17-point opinion poll lead and a government festering on it Brexit contradictions it is time for Labour to start the conversation.