Where did Liz Truss and Kwasi Kwarteng go wrong?
Liz Truss has just resigned. It all started to go wrong for her with the ‘mini-budget’.
It’s the neoliberal way
When Liz Truss and Kwasi Kwarteng came into office, they did what every government that is dependent on the rich for donations to get into power does. As economist professor Richard Wolf explains, they:
- cut taxes for their rich friends — lowered corporate tax and did away with the top income tax bracket
- gave something to the poor — in this case help with energy costs — in the hope that they would not notice how unfair the budget was
- sought to borrow the shortfall left by the resultant decrease in revenue and increase in spending
Although this is the neoliberal modus operandi, since Maggie Thatcher bust the unions with the miner’s strike and Ronald Reagan with the PATCO strike, left wing parties (e.g. New Labour) have had to depend on donations from the rich too, at least until the internet grew and Senator Bernie Sanders showed it was possible to get considerable funds from many small donations online.
Their sums did not add up
Normally, at least some of the rich who received tax cuts would take the money they saved and invest it in the government and get paid interest for it.
However, Truss and Kwarteng did not provide details as to how their budget would add up, and seemed to actively avoid having the Office for Budget Responsibility (OBR) do it for them. And Britain, like everyone else, was badly affected by the war in Ukraine and other international factors (supply chain problems, for example). In addition, many of its businesses were adversely impacted by Brexit. So would-be investors either took their money elsewhere, or demanded higher interest to match their increased risk.
Truss and Kwarteng had failed to convince anyone but true Tory believers that their plan was sound. So suddenly their plans looked a lot more costly and the market reacted accordingly, leading to higher interest rates for mortgages (many mortgage products and offers were withdrawn so that sales fell through and many mortgage holders faced rate increases either immediately or when their fixed rate terms came to an end). In one of the twists of our crazy economic system, it also threatened pension funds and the Bank of England had to intervene to save them, which complicated matters.
You’d think a Chartered Management Accountant like Liz Truss and an economic historian like Kwasi Kwarteng would know better, but sometimes ideology trumps all. Clearly these two will never be trusted to run the country again and the neoliberal think tanks will line up others to take their place. Whether they will be rewarded for trying or punished for failing, only time will tell.
But for now, before the Tories can try their strategy again, they have to balance the books much better and restore Britain’s credit rating. So much as it pains them, they have had to reverse many of their tax cuts and are trying to prepare the people for more austerity.
The people may not take it this time. For example, the NHS of which we are so proud has been brought to its knees by the pandemic and by a number of Tory policies:
- a shortfall of investment over the past 12 years of Tory rule
- a skimming off of funds by partial privatisation
- wasteful giving of COVID contracts to cronies, with eyewatering sums being written off
- the fall in real wages for staff
- the loss of many staff due to Brexit
- the loss of many senior doctors due to a pension snafu that means they lose a lot by carrying on, which the Tories have not fixed
It is also facing eyewatering increased energy costs.
The people know that the NHS were working their butts off and risking their lives to COVID when the Tories were partying, profiting, risking spreading COVID and generally taking the piss.
Also, many other groups of workers have seen their own wages fall in real terms as the cost of living skyrocketed, while the rich were getting their tax cuts, and are very angry and are already striking. Increased austerity will only send more of them past the tipping point. Even nurses are considering striking for the first time.
The Tories have even had to rethink reducing immigration, a key platform of Brexit, with Truss suggesting she’d like more immigration for high skilled jobs — the complete opposite of former home secretary Suella Braverman’s policy of reducing immigration and of the stated purpose of Brexit.
Normally, as soon as neoliberals got out of office, they scream about the deficit (which they had grown) so much that the left wing party that succeeded them would feel obliged to cut spending rather restore it (the Two Santa Clause theory), which would defeat their purpose, break their promises and tank their popularity. Because if the debt burden is too high, you can’t afford to service it and keep a country running at the same time. But this time it is Jeremy Hunt, a Tory, who is having to bite the bullet, which will be interesting to watch.
Whether any neoliberal will learn from this that their ideology does not work, that cutting taxes while increasing spending is a scam that has to be paid for, I doubt, despite their massive u turn for the present. I suspect that once they have improved Britain’s credit rating, if they do — austerity does not make for growth — or Labour does, they will want to try again, so be warned, and hope that the people do not forget this lesson.
The lesson?
The lessons to be drawn from all this are:
- neoliberalism is a scam which has to be kept going with borrowing, like spinning saucers on poles are kept going by repeated boosts
- budgets have to come with full plan details, or the markets won’t buy them
- you need to give enough to the people, and do enough PR, that the people don’t feel the budget is grossly unfair
And it is not only conservatives who will try this, even though the opposition may include many whose priority is the people, so beware all politicians who say they can cut AND spend.