September 2022

By Michael Burke

The ‘mini-Budget’ delivered by Kwarteng and Truss was so devastatingly bad for the British economy and for the key finacial markets that one major international bank ended the day calling for an emergency interest rate rise by the Bank of England!

Of course, this would do nothing to alleviate the economic crisis that underlies this slump, and may be just special pleading by financial speculators. But it is an indicator how far removed this government is from economic reality.

As such they will completely fail to deliver on their stated aim of lifting the long-term growth rate of the economy from abysmally low levels. Instead, they are engaged in fantasy Thatcherism, an effort to Americanise the British economy with a policy of hammering workers and the poor, susbsidising big business and the rich. The are likely do enormous damage before failing.

Numerous commentators have pointed how regressive the government’s measures are, in redistributing upwards for high earners and for owners of capital.   This is how the Resolution Foundation explained this reactionary redistribution, shown in Chart 1, saying, “Almost half of the gains from tax cuts next year go to the richest 5% of households. The poorest half get an average of £230 vs £3,090 for richest fifth.” Overall, taking into account all changes to tax and National Insurance, “only those earning over £155,000 will be better off.”

This is just 1.4% of all taxpayers. This is economics of and for the 1%.

Chart 1.

Source: Resolution Foundation

At the same time, there is an enormous tax giveaway for businesses, amounting to tax cuts of just under £70bn in taxes on profits over the next 5 years.

All of these measures are being enacted when the mass of the population is struggling with the deepest crisis of living standards in living memory. The message to workers and the poor, ‘Go to hell!’

A balance of payments crisis

This wilful disregard of the objective reality is not confined to the issue of the impact on households and the cost of living crisis. The mini-Budget simply failed to take account of the key problems of the British economy, which is why the response of financial markets was panic, rather than horror from the population.

Britain has a long and unhappy history of ‘balance of payments crises’. These reflect the British economy’s chronic lack of Investment, leading to both weak productivity growth and lack of competitiveness.

The catalyst for these long-term trends to turning into an outright crisis of a falling currency and rising interest rates on government (and other debt) has frequently been tax cutting Budgets. These only served to suck in imports further, weaken the pound and make government debt unattractive to overseas investors without offering much higher interest rates. This is what happened in both the Barber and Lawson Booms.

We can now add the name Kwarteng to this rogues’ gallery of Tory Chancellors. However, a key difference with his predecessors is that the current Chancellor implemented the enormous giveaways to business and the rich when there was already an old-fashioned balance of payments crisis under way.

This is how SEB characterised the comparison on Twitter.

The basis for the British economy’s repeated balance of payments crises has the same sources as its weak growth, weak productivity and low wages. This is its chronically weak levels of Investment.

There is too the specific factor of Brexit. But it is not simply a case that Brexit has made it harder to export goods to the EU. It is worse than that, as shown in Table 1.

Table 1. UK Trade Balance in Goods with the EU and non-EU Countries, £bn

	EU	Non-EU
Q1 2022	-30.2	-31.0
Q1 2021	-16.9	-12.7
Q1 2017	-24.2	-11.2

Source: ONS

The overall deterioration in the trade performance in goods certainly accounts for more than the overall widening of the current account deficit. The trade deficit has widened significantly. And the UK trade balance with the EU between the 1^st quarter of 2017 and the same quarter in 2022 has certainly deteriorated, as shown in Table 1.

However, the widening of the trade gap is more pronounced outside the EU. In addition, UK exports to the EU are slightly higher than they were at the beginning of 2022 than in the same period in 2017, £42 billion versus £39 billion.

But trade is not simply about one country selling a food to another. There are incredibly complex cross-border supply chains that operate particularly in advanced manufacturing. The British economy has been a major importer of these semi-finished goods, as well as a major re-exporter (in European terms) of either finished goods or semi-finished ones, with some value added. There has been a surge in imports of these semi-manufactures from outside the EU without any corresponding rise in exports to the same countries. In effect, it appears as if Brexit has cut out Britain from existing supply chains in Europe, and companies based in this country will have had to replace them with more expensive and/or inferior products.

Naturally, this sharp adjustment in Britain’s place in global supply chains will further depress Business Investment. While virtually all major capitalist economies have experienced a pronounced decline in levels of Investment over decades, the downturn in British Investment has been even greater. This has been a chronic malaise, now made acute ever since the outcome of the referendum in 2016.

Chart 2. Investment (Gross Fixed Capital Formation)as a % of GDP in the EU, US and UK since 1970.

Source: World Bank

Why have they done it?

Clearly this government is not primarily concerned with courting popularity, unlike Johnson, Cameron or even Thatcher who lied about their intentions. Nor have they taken much account of the likely response in financial markets, where a falling pound will add to inflation and rising interest rates will deepen the downturn.

As a result, in deepening the structural failings of the British economy they have created additional problems for themselves politically. So, why do it?

The economic policy is not irrational if the scale and character of the British economic crisis is grasped.  A key aspect of this is shown in Chart 3 below.

Chart 3. UK Net Capital Stock and its Components 1996 to 2020.

The net capital stock is the product of Investment in the economy once depreciation and dilapidation are taken into account. It is the means of production.  Prior to the Global Financial Crisis in 2007 to 2008 the average annual growth rate for the net capital stock had settled at around 2.4%. In the business cycle since, which is probably ending now, the growth rate of the net capital stock has halved to 1.2%.

It is not coincidental that the net capital stock in both instances is closely related to the real growth rate of the economy over the business cycle, as net investment is the primary determinant of growth.

As we know, Investment has since fallen, led by Business Investment which was 12% lower in 2021 than in 2019. This comes close to an absolute crisis for the British economy and especially for its business sector.

The ‘mini-Budget’ shows that the health of the business sector is clearly the most important priority for this government. The Truss/Kwarteng government differs from its predecessors by stripping way any pretence otherwise.  For any government an Investment strike by its business sector would be a matter of grave concern. For this government it is a catastrophe.

Their agenda is to boost the returns to private capital by cutting taxes, cutting wages, deregulation, outsourcing and privatisation.  The problem is that this Thatcherite solution does not work. It did not work under Thatcher and will not work by repeating it in much worse conditions.

As Chart 4 below shows, Thatcher’s policies benefitted from enormous N Sea oil revenues almost from the moment she entered Number 10 Downing, peaking at 3.4% of GDP in 1984-85.

Chart 4. North Sea Oil Revenues

Source: OBR

This was an enormous windfall. But the policy response was tax cuts and privatisation, even including the main company benefitting directly from the oil bonanza, BP! These tax cuts eventually led to an unsustainable boom (the ‘Lawson boom’) which ended with a crash. But the dominant trends of the Thatcher period were economic slump and mass unemployment. The official unemployment total stayed close to 3 million people for 6 years.

The weakness of the economy is highlighted in the chart below.

Chart 5. UK Real GDP Growth Under Thatcher, excluding North Sea Oil revenues, % change

Source: OBR, ONS data, author’s calculation

Excluding the surge in N Sea oil revenues the economy grew by just 12% over the entire period, making it the weakest period of growth of this length over the entire era since the end of World War II. There was also no net asset creation, as there has been with Norway’s Sovereign Wealth Fund. The revenues were simply frittered away in tax cuts.

These are the policies now being emulated by this government. And it should be stressed that their own, self-made inheritance is far worse on all key economic indicators than Thatcher operated under in 1979.

This government has taken the view that it is impossible to disguise the scale of the attacks that are coming, even with the help of the British media, so they are not going to try.

Instead, they have staked out ground that claims they have the answers to the economic crisis. They will then dare other social forces, most notably the unions, and the opposition, to formulate an alternative. That is the next major challenge.

Book review: ‘Thatcher’s Trial, Six Months That Defined A Leader’, by Kwasi Kwarteng, 2015

The article below was originally published here on The Rising Tide blog.

An emergency budget is due on September 23. The new government led by Liz Truss has started as it means to go on. It will borrow £150bn to give to the already engorged energy companies. Meanwhile, the people will pick up the tab.  

Under the premiership of Johnson and now Truss, their critics have given far too much weight to issues of competence and style. The issue is not competence or even intelligence but policy. 

The class war content of the policies enacted and proposed has been grotesquely downplayed. Or even worse, in the case of Johnson often misrepresented as defying traditional Tory policies of low public spending rather than the reality of unprecedented levels of public expenditure being used to enrich big business and the wealthiest in our society.

Thatcher

The new Chancellor, Kwasi Kwarteng, will be centre stage when he delivers his first budget. His 2015 book, ‘Thatcher’s Trial, Six Months That Defined A Leader’, provides many clues to understanding his politics, and how they will shape his economic policies. The book focuses on the six months from March 1981 budget to Thatcher’s September 14 cabinet reshuffle.

The events Kwarteng selects in the book find an echo today. The new prime minister making her mark; a controversial budget dominated by inflation and a crisis in Ireland. On the other hand, others like the Thatcher purge of the so-called wets in the Tory party has already been done by Johnson, or in the case of the 1981 right-wing SDP split in the Labour Party, has taken the form of a defeat of the left within the party. The other events Kwarteng looks at, like the social rebellions, are probably just around the corner.

The book is more narrative than analysis. But it has a distinct theme: Thatcher as a leader defying the odds and conventional wisdom in a crusade of national renewal. In short, the book is a celebration of right-wing voluntarism.

Kwarteng provides no evidence for national economic success under Thatcher because none exists. But as with Johnson and Truss, the talk of national renewal and unprecedented economic growth is just fodder for the newspapers, the BBC and election-time propaganda.

Monetarism

This week, the Chancellor will echo the PM when he speaks about the importance of growth. Kwarteng and Truss will put forward policies for the few, not the many. They will justify their redistribution of wealth to the rich by claiming that everyone benefits from the bigger national economic cake they say will follow, rather than focus in their view on redistributing more fairly, an increasingly small one.

With no sense of irony, they will decry the economic failure of previous governments, including the Tory ones. They may even imitate Thatcher, who criticised previous Tory leaders like Macmillan and Heath as quasi-socialists for their ‘acceptance’ of the post-war social contract and the welfare state. 

They will offer the well past its sell-by-date reheated fare of monetarism as a way to increase economic growth. Unlike Thatcher, who had the Nobel Prize-winning Milton Friedman to add some intellectual gloss to the economics of warfare against the working-class and oppressed, Truss and Kwarteng will be relying on the downmarket versions in the form of the Adam Smith Institute and the TaxPayers’ Alliance who now occupy senior advisory posts to the government.

Chancellor Kwarteng’s mantra will be the same as Thatcher’s. As he puts it, ‘For her, ‘the way to achieve recovery was to ensure that a smaller proportion of the nation’s income went to the government, freeing resources for the private sector where the majority of people worked’.

State investment

But this mantra, as the Socialist Economic Bulletin  SEB  explained, “is a misreading, as the far higher growth rate in the US and to a lesser extent the UK was in the pre-war and war period itself. The exceptionally strong growth was caused by the state taking control of investment and directing very large increases, in order to wage war. The subsequent ‘Golden Age’ was the gradual deceleration of this war boom.”

Chart 1 SEB

The 1970s

The collapse of the post-war boom in the early seventies brought a combination of a political, economic and social crisis. The question was, as it remains today, in the interests of which class was a solution to be devised. 

Edward Heath, [Conservative PM 1970-74], tried and failed to implement his ‘Selsdon Man’ policies of free market competition and attacks on the rights of trade unions. Instead, a united labour movement led by the NUM defeated him.

Heath did try to make the working class pay to resolve the economic crisis with his version of an irreversible shift in power and wealth from labour to capital. But as Heath explained, this was not enough to increase investment and, with it, growth.

In 1973 he complained to the Institute of Directors, ‘The curse of British industry is that it has never anticipated demand. When we came in we were told there weren’t sufficient inducements to invest. So we provided the inducements. Then we were told people were scared of balance of payments difficulties leading to stop-go. So we floated the pound. Then we were told of fears of inflation and now we’re dealing with that. And still you aren’t investing enough’.

Thatcher rose to power in the Tory party on the back of Heath’s two electoral defeats in 1974. Like Heath, she was also committed to growth.

Her strategy – embraced by Truss and Kwarteng – is highlighted by the new Chancellor in a reference he makes to an anonymous journalist writing in the Economist: ‘the government was elected in 1979 above all else to roll back the frontiers of the public sector, to leave resources free for private-sector expansion. The key to this strategy lay in reducing public spending and borrowing, to bring down taxes and interest rates.’ Critical to this was defeating the organised labour movement by set-piece confrontations backed by anti-trade union laws designed to make strikes as ineffectual as possible.

Powellism  

In his book ’From Labourism to Thatcherism’, Colin Leys also highlighted another strategy proposed inside the Conservative Party by Enoch Powell. A strategy implemented by Boris Johnson, to be continued by Truss and Kwarteng. “The later sixties saw ‘a more fundamental right-wing movement than Heath’s ‘competition policy’ gaining ground inside the Conservative Party. Enoch Powell, shadow minister for health, shared his enthusiasm for the market for cutting back the state, but went much farther in calling for denationalisation, an end to state intervention in industrial disputes and strict control of the money supply to control inflation. He also combined this with a nationalist campaign against entry into the EEC and a racist campaign against immigrants.”  

Powell’s strategy was carried out by Johnson. Truss will take Powell’s strategy many steps further. That will not be about her character or competence but her design and purpose. It will be about the times and the demands of the capitalist class she is the political leader for the moment. Already, there is talk in the papers that the government is reviewing regulations on the 48-hour week and holiday pay. That is just the beginning. On her watch, the vicious racism will accelerate. The Tory press is already crowing that Truss will stop all attempts by those fleeing war to cross the English Channel. 

In short, each attempt by the Tories since 1970 to reverse Britain’s economic decline has become more extreme.  

Tory austerity

Twelve years of Tory austerity, an unprecedented wage fall, and a surge in the wealth of the 1% have failed to foster growth. The critical element to growth, investment, has not been revived. On the contrary, Britain faces an investment strike by capital as workers have not been squeezed enough to restore the level of profits it demands before investing. 

The economics espoused by Truss and Kwarteng is like the bloodletters approach that hastened Charles II’s demise – a decline in the patient’s condition has not led to alternative remedies being pursued. The answer – then and now – is that the bloodletting did not go far enough.

Brexit and Covid

Brexit was both an application of and a facilitator for the new Powellism of Johnson and Truss. Covid has set the template for transferring vast amounts of public money to private corporations. As a result, the NHS continues to be deliberately undermined, and the take-up of private health treatment is surging, often with reluctant patients. Conservative think tanks openly talk about using inflation to reduce the real level of public spending and wipe out some areas of state provision altogether. 

Slash and burn  

Truss may not have much time as PM, but we should not assume she won’t use it to great effect. Her policy will be one of slash and burn. She will try to Americanise as much as she can of not only the British economy but also British politics. The latter will see a ramping up of racism, bigotry and attacks on women’s rights. She will hope that an incoming Labour government will be reluctant to undo her ‘achievements’, particularly on privatisation and attacks on trade union rights. She will also hope that Keir Starmer will be what Tony Blair was to Thatcher, her ‘greatest achievement’.

The labour movement  

Truss and Kwarteng have signalled their desire to achieve 2.5% GDP growth in the British economy in advance of the budget. Anything approaching that growth rate can only be achieved in one of two ways – by a massive increase in public investment as proposed by Jeremy Corbyn and John McDonnell i.e.  Corbynomics, or by unleashing an even more vicious attack on the working class share of the economy. The latter would cause much more devastation than the austerity assault suffered since 2010.

It would be of great benefit for our side in the class struggle to emulate Kwarteng, the political historian, in one way – learn from the 1970s. A united labour movement brought down a Tory government in 1974 and replaced it with a Labour one. It can do so again. But a Labour Party that repeats the failures of the Wilson and Callaghan governments will lead to an even bigger disaster for the working class and the oppressed than in 1979.

‘Thatcher’s Trial, Six Months That Defined A Leader” by Kwasi Kwarteng, 2015

By Michael Burke

There are widespread hopes that the surge in prices may be coming to a halt. Yet there is little evidence to support them. There is very little to suggest the main driving forces of global inflation are receding. This can be shown factually in a few graphics.

The main causes of inflation have nothing to do with the war in Ukraine. The chart below shows an index of globally traded commodities. It is clear that the surge in prices began in April 2020, while the current military conflict in Ukraine began on February 24 this year.

Chart 1. CRB Commodities’ Index, last 5 year

Source: Bloomberg

SEB has previously argued that the impulse for the inflationary wave was provided by an extraordinarily reckless US economic policy. This combined an unprecedented growth in money supply with an equally unprecedented rise in US government Consumption. This was also timed for the synchronised exit from lockdown that was taking place in early 2020 in the main Western economies.  It also came after a prolonged period of low or falling Investment in those same economies.

This was almost a textbook case of causing inflation by printing money and stimulating Consumption without anything remotely like a corresponding rise in Investment. As in the textbooks, this led to inflation.

The first of these factors can be seen in Chart 2 below, which shows the main components of US Government Consumption Expenditures from the beginning of 2020 onwards.

Chart 2. US Government Consumption Expenditures, $bn

Source: BEA

Before the policy began, the combined US government outlays on Consumption Expenditures and Current Transfers totalled $6.3 trillion. The largest inflationary impulse came from an increase in this total the 1^st quarter of when the combined total of outlays was $9.2 trillion. This level of spending has subsequently receded, but at $7.4 trillion remains way above the starting point at the beginning of 2020.

The inflationary trend is reinforced by the exceptional growth in US money supply, as shown in the chart below.  The exceptional pace of growth in the supply of money can be illustrated by the point that it took 10 years for US M1 money supply to double from $2 trillion to $4 trillion. But M1 money supply rose from $4 trillion in February 2020 to $20.7 trillion in March 2022, over 5 times larger in little more than 2 years.

Chart 3. US M1 money supply, US$ billions

Source: FRED

The level of money supply has since edged lower, down to $20.5 trillion. It is probably not prudent to withdraw this money at the same reckless pace it was created. But the consequence of such exceptionally high level of money supply circulating in the economy will be to reinforce inflationary pressures for some time to come. 

As already noted, the same note of caution applies to US Government Current Expenditures. They have fallen back but remain at a level likely to support inflation rather than suppress it.

Crucially, none of this has huge stimulus to spending has led to increase in Investment. Increasing the means of production through Investment is the only method for raising the level of output up to the inflated levels of government Consumption and money supply growth.

As shown in Chart 4 below, over the 2-year period from the 1^st quarter of 2020 to the 1^st quarter of 2022, the total level of Investment (Gross Fixed Capital Investment, GFCF) has risen by just 2.6%. There has been almost no increase over that period in the means of production (especially when the rate of depreciation is considered). As the consequences of this completely negligent US economic policy are euphemistically described as ‘bottlenecks’, this highlights there is limited spare capacity slack in the economy to prevent prices rising further.

Chart 4.   US Gross Fixed Capital Formation, US$ billions, 1^st Quarter 2018 to 1^st Quarter 2022

Source: OECD

Finally, it is important to note the impact of central bank monetary policy, as interest rates are generally being increased in the Western economies in a misguided attempt to dampen inflation. Because those price pressures are caused by an economic policy which has created a huge imbalance between supply and demand, interest rate rises are an attempt to correct that imbalance by suppressing Consumption.

The central bankers explicitly state they aim to suppress wage growth below inflation. This will mean adding to the risks of slump and amount to a redistribution of wealth and incomes from workers and the poor to the profitable and to the asset-rich.

In addition, for those with access to credit, real interest rates remain extraordinarily low. Chart 5 below shows the US government yield curve, which is the interest rate payable on US government bonds from 1 month out to debt that matures in 30 years.

One of the key benefits for the US of the US Dollar dominance in global trade is mirrored in global financial markets, with the US setting the floor on global interest rates for most countries (the main exception being Japan).

Chart 5.

Source: FT

There is no part of the US government yield curve where interest rates are currently more than 3.5%. Yet US CPI inflation is currently 8.5%, meaning that interest rates in real terms are -5%. For anyone who can borrow at interest rates close to these levels in real terms, credit is exceptionally cheap.

However, this is available only to those with the best credit ratings, big businesses and the very rich. In practical terms, while most of the population is suffering a sharp fall in real incomes, the financial markets operate in such a way that only widens class divides and deepens the upwards redistribution of wealth and incomes that is currently taking place.

Yet the best credit ratings of all, and the cheapest borrowing costs still belong to government. The Western governments could slow and then reverse the surge in inflation with a massive level of Investment in the productive economy. The imbalances between Investment and Consumption could be ended by a very large increase in Investment, rather than suppressing Consumption.

But that would significantly increase the role of the State in the productive economy and lessen the dominance of the private sector. This is not at all the current policy programme, and is in fact its opposite.