Charge of the Light Brigade or Rorke’s Drift? Both massacres, but one ultimately ended in triumph. Which of these will the race for economic growth started by Prime Minister Liz Truss and the Chancellor, Kwasi Kwarteng and their Government most resemble? Anyone who cares for the UK must surely hope Rorke’s Drift, even if they consider it unlikely.
All those who oppose the Government’s political philosophy or who wish the PM to fail or who oppose Brexit or who intellectually disagree with UKGOV, including some Conservative MPs, have pronounced the mini budget, announced some 10 days ago, a disaster, with market turmoil bashing the UK pound and the Bank of England taking special measures to defend the pound. Interest rates are bound to rise. But is the policy being adopted really the wrong one? Is it even affordable? Or is it pure zealotry?
GROWTH IS THE ONLY ANSWER WORLDWIDE
It is economic growth throughout the decades since World War 2 and before that which has made the world such a rich place relative to the past. Growth has driven down poverty to record low levels and is the measure of optimism or pessimism economically. A slow growth rate means stagnation. Recession, negative growth over a prolonged period, is a major cause of widespread grief normally. The main criticism of Brexit arguably is that many experts forecast a slower growth rate for the UK as a result. Every political party in the democratic and developed world will agree that it is growth which enables nations to improve the lot of citizens, including the most deprived. But China aside, for the major economies growth has been stuttering since the financial crisis of 2008, and the UK has struggled to get momentum and to improve productivity, despite enthusiastic promises to do so, and it is fair to say it has been stagnating.
Often one reads that much political and actual energy is about how to divide the economic cake between people without increasing its size. Some believe governments through higher taxes are best equipped at redividing the cake to achieve greater fairness as they perceive it. Others consider governments the last persons competent to manage citizens’ money and that lower taxes are good and more likely to incentivise people to achieve things. Some would say that it is concentration on distribution of the cake which has led to stagnation. No doubt the reasons are more complex ranging from uncontrollable outside influences, e.g., Covid and war, to incompetence and indecision among other things. Harking back and spending energy on the past, focussing on the culture of blame, is a complete waste of time and inhibits much-needed progress.
Ignoring for a moment the recent budget in the UK, high inflation was already baked in. Given the USA is in recession and that US interest rates are way above those of the EU and even more above the UK’s, substantial interest rises in the UK were already inevitable. The cost of living stresses were already here. It is also general common ground that Putin’s evil war and consequent world destabilisation, with a policy of as much damage to the West as possible and multiplying rises in oil and gas costs especially are the root cause of the extremeness of economic problems.
It is against that backdrop that all governments are struggling to minimise damage to their populaces. No major nation has announced a growth policy comparable to the UK. Why is the UK being so denigrated in public utterances, journalistic comment and market activity, when it has declared a drive for growth as its priority? But first to keep a focus on the Putin evil.
PUTIN HAS DECLARED HE IS AT WAR WITH THE WEST
Putin has declared more than an economic war on the West. His failing war on Ukraine has driven him to expand narratives about how Russia is under attack from the West to justify more and more outrageous acts against humanity and in effect the world as a whole. The fiction must be maintained that there is no such war, just a war between Russia and Ukraine, in which the West vows Putin cannot be allowed to succeed and are doing and must do all they can to prevent that success. If it is true that the latest multiple attacks on gas pipelines undersea are Putin driven, and that perhaps is likely, then he is actually bombing international infrastructure. What next? The pretence must continue lest this war escalates into nuclear disaster.
The point of interjecting this here is that discussion of and a solution to every major economic and other problem, must surely be considered as to how it contributes to Putin’s defeat, because until that defeat, nothing can be normalised. There is a risk Western governments and major institutions, and indeed markets, in pursuing discordant activity among themselves, serve only to fight Putin’s war for him. Just as buying gas from Russia does.
WAS IT PRESENTATION MORE THAN CONTENT WHICH FLOORED THE MINI-BUDGET?
The presentation of the mini budget exhibited gross misjudgement. Much had been trailed but there were too many surprises. The lack of explanation and analysis of implications, as well as the triumphalist tone, instead of serious appreciation of the gravity of the climate, both economic and social, and appropriate humility, were naïve. The unpreparedness to deal with negative market reaction and commentary, especially around the exchange rate dive, with apparent lack of coordination with the Bank of England, was amateurish. There seems to have been no sustained positive communication programme. That the PM was invisible for days was extraordinary. The more so, because it is so evident that, in so many quarters, just as with the Johnson government, powerful and determined forces, as well as some unimportant but vocal journalists, wish the PM to fail, not least some in her own party. The naivety of timing and presentation gifted manna from heaven to opponents. UKGOV has effectively admitted this.
Growth as a primary driver is, for reasons stated above valid: it is universally recognised as ultimately the only way to turn prospects around. The mini budget included numerous steps in that direction. Even Labour would not reverse the 1% income tax cut. The biggest expense, the shield of the public and businesses from extreme energy price rises by capping the price, was inevitable and was generous. Europe is doing the same, Germany especially with massive subsidies. Indeed, it was demanded by all quarters in the UK. Measures such as investment zones with special fiscal privileges are positive, as were other steps. Reversals of NI and corporation tax increases were not real cuts. This is where the costs sat and analysis of the impacts was sadly lacking, but these were unsurprising.
In the rush to send a message of entrepreneurialism and conservatism, two measures dominated public comment and diverted from the serious business. First, scrapping restrictions on bankers’ bonuses presented opponents with the easy populist attack on aid to the already wealthy. Pathetically, sophisticated but populist British media and commentators, believe it right to attack the banking community to create division and feed the politics of envy. Bankers have been the only body of workers singled out for restrictions on pay by the EU, as a punishment for the financial crisis for which governments and regulators were more at fault than banks. The restriction is so patently unjust but so easy to use to excite hatred of higher earning people, who pay high taxes. Are high earning bankers so different from high earning footballers?
Second was the immediate abolition of the 45% income tax rate. It only yields about £2 billion, small in today’s give away parlance. It is arguably iniquitous that when combined with NI those taxpayers were paying over half their income to the treasury. But a giveaway to the well off was naively stupid at this time and provided more manna for detractors. Both these measures were of no real monetary consequence, but they have been used to castigate and discredit the PM and the Chancellor. Timing and presentation were inept. In fact, an irritated conservative party has since forced a retraction of the measure.
The mini budget is supposedly but the start of a series of proposals, such as removing impediments to business, to be announced in the coming months. The full picture may or may not provide a formula for growth and minimise recession. It would be good to know the full programme soon. Major tactical errors have been made. It is essential that, unlike the Johnson era, the leaders learn from those mistakes if ever lost trust is to be restored.
THE DETRACTORS: NOT ALL ABOUT CARE FOR THE COMMUNITY
Naturally opponents sought to capitalise on the errors. Keir Starmer has rightly questioned the funding of the tax cutting elements and the effects of borrowing. But he has not suggested a growth plan of his own. He has naturally stirred the pot of wealth envy seeking to distinguish Labour as the party caring for workers, implicitly classifying the high earners as non-workers. These challenges must be met.
EU representatives have derided the UKGOV approach. But do they have an interest in seeing a weaker UK, to punish for Brexit, to assist negotiation in Brexit matters? If having a low rate of corporation and income tax might make the UK attractive for investment, might they have an interest in deriding them, even though in Ireland the EU have established their own corporate tax haven?
The old establishment regulatory leaders such as Mark Carney and previous chancellors have rejected the plan as reckless. However, some commentators lay the underlying cause of today’s crisis at the door of previous leaders. In particular it is put down to the temporary illusion of cheap money created by excessive quantitive easing by the leading central banks (the Bank of England alone £850 billion). Perhaps blaming Kwasi Kwarteng is easier to explain.
Is it the role of the IMF to attack a UKGOV decision on income tax on the grounds it is socially divisive? Something else is motivating such behaviour.
Meanwhile in the UK, Union bosses threaten strike after strike to make problems worse. Is their leaders’ motive to bring down government as well as aiming for higher wages? The higher wage issue in every sector in time of war should certainly be dealt with in dialogue not conflict?
The conservative dissenters from the PM approach are among the most abusive. Maybe they will bring the roof down any way.
The extremeness of language used by certain economists and commentators to describe the UKGOV approach may have to some degree political motivation, as may its economic supporters. Is there an orthodoxy of group think across economists and governments which only wish to see traditional tools to react to financial events. The background to current inflation and price rises is unique in modern times – a European war threatening Western survival and consequent unprecedented hikes in energy cost which then infects with inflation the cost of a great many products and services. And it is universal thinking that it is only with growth that longer term prosperity is assured. Yet there are no meaningful competing growth plans. Is there an element of déjà vu in that during Covid the raft of epidemiologists clamoured for lockdown after lockdown for as long as possible with Armageddon predictions. With a minority espousing alternative medicine? In hindsight the general move is to think lockdowns were perhaps best avoided. Orthodoxy is not always right.
It is notable perhaps that many a representative of British businesses welcomed many of the proposals, but the absence of an explanation of affordability creates uncertainty. Increased interest rates pose perhaps the biggest threat with the pound’s weakness: but these challenges were inevitable given the war and energy prices, and the recessive effects irrespective of the budget. What mostly needs to happen is that market players and leaders need to calm down. Personal animosities and other negative emotions which do not serve the UK’s interests need to be put aside.
PATIENCE IS PARAMOUNT
Some more balanced commentators suggest that it is possible that the UKGOV measures will enhance growth, even if a long shot. Calmness now is vital at a time when Putin is seeking to undermine and weaken every aspect of Western life. The response must be unified and measured. As for the UKGOV growth plan, one option is to condemn it out of hand, seek to oust the government and resort to certain stagnation or worse for the next year or two. Alternatively, perhaps patience is better to allow UKGOV over coming months to enlarge its plans and maybe deliver some. If they fail, a general election will result, but now is not the time for that. More assistance for the most helpless in society may be necessary. However, the doling out of cash is not a long-term recipe for improvement of people’s lives. It creates dependency. It shrinks the cake and requires more taxes from hard workers, and surely it is indisputable that the ordinary person wishes to keep and choose how to spend hard earnt wages. The improvement of lives is best assured by growth, and there is only one growth plan on the table even if it needs more flesh urgently.
On the other hand, Martin Wolf of the Financial Times echoed many a Truss opponent when on 3rd October he described the so-called plan as a piece of zealotry, no plan at all, and its promoters as “mad, bad and dangerous. They have to go.”
The Charge of the Light Brigade resulted in ignominious defeat, it is said due to failed communication in army ranks. Rorke’s Drift endured huge enemy assaults, with a high casualty rate, but ultimately, if the cinema is to be believed, a volte face and respect from the aggressors for a dogged determination to resist and win. Only time will tell which is the right analogy.
