The ghosts of British economic crises past are raising their spectral heads. Memories are being evoked of the ill-conceived and ill-fated “dashes for growth” under Conservative chancellor Reginald Maudling in 1962-64, Anthony Barber in 1972-74 and my old friend Nigel Lawson in 1988-89.
Yes, they too were Tory chancellors. They usually are. When Gordon Brown, Labour chancellor from 1997 to 2007, was reported as promising “no more boom and bust” he was teased and widely misquoted. What he insisted he actually said was “no more Tory boom and bust”.
These growth efforts were well-intentioned and had in common that it took time for them to be seen as failures. But the Liz Truss-Kwasi Kwarteng dash for growth is something else: the starting pistol for this one has been fired by two of the most arrogant politicians it has been the British public’s fate to have to endure and it looks as though it has been brought to a halt when it has hardly begun.
Kwarteng’s and my paths have crossed only occasionally. Our encounters have been reasonably civilised, but I had a taste of the arrogance when, as a judge of books on financial history some years ago, I was party to a unanimous verdict that the prize that year should go to a quite brilliant volume by Liaquat Ahamed about the leading central bank governors of the 1920s and 1930s entitled Lords of Finance.
Kwarteng bearded me and asked why didn’t he win the prize for his book on gold. Well, there were various answers to that, but one was that the book wasn’t good enough. Now, I am told by contemporaries of his at Eton that Kwarteng was considered absolutely brilliant, but undoubtedly arrogant.
Arrogance is a classic Aristotelean fatal flaw. Seldom has the flaw been on such public display recently as when, after the manifest disaster of the reception to his “fiscal event” of 23 September, the headline in the FT last Monday screamed: “Kwarteng pledges more tax cuts as Tory fears for sterling mount.” We were told that Kwarteng had vowed to double down on his tax-cutting drive despite investors’ jitters, “leaving Conservative MPs and market traders braced for further turbulence”.
And turbulence there duly came, with the Bank of England having to intervene to buy government gilt-edged stock on Wednesday to try to quell a quite dramatic collapse of confidence in the government’s “growth policy” of borrowing to finance tax cuts for the rich, while poor children are discovered going to school with empty lunch boxes.
This is naked redistribution of income from the poor and the rest of society to the rich, with no evidence whatsoever that it has any positive impact on the economy’s growth rate, as a clutch of recent IMF, OECD and respectable thinktank studies have shown.
The Truss-Kwarteng farce is bad news for the pound. When sterling fell towards parity with the dollar in January 1985, Margaret Thatcher rang her friend Ronald Reagan and the US propped up the pound. I don’t think relations between Joe Biden and Truss are yet on such a basis should the need for help recur.
The need to maintain, or restore, financial stability is one of the principal roles of the central bank, along with attempting to control inflation. The paradox last week was that the Bank was proclaiming its intention of raising interest rates to counter inflation – ie a contractionary monetary policy – while having, with its much publicised intervention, to pump liquidity into the financial system – ie an easing of monetary policy – in the interest of restoring financial stability.
In trying to swim against the tide of sensible economic opinion and the views of the financial markets in which they affect to believe, Truss and Kwarteng complain about “Treasury orthodoxy”. But as Ed Balls, a key figure 25 years ago in awarding independence over monetary policy to the Bank, points out, there is nothing wrong with Treasury orthodoxy. It allows higher/lower spending; higher/lower taxes; more/less fairness; more/less intervention in response to big shocks – the more or less to be decided by the government of the day.
The financial markets have seen through Truss and Kwarteng. And let’s face it: their desire to raise the British economy’s productivity has been given a shot in the foot by their very own Brexit and its reduction of 4%-5.5% in annual GDP (by the National Institute of Economic and Social Research’s estimate).
On which subject, while congratulating Keir Starmer on a successful Labour conference, I emphasise that, notwithstanding his latest slogan, there is no evidence that Brexit can be made to work. Brexit is a disaster and the Labour leader should say so. It is an open goal.
October 2, 2022 at 11:50AM William Keegan