The combination of right-wing ideology, arrogance and stupidity is a dreadful combination for a Chancellor of the Exchequer. Alas, the same holds for a Prime Minister, but it may be worse as she also seems to be delusional and completely incapable of understanding what she did wrong to crash an economy already in recession combined with rising inflation and a cost-of-living crisis eroding wage incomes and impacting small businesses. One would have hoped that the 10 days of mourning between being chosen as Prime Minister due to the death of the Queen would have led them to have a think about the proposals for the proposed “mini-budget” – alas, that did not happen. Instead, what was produced was an exercise in fantasy trickle-down economic policy that would have made Ronnie Raygun blush.
Somehow in the course of their preparations of this mini-budget they seemed to think that now that Britain was no longer constrained by the EU (which is odd since the Troika of the EU seems to love this type of neoliberal economic policy) that the time was ripe for trickle-down economics and honestly, they cannot blame the result on anyone but themselves. They clearly believed this was their chance to implement their fantasy economic policies in the midst of rising inflation and a commensurate cost of living crisis eating away at the incomes of the working class (in and out of paid employment). Rising numbers of trade union strikes about cuts to jobs, rising prices of fuel and food didn’t deter them, neither did the fact that those dependent on benefits to survive were in deep crisis and winter is coming …
The “Mini-Budget”
On the 23rd of September, Kwasi Kwarteng stood there with the all the usual bravado, swagger, and braggadocio characteristic of Tories while announcing a “mini-budget” whose main purpose is to transfer income to the wealthiest in society claiming it will produce economic growth despite the fact that trickle-down economics historically has only led to a massive concentration of wealth and income in the hands of the wealthy and hence increased financial instability. Ironically given that Kwarteng has a doctorate in Economic History, one could have hoped that they could have been bothered to examine the impact of trickle-down economic theory historically, but hope seems to be a fantasy these days in Britain and whatever fantasy that still exists seems to only apply to the ruling classes and the hard-right.**
What needs to be remembered, is that this so-called mini-budget put forward by Kwarteng was done in conjunction with the newly chosen Prime Minister, Liz Truss. The mini-budget represents a level of entrapment in right-wing free-market ideology so strong that they are incapable of actually understanding the reality of the British economy and whether these policies make any sense in this current crisis. Not that these policies make any economic sense in a stronger economy, but in one already in recession and with rising inflation they were guaranteed to increase the difficulties that the majority of the population live under due to rising inflation arising from rising fuel, food, and housing costs undercutting wage incomes. Rather than borrow to raise benefits commensurate with rising inflation and increase the minimum wage; they instead chose to increase government borrowing to cover tax cuts to the wealthy (those worst impacted from inflation don’t pay taxes; Truss knows this and doesn’t care).
Since it was not a formal “budget” (just a mini-budget, nothing to see here … who needs oversight?) there was “nothing” to be examined by the Office of Budget Responsibility (OBR) they clearly hoped that their combination of tax cuts (eliminate the 45% tax rate, eliminate the rise in Corporation tax from 19 to 25% in April 2023, eliminate the 1.5% increase in National Insurance to cover health and social care) and funding for coverage of rising fuel prices that have been capped at £2500/year for the next two years with the government paying the difference (they refused to increase the fossil fuel levy and instead went with government borrowing to cover the costs) would be a stimulus for economic growth.
The media insisted on calling this policy package a “stimulus” for days after the announcement … I was truly wondering if we heard the same policies announced by Kwarteng …
Truss and Kwarteng insisted that these policies were needed to keep Britain from falling into the recession it was already in (perhaps someone forgot to tell them). Essentially, this was a cut in taxation to those with higher incomes and corporations offering neither a costing nor an explanation of the changes in spending (if any) arising from cut in government revenue (and hence increased borrowing to cover spending).
To say that the elimination of the 45% tax rate on those earnings over £150,000, (“we are putting money in people’s hands”) will promote economic growth is consistent with Truss’s bizarre ideas that economic growth can be achieved by wealthier people opening up small businesses. The problem is they don’t need the money (unlike the people truly unable to afford food, rent, heating and basic necessities simultaneously in Britain which is growing). As we know historically, they will not invest it in things that will create economic growth; instead, most probably the money will be saved (not invested) giving rising interest rates or it will be spent on the financial markets like much of quantitative easing. This just leads to further financial instability. Adding further salt to the wound, removing the cap off of bankers’ bonuses seems to be an afterthought.
The other policies announced included further tax cuts. One was a reversal of increases in corporation tax (due to rise in April 2023 from 19-21%). Then there was the elimination of the 1.5% increase in National Insurance payments proposed by Rishi Sunak under Johnson to cover investment in Health and Social Care primarily affects those with larger incomes; those on lower incomes get back very little money. Let’s not forget the proposed infrastructure and investments zones (we used to call these free-enterprise zones when in use in Africa and Latin America) in 38 areas of England where the economy has been depressed where there will be low taxes on profits and higher profit rates and support for investment and of course, wage differentials with the rest of the country; this is to encourage foreign investment in these areas. So, it looks like they are abandoning the policy of levelling up that was part of Boris Johnson’s manifesto and have settled for levelling down.
Some of this should sound familiar, these are the same policies forced on the global south to get access to World Bank funding. The only difference is that this is in Britain, its own politicians are doing it to us and it will be funded by government borrowing.
Already, austerity policies introduced after the 2007-8 “Great Recession” have vitiated public services through a combination of underfunding and privatisation (e.g., the NHS is barely working, social care is privatised in the main neither providing the quality and quantity needed, public transport has been undermined by privatisation, etc), workers’ nominal wages have stagnated (and have not recovered to the level they had before 2007-8 economic crash), and benefits no longer serve as a safety net (they are far too low to enable people to survive on them which is why Rishi Sunak uprated Universal Credit benefits by £20/week during the pandemic for those who were sacked and ineligible for the furlough scheme). The truth is the Universal Credit was not meant to be a proper safety net for the working class. It is based on the notions of sanctions and less eligibility; its point is to get people off benefits and into work. As such, being dependent on benefits is meant to be hard and the Tories worked very hard to get people off of them and into the workforce as low-paid precarious and part-time labour.
On the 10th of October, an independent study whose results appeared in the Journal of Epidemiology and Community Health demonstrated that more than 330,000 excess deaths between the period of 2012-2019 in Great Britain were linked to the spending cuts in public services and benefits due to austerity. The Guardian reported:
“The authors of the study suggest additional deaths between 2012 and 2019 – prior to the Covid pandemic – reflect an increase in people dying prematurely after experiencing reduced income, ill-health, poor nutrition and housing, and social isolation.
Previously improving mortality trends started to change for the worse after austerity policies introduced in 2010 when tens of billions of pounds began to be cut from public spending by the Tory-led coalition government, the study said.
The study, published in the Journal of Epidemiology and Community Health, found there were 334,327 excess deaths beyond the expected number in England, Wales and Scotland over the eight-year period.”
These policies are nothing new, they are just austerity policies (aka making the working class pay for an economic crisis) and neoliberal economics on steroids. Moreover, these policies are being advanced in an economy which was already falling into recession and where wage incomes (i.e., wages and benefits) are being eroded by rising inflation. Trade unions are striking across the country as offered wage deals are lower than rising inflation.
Borrowing to invest in the economy and to cover those hurt by rising inflation would be one thing; creating jobs and covering demand at least covers the majority and some will come back through increased revenue due to rising demand and job creation. This is not that at all; this is a fantasy built on a fantasy. British business and the Right were actually quite excited by the mini-budget (and, why not, they were going to make out very well from it); to say the least international markets were not thrilled. You know that when the IMF calls the Chancellor of the Exchequer and the Head of the Bank of England to an emergency meeting and states that they are worried about rising income and wealth inequality in Britain that you have entered a new reality; really all these economists that are worried about this were perfectly happy with earlier versions of trickle-down economics.
Giving more money to the wealthy hoping they will invest it in the economy to create economic growth is not even a Hail Mary pass; telling the Bank of England to deal with rising inflation was just another throwaway comment from Kwarteng as though all that was required to keep raising the interest rates and that would somehow have no impact on the economy. Perhaps since they are only concerned with the needs of the wealthiest, they didn’t realise the inconsistencies in their budget with continuing increases in the rate of interest.
The most common way to deal with rising inflation is to raise interest rates – these chokes off growth and investment; this is because they increase the price of borrowing across the economy. The policy of rising interest rates relates to inflation that is brought about by increasing demand; the current inflation we are seeing is due to cost increases due to breaks in supply chains due to the pandemic and in Britain due to Brexit. This impacts both producers and consumers; a larger business can cope better than small business who are already feeling the pinch. Wealthier people are impacted less by increases in borrowing than working class people. So, a policy of lowering stamp duty on purchases of homes is overwhelmed by increasing mortgage rates. Most people have a short-term fixed interest rate and then are forced to switch to flexible ones. But with a rising rate of interest many people cannot afford to refinance their mortgages and this does hit working class people that bought homes who will not be able to afford the higher mortgage payments (see cost-of-living crisis) … and will put paid to the homeownership dreams of British people.
Essentially these policies amount to massive borrowing by the government (to make up for lost revenue due to tax cuts; literally throwing away revenue to further increase economic and wealth inequality in the fantasy that spending by the wealthy would increase economic growth.
Free-market ideology and other justifications for increasing income and wealth inequality
The Wealth-Creators Myth
I keep wondering how much that fantasy that spending of the wealthy creates economic growth is linked to the absurd notion that you often hear from the Conservatives (of various denominations) that capitalists are the wealth creators.
This is a grotesque misunderstanding of wealth creation; it simply does not arise from capital in and of itself self-reproducing and increasing at will (really since they claim to love Adam Smith so much, a cursory glance at The Wealth of Nations would disabuse them of this stupidity). It is as if, in their minds, wealth arises due to the creation of capital with no other forces in play (e.g., labour), perhaps they view it as similar to apples sprouting from trees unattended by humans.
A closely linked form of confusion relates to the idea that all we need is increased supply and that will lead to economic growth; this is the classical version of Say’s Law where production creates its own demand. A similar argument relates to export-led growth arguments where domestic demand becomes irrelevant as we are planning to sell overseas in international markets. But someone needs to purchase the increased output of goods and services at a price above the costs of producing them or there will be no economic growth comrades, that is basic.
This understanding of wealth creation is absurd, but it is deliberate; it is used to justify throwing further money to the wealthiest in society while the incomes of the rest of us are collapsing. Afterall, they think that capital and economic growth just seem to sprout endlessly from the pockets of the ruling class.
Blaming the working class
But honestly, even though they do not care about the little people (“idlers, each and every one, whose fault it is that Britain is collapsing into mediocrity”), you know that all hell has broken loose when Sky News feels the need to explain the importance of demand in economic growth.
Yet, the then (and now no longer) Chancellor of the Exchequer, Kwasi Kwarteng did just that and he did it in cahoots with the newly chosen Prime Minister, Liz Truss. Don’t be mistaken, these were their brilliant ideas and their bold future for a Britain released from the shackles of the EU and how it would then rise again like a phoenix from the ashes of history. I could not bring myself to read their “book” Britannia Unchained (2012) written with other members of the right-wing Free Market Group in the Tory Party. However, a not unsympathetic commentator, Jonathon Portes, wrote in the New Statesman about “the slipshod research and factual errors” and the laziness of the authors as good examples of the lack of work ethics that they think characterise the working class in Britain.
Even today with only 3.5% unemployment and an economic inactivity rate of 21.7%, Truss still insists that the problem with Britain’s economy is low productivity and not enough graft on the part of the workers. No, it has nothing to do with financialisation, short-term investments, short-turnover of capital, the fact that wages are so low that it doesn’t pay for employers to introduce capital to increase productivity; it also has nothing to do with the destruction of working conditions and precarious labour markets. No, it is all to do with lazy British workers. And to make sure that they worked more and harder; if British people are lazy, they must be forced to work. The only mention of benefits in the mini-budget is that people receiving them must be forced to get more hours of work and to see their work counsellors or face sanctions as it is their fault they are poor and dependent upon benefits (poor life choices and all that) and not that inflation is eroding benefits. What they have demonstrated is they view benefits as a top-up on lower wages rather than a welfare net to protect people. Already they are far too low to allow people to survive on as the point was one of less eligibility; that is, those out of work must have lower incomes than those in work and people must be forced to work to go above the benefit cap. In this situation, benefits enable employers to pay low wages as they will be topped up by the government.
The Fallout
Somehow, Kwarteng and Truss forgot about international markets in their rush to release the mini-budget. How could they forget that capitalism is an international system? The pound collapsed almost immediately in relation to the US dollar and the Euro following the announcement of the mini-budget only reversing slightly as announcements that the OBR would be examining the budget and producing a forecast report addressing costings of the “mini-budget”, that the Chancellor would produce a medium-term financial plan by mid-November.
The rising interest rates meant to deal with rising inflation led to people dumping gilts (longer term government investment bonds) as the money tied up in long term gilts had a far lower interest rate and this almost collapsed part of pensions held in gilts which are normally considered safe investments. The Bank of England was forced to buy up bonds to keep people’s pensions safe. They stated that the buying of gilts would cease on Friday the 14th of October. Following rising interest rates, mortgage rates rose precipitously and mortgage offers for new customers were withdrawn and those already holding mortgages will now face higher borrowing charges.
The government started jettisoning policies announced in the mini-budget; the first to go was the elimination of the 45% tax rate on incomes over £150,000 (3rd of October), then was the reversal on the increase in Corporation Tax on the 14th of October; the same day she sacked Kwasi Kwarteng to “save her premiership.” Kwarteng’s replacement is none other than Jeremy Hunt.
The media announced that Hunt was the new Chancellor of the Exchequer and somehow is in the left of the Tory party; this will tell you how far to the right the Tory party has gone.
Hunt is the man responsible for much of the damage to the NHS, increased privatisation and whose policies set off a Junior Doctors strike when he was the Health Secretary among other things like trying to close down maternity and accident and emergency services. He has spent the past few years out of government but still working doing work around the NHS and provision of services and better outcomes for patients.
In interviews with the MSM after accepting the post, Hunt spoke of the need for further efficiencies in spending. Hunt’s use of the term "efficiencies" instead of cuts followed by privatisation is fascinating. Using “efficiencies” does not change the nature of what he is proposing as it is quite clear. When politicians use the term “efficiencies” it relates to the neoclassical view of the operation of the market bringing about Pareto efficient allocation of resources.
Truss also used the term world class services that are delivered efficiently yesterday in her short announcement on Friday (the 14th of October) when discussing Kwarteng’s sacking, and her reversal on raising corporation tax and the appointment of Hunt. Jeremy Hunt referred to efficiencies on Friday in his statement that efficiencies are needed ...
It seems that cuts and privatisation need a code word rather than simply use cuts and further privatisation ... expect to see the words efficiency or efficiencies appearing in their speeches ... it is a good word; if it is efficiencies and you want to have public services run efficiently, you are talking about cutting them (remember: nationalisation = wasteful) and efficiencies refer to the market mechanism (mainstream economics maintains that markets are efficient because they deliver Pareto optimal solutions) and we are back to the usual free-market ideology of don't talk about nationalisation, it is only the market which delivers efficiency ...
Some final thoughts …
In normal situations, Truss would have 1 year before her leadership of the Tory Party could be challenged. However, the situation is so bad that the Tory Members of Parliament may move to get rid of her and install someone else (perhaps someone that has some experience and “commands respect” … I’ve heard the names Rishi Sunak and Michael Gove mentioned today on the news). There is still 2 years until an election is forced to happen and the Tories will not call an election if they can help it, as current polling for the 2025 General Election show Labour on 50.1% compared to the Tories on 24.63% and that would be a Labour landslide with a 184 seat majority (Boris Johnson held an 80 seat majority for comparison).
The Tories will probably try to replace her in another leadership election in the middle of a worse economic crisis that has been caused by Kwarteng and Truss. To get rid of Truss which they probably are willing to do means another leadership election. A general election would require enough Tories to vote with the opposition to call one. That means more delays while the Tories try to avoid a massive electoral defeat while the working class is desperate, unable to feed and clothe themselves, heat their homes and pay rent. The Tories may have tried to address rising fuel prices, but nothing has been done about rising prices of food, rents and basic necessities. Rising interest rates mean that rents will rise for those in private rentals, where will money to pay this come from? The Tories refuse to act on rising prices of food, regulate and control rents … how can people be expected to stand around while the Tories twiddle their thumbs?
While all these economic policies shifting money to the rich continue, the situation has only gotten worse for the majority of the population. We know that the Tories certainly will continue to try to destroy the rights of workers to strike and it is still up in the air whether they will increase benefits to cover inflation or commensurate with the rise in wages. This will only further inflame the situation and it is becoming literally a matter of surviving for large numbers of people. While the MSM babbles on about the government and arcane economic policies, they've abandoned the majority of people in Britain who will soon be unable to cover rent, feed and clothe themselves ... solidarity requires struggles to go beyond workers in union jobs and to stand with precarious workers and those on benefits especially women and disabled people who are far more dependent upon benefits and have already borne the brunt of austerity. We need to stand together and this cannot happen fast enough as we are already almost too late …
** for a more serious economic analysis on the Mini-Budget, please see The Institute for Fiscal Studies and The Resolution Foundation responses to the “Mini-Budget”