Sterling was headed for parity with the dollar. The cost of government borrowing had hit 5 per cent. The International Monetary Fund (IMF) was on the phone. And in Downing Street, Liz Truss and Kwasi Kwarteng were screaming at each other over who’s to blame. Then the Bank of England stepped in.
The Bank has reversed its plan to sell the government debt it bought in the wake of the 2008 financial crisis, and instead has waded into the markets to buy debt – “fully indemnified by the Treasury”. Left to the mercy of the markets, it said, there was “a material risk to UK financial stability”. Pension funds were seeing the value of the safest investments in the world collapse; banks were reining in lending to the private sector.
The last time the Bank had to do something as drastic as this was when Covid-19 triggered a run on sterling. The time before that was the fall of the Lehman Brothers in 2008. But this was no “exogenous shock” – it was a crisis manufactured over coffee and biscotti by Truss and Kwarteng. How they’ll possibly explain the sudden collapse of their entire growth strategy will be the question at next week’s Tory conference.
The fact is, the Conservatives have run out of options. Since Brexit, all possible versions of Tory macroeconomics have been tried: soft Brexit plus austerity under Theresa May; hard Brexit plus the big state under Boris Johnson; hard Brexit plus the small state under Truss. Though Truss was right to protect consumers and businesses from energy bills that could have wiped out the private sector, combining this with the biggest tax cuts since 1972 was always going to trigger a market reaction. What precipitated disaster was not making any attempt to predict the consequences or acknowledge the risks.
Borrowing money to give away to rich people is a signal to the markets that you intend future taxpayers to pick up the tab. But if you cannot explain where those taxpayers are going to find the money – other than fantastical visions of growth – those who are lending the money are going to charge you more; and some may not want to lend at all. This is what prompted the IMF to warn Britain that it must reverse its current stance. If the Treasury’s foot is on the accelerator and the Bank of England’s foot is on the brake, then at some point something has to give.
Technically, Kwarteng could change the remit of the Bank, raising the current inflation target from 2 per cent so that the Monetary Policy Committee doesn’t have to increase interest rates. But central banks don’t just obey their formal remits: they obey global market forces – and in the end, few doubt that Kwarteng will be forced to abandon large parts of his tax giveaway, or specify public spending cuts so deep that they would strangle the very growth he’s trying to stimulate.
One of the scariest things about this self-inflicted crisis is the disjuncture between economic time and political time. The Truss/Kwarteng strategy has brought chaos within three weeks. Yet they have more than two years left in office before they have to call a general election.
And even if Truss was forced to sack Kwarteng, or resign herself, who would the Tory party choose? The membership chose Truss precisely because she offered it a tax-cutting nirvana, as opposed to the polite technocrat who warned them exactly what would happen if such a nirvana were implemented. The Conservative newspapers revelled in schadenfreude as Kwarteng sacked the one civil servant who could have stopped it happening.
Though this is a manufactured crisis, it’s rooted in three deep and uncontrollable dynamics. The first is deglobalisation. It began in the mid-2010s and accelerated during the pandemic as the scramble for secure supply chains moved from PPE (personal protective equipment) and vaccines to semiconductors, natural gas and rare metals.
The second is climate change. Vladimir Putin is strangling energy supplies as part of a hybrid attack on the collective West – but he’s doing it now because he knows that, as the world decarbonises, the Russian economic model is doomed. Thanks to Putin we will live the final two decades of the carbon era in chaos.
The third elemental process is the relentless immiseration of ordinary people in the West, by an economic model in which growth is geared to drive inequality. Populations were compensated for stagnating real wages with cheap consumer credit in the years before 2008, followed by quantitative easing and vast borrowing by states, corporations and households.
All Western governments are struggling with these elemental forces. But because we embraced neoliberal pauperisation the hardest, we are getting the hardest kicking as it goes wrong. Because we refused to build new nuclear power stations, scrapped our gas supplies, and delayed over solar, wind and wave power, we have the highest inflation in Europe. As for deglobalisation, we fired the starting pistol: Brexit was the first strategic victory of the economic nationalists.
If, after Brexit, the UK had quickly settled on an economic consensus, spelling out where growth would come from, who we would trade with, and long-term social goals, things might have been different. Instead, the Tory party acted as a chaos engine, repeatedly shredding its own doctrines, ejecting its own leaders, and enriching only the hedge fund managers whose computer models enable them to profit from instability.
There is only one logical solution: soft Brexit plus the big state. The government would announce a state-directed energy revolution, creating tens of thousands of well-paid jobs and slashing household fuel bills. It would raise windfall taxes on the energy giants and slap turnover taxes on the tech corporations. It would redistribute wealth through a living wage policy and increase workers’ ability to bargain collectively. At the same time, it would embrace voluntary alignment with the European single market and seek urgent deals with the EU on energy, security and defence collaboration.
The label for such a strategy is Keironomics – and the man himself spelled it out in detail this week at the Labour conference: a state-owned energy champion, a sovereign wealth fund, a minimum wage linked to real living costs, a policy of borrowing to invest and taxing for current expenditure.
The tragedy is that, by the time he and the shadow chancellor Rachel Reeves get to try it out, the UK will be a heavily indebted and inflation-ravaged country, its housing stock and much of its corporate sector bought at knock-down prices by cash-rich foreign investors.
In the short term, the Bank’s intervention has bought some time. Keir Starmer’s task is to build a coalition in the House of the Commons to overturn the half of the Kwarteng budget that’s done the damage: to demand an immediate report from the Office for Budget Responsibility (not one in November); to insist the Treasury produces full growth, distribution and debt modelling for all decisions; and to calm the bond markets by laying out in detail the fiscal rules of the coming Labour government.
The irony is, despite Rishi Sunak having lost the Tory leadership race, there is probably now a majority in the Commons for the fiscal programme he championed. If this were a Richard Curtis movie, he could be chancellor for a few weeks in a provisional government headed by Starmer, before seeing his party dispatched to electoral oblivion. In reality, there is only Truss and she is no longer in charge: the Bank of England is.