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26 October 2022

Politicians fixated on growth have led Britain into chaos

Leaders must accept that the old economic regime is over, or face further disgrace.

By Helen Thompson

That Conservative MPs allowed someone as unsuited to leadership as Liz Truss to become prime minister is a shocking indictment of the parliamentary party. Knowing first-hand that she has no semblance of superior judgement nor competent communication skills, the MPs should never have given the party members the opportunity to vote for her. But Truss’s humiliation is a symptom of something greater than the chasm between her ambition for power and her (lack of) ability. British politics is yielding repeated chaos because politicians are stuck in a mindset that the world has rendered obsolete.

Representatives across all political parties have not realised that we have left Kansas for Oz and, unlike for Dorothy and Toto, there is no way back home. Impulsively flinging herself into a political project divorced from economic reality, Truss acted according to a partisan script that condemned cast members to keep repeating a story about higher economic growth and the distribution of its rewards. She posed as the Margaret Thatcher of caricature. Boris Johnson bet on net zero as the next political frontier. Keir Starmer has done the same, just in more sober tones and with promises of a larger cheque book. The first Conservative leadership election contest this year took place on the premise that in advocating for a levelling up strategy, Johnson was only paying lip service to the so-called growth paradigm, which dominates Tory thinking.

[See also: The growth delusion]

But in the advanced economies of the West, the possibility of sustained economic growth is disappearing. The origins of this crisis go back to the first decade of the century. Western economies recovered from the 2008 financial crash thanks to a heady mix of American shale oil, access to easy credit and Chinese growth. These advantages were themselves disruptive. Shale pushed Saudi Arabia into an energy axis with Russia. Financial markets became addicted to quantitative easing. Reliance on China, at a time when Xi Jinping began making its economy more self-sufficient, drove the German economy to the brink of recession in 2018.

Now, the conditions that kept the old growth regime on life support have ended. Shale can no longer expand fast enough to compensate for the stagnation in one of the world’s major oil fields. Energy-driven inflation has forced central banks to tighten monetary policy in a world in which the stability of the whole financial system depends on low interest rates. China’s economy is burdened by its zero-Covid policy, drought and a property market slump. In announcing a new round of restrictions on exporting semi-conductor technology to China, the Biden administration has effectively declared that Chinese economic growth is a geopolitical liability, not a global macroeconomic asset.

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These multiple problems would render crisis the new normal even without Russia’s invasion of Ukraine. But the war of conquest pursued by an energy superpower has upended global oil and gas markets by making all commodity transit to Europe more expensive and logistically complex. For the foreseeable future, a violent struggle will continue for influence over the world’s most significant waterways in the Black Sea and control over some of the most fertile agricultural land in eastern Ukraine.

The burdens that afflict the British economy in a world of constrained energy supply, highly leveraged financial markets, and war in Europe will endure. Higher growth will destroy itself through energy inflation. Even if fracking starts again in England and Wales, it will encounter the same geological dead-ends it did when it was last tried.

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If Labour comes into office with a plan to drive growth by accelerating the decarbonisation of electricity, Britain will still need to import more than 700,000 barrels of oil a day at market prices set by Russia and Saudi Arabia. It will be paying for this oil in dollars and every price increase will worsen Britain’s already huge trade deficit. No politician in this country promising “green growth” will be able to explain how they intend the economy to function in the short- to medium-term future, let alone expand with fewer petrochemicals or trucks that don’t use diesel. Nor could they explain how, as Labour proposes, the borrowing to offer interest-free loans to lower-income households to buy electric vehicles would be acceptable to the bond market investors who have just punished Truss.

In Britain, the response to the accelerating crisis has been to blame Russia’s war or engage in rank boosterism. “We must never fall into the trap of pessimism,” Jeremy Hunt declaimed in his statement on 17 October, repudiating his predecessor’s mini-Budget. What awaits us in the future, he continued, was “long-term growth” – so long as the country could demonstrate “a commitment to sound finances”. But his reasons for believing that growth via austerity will work are no more than mantras – “we have some of the most talented people in the world” – expressed in language entirely detached from today’s crises.

Hunt’s new fiscal plan might have been a U-turn on the particulars, but in the context of the crisis-conjuncture, it is yet more denial. Until the politicians get real about how dysfunctional the world economy has become, they will keep being humiliated.

[See also: As China’s growth stalls and supply chains falter, the West faces a stagflation trap]

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This article appears in the 26 Oct 2022 issue of the New Statesman, State of Disorder