“Unbelievable,” “unheard-of,” “unprecedented,” were some of the words commentators, journalists, market participants, and politicians used to describe the havoc Truss and her government had managed to wreck in less than a month in government. But I feel these superlatives do not fully capture just how abysmal the government’s handling of the economy has been so far. I am not sure it is clear enough to UK citizens how very close we came this week to a major financial crisis. Indeed, had the Bank of England (BoE) not stepped in on Wednesday with a £65bn injection into bond markets, we would have witnessed the mass insolvency of pension funds followed by a system-wide financial crisis. Indeed, market insiders consider that we were close to a Lehman Brothers moment in reference to the bank whose failure sparked off the Global Financial Crisis of 2008.
This is extraordinary for many reasons, but most importantly because this is purely and simply and straightforwardly – no ifs no buts – an economic crisis entirely fabricated by the UK government that has started to implement its fairytale economics into actual policy. The Chancellor’s mini-budget from last week was the first ‘live bullet’ – to use Jon Sopel’s term – that the libertarian free market fringe of the Brexit movement fired since gaining complete control over the government. The result was a historic sell-off of UK government bonds – until recently seen as low-risk assets that pension funds could hold with a view to long-term returns.
The market reactions that we saw this week is what happens when Britannia Unchained hits reality. Brexit has often been described as the dog, against all expectations, catching the car it was running after and then not knowing what to do with it. It feels like we now get a taste of what happens when a dog actually decides to try and drive the car it caught!
Equally extraordinary, however, was the Truss government’s reaction to the situation. Part of me thought that this sort of market turmoil is what it would take to shake up the Brexiter cult and make them come to their senses. Far from it! The – by now familiar processes – set in whereby Brexiters first deny that anything is happening at all, then – when it becomes impossible to do that – blame everyone else (the media, Remainers, the EU, and now even the markets) for what is happening, while refusing to take any responsibility, and finally claiming that what is happening was part of the plan all along.
From denial to ‘part of the plan’
Truss’s strategy in dealing with the crisis was first to deny that there was one. She reportedly held various meetings on all sorts of issues but not the market reaction to the mini-budget. She – and others in her government – then went on to argue that what was happening in Britain was part of a global problem, blaming it on Putin and the war in Ukraine, and to Japan where the central bank intervened to prop up the Yen. Yet, if global sources of financial instability cannot be denied and pushed the EU financial markets regulator last week to issue an unusual warning, denying that the fall in sterling and the value of gilts and the increase in yields were a direct result of the mini-budget can only be seen as post-truth economics. Also, the global sources of financial instability do not explain why the UK is hit harder than other countries and the UK’s borrowing costs are now higher than those of countries like Italy and Greece.
After days of complete silence, on Thursday, Truss went on an interview marathon around local radio stations, which some conservative MPs called a ‘shitshow.’ Indeed, the PM had nothing much to say in her defence – several of the interviews being notable for the long silences rather than what she said. It became quickly clear that the market reaction to her economic plan have not shaken her or her Chancellor’s belief in their plan. Hence, the turmoil must be someone else’s fault.
On Tuesday night, in an unusual move, the International Monetary Fund (IMF) openly criticised the government’s tax plans, arguing that it will lead to increased inequality and higher prices. Unsurprisingly, Tories hit back at the IMF while trying to defend Truss’s plan. Andrew Bridgen, on the Today Programme blamed the BoE for not putting up interest rates last year. Crispin Odey – the notorious hedge fund manager –, in turn, blamed the ‘historic rout on the pound’ (the Telegraph’s words) on Remainers in the City who ‘just hate this government.’ The list of people, institutions, or things to blame for the mess goes on and include HS2 and fracking. Yet, first prize for shifting blame for a house-made financial and currency crisis onto someone else must go to Daniel Hannan who seemingly in all seriousness blamed it on the prospect of Labour forming the next government. So, it would seem that after 12 years of blaming the previous Labour government for the Tories abysmal record in power, they now turn to the future and start blaming the next Labour government!
After there was none left to blame, the conservative strategy in defending their indefensible economic plan started to change again. Increasingly, Brexiters came out to say that what was happening was nothing unusual, but just the markets doing their work; Anyone thinking otherwise was simply an idiot. Over the weekend the PM then started taking some responsibility for what has happened, acknowledging that the tax cuts were responsible for the turmoil. But again, that of course did not mean her policy was wrong, merely that the world did not understand them and she should have laid the ground better.
As the week went on, more and more voices emerged interpreting the turmoil and backlash as a good sign. In a familiar move of ‘bellicose victimhood’ to use Chris Grey’s term, people like Shanker Singham started spinning the market reactions and the criticisms of the policy as an effort to frustrate the libertarian reform efforts. What had to be done, then, is to resist the objections of feeble and fearful Remainers who are afraid of the PM’s visionary reforms.
Indeed, Trussonomics is working as John Longworth epxlaind on Twitter: “The economy is growing rather than contracting” (presumably referring to the fact that contrary to expectations, the UK economy grew by .2% rather than shrinking by .1% in the three months to June, i.e. long before Trussonomics was even a word and still leaving the UK as the only G7 country with a smaller economy compared to before Covid), “the pound has jumped in value” (after a massive BoE emergency intervention and from a historic low, and despite ‘rock bottom confidence’), and “we have relief for now from energy bills” (which will still lead to energy bill levels that will be unaffordable for many). So, in Brexitland, all is going to plan and anyone saying the opposite – especially “the media” – should ‘grow up’ and the PM hold their nerve just like Thatcher did.
Into the bunker
The way in which the government’s and its Brexiter backers’ arguments have evolved over the past week are remarkable, but by now quite familiar. Reinterpreting economic and political reality to turn them into proof that Brexit is going according to plan has been a key strategy of Brexiters since 2016. Remember, for instance, the short period in November 2021, when the Johnson government tried to spin wage rises resulting from Brexit-induced labour shortages into part of a plan to move the country towards a high skill, high wage economy.
More worrying, Brexiter ideology has increasingly traits of a cult that is impenetrable to reason, argumentation, and unable to evolve by learning from feed-back from the real world that indicates that the theory may be wrong. To the contrary, as Chris Grey astutely observes “every piece of evidence that proves their claims wrong is re-interpreted as proof that they are right.”
This sort of ideology has set in motion a spiral of division that continuous to tear the country apart – with Brexiters now in control of the Conservative party, inexorably drifting to the right (not just in political but also economic terms, as John Burn-Murdoch shows in an excellent article), unable to face reality or acknowledge anyone else’s legitimate concerns. Several observes refer to the Tories’ bunker mentality, where only those who agree with the Brexiter ideology are listened to – everyone else’s opinion discarded as treason.
With the governing party so entrenched in fantasies and policies that are disconnected from people’s everyday life, the only way to stay in power is to completely shut out reality. That can only lead to one thing, namely that increasing numbers of dissenting voices need to be shut up. Robert Shrimsley may be right that direct comparisons with Turkey may be overblown at this stage. But only just. Like Erdogan in Turkey, whose unorthodox economic policy jeopardises his political survival, the Conservatives will soon be in a position where the havoc they wreck with their absurd economic policies means that they simply cannot afford democracy anymore. Due to the increasingly chaotic running of the economy, the list of people who dissent and therefore have to be shut up grows by the day.
Regular readers of this blog will know my concerns about what this will do to the country in the long term. Indeed, as much as I want to believe that these pernicious dynamics will eventually be stopped by a fundamental solidity of the UK’s democratic institutions, the libertarian takeover of our government and its incompetent handling of the economy will lead to a situation where abolishing democracy may be the only thing that can keep them in power. This may seem unthinkable to many readers, but so was a few years ago the idea that an US president may not accept the results of a presidential election and instigate his supporters to storm the Capitol. There is no place for complacency especially given that the Johnson government has already laid the ground for a fully-fledge assault on our democratic institutions.
Doubling down & the A word
Given Brexiter bunker mentality and their fanatism, it is perhaps no surprise that the only answer to the crisis was doubling down on their policies. Already last weekend Kwarteng promised more unfunded tax cuts – as it has become clear since possibly to please some of the hedge fund managers he met after the announcement of the mini-budget. Similarly, Truss’s willingness to be unpopular seems unlimited given her attempt to imitate Thatcher’s ‘the Lady’s not for turning’ approach to the crisis (except that in her unlimited opportunism of course she is).
The government did make some compromises this week. On Friday, in another unusual move, Truss and her Chancellor met with the Office for Budget Responsibility (OBR) whose analysis of the planned mini-budget they previously had rejected. The meeting did not, however, lead to a fundamental change of course by the government. While agreeing to ‘work closely’ with the OBR and finally accepting that it carries out a fiscal forecast, the government insists that the Chancellor’s announcement of plans to bring down government debt in the mid- to long-term will not be brought forward from the November 23 date.
That announcement is almost certainly going to constitute another doubling down on the government’s economic plan, by bringing back austerity. Several events this week already hint at that. Thus, the government persist with its intention not to increase benefits with inflation in order to reduce government spending. Similarly, Chief Treasury secretary Chris Philip has announced that the government will stick with its spending plans set out in its Comprehensive Spending Review of 2021, which means government departments will have to find further ‘efficiency savings’ to be able to deliver services on a de facto shrinking budgets.
This all contributes to the overall strategy of ‘starving the beast,’ i.e. deliberately reducing the government’s income through tax cuts and then imposing austerity to shrink the state. Simon Clarke, secretary of state for levelling up, explicitly stated this goal this week "I think it is important that we look at a state which is extremely large, and look at how we can make sure that it is in full alignment with a lower tax economy”. In other words, after 2010 another phase of devastating age of austerity is about to start. Contrary to Osborne’s decade of austerity between 2010 and 2019, this time austerity will hit an already fragile country where people are desperately trying to pay their bills. The previous decade of austerity has plaid a crucial role in the Brexit vote. Another period of austerity, rather than stimulating economic growth, will lead to further political turmoil. Brexiters seem to be willing to accept that turmoil, as knocking down the current system with a wrecking ball is something they think will allow Britain to flourish. As Chris Grey rightly pointed out, no government is reckless enough to fabricate a crisis like this intentionally. At the same time, as long as they survive it politically, its consequences are not something that will overly worry the ‘wrecking ball politicians’ in charge of the country.
The silver lining
Perhaps the pain that Truss, Kwarteng and their government are inflicting on us will be a price worth paying in the long run. Not because their ‘reforms’ will work, but because their incompetence and cultism finally expose the Brexit project for what it is – a project that has allowed an extremist fringe of the right wing of the political spectrum to grab power.
Its many contradictions and damaging effects on British society, politics, and the economy are now so clear that Labour leader Kier Starmer felt confident enough to mention Brexit in his speech at the Labour conference, stating that people had not voted for Brexit to ‘slash workers’ rights[,] lower standards on food, animal welfare or the environment[, or] wanting to end redistribution’ to conclude that ‘[w]hether you voted leave or remain, you were let down.' While – wisely – not deviating from the ‘making Brexit work’ slogan, this is perhaps one of the clearest statements to date by the leader of the Opposition about everything that’s wrong with Brexit, indicating in and of itself that it becomes increasingly easy to criticise the government for the Brexit it delivered.
If conservatives like Phillip Oppenheim – former conservative exchequer secretary who wrote a scathing letter in the FT – are right, Truss may be the last Conservative PM in our lifetimes. Even if the damage Truss is inflicting on the Tory party is just large enough for it to be unelectable for a generation, then it may well be a price worth paying. Getting rid of the anachronistic monstrosity from a different age that prevents Britain from flourishing in the 21st century, may then allow more modern political forces to fill the space vacated by the Tory party on the centre-right of the political map. That may then finally permit the crucial electoral reform that cannot happen as long as Conservatives and Labour take turns monopolising governmental power. Changing the electoral system seems like a pre-condition for halting the spiral of division that is tearing the country apart, as even conservatives acknowledge. Thus Philipp Oppenheim writes that the FPTP system no longer delivers stability, only division and decline. Once the nightmare is over, maybe we will thank Liz Truss for her wrecking ball politics.