Everyone can see that the Tories have destroyed the economy. Inflation is soaring, mortgage rates are shooting through the roof, and the cost of government borrowing is spiralling out of control. The only thing going down is the value of the pound.
Many Tories, including Chancellor Jeremy Hunt, are already building the narrative that the government borrowed too much and so we must cut public spending – a return to the austerity policy of the last decade. This argument is wrong in many respects.
Firstly, the economy has not crashed simply because the government borrowed too much money. France, Japan and Spain all have far larger government debt than the UK, and yet they are not experiencing the kind of economic crisis precipitated by Liz Truss’ mini-budget. During the pandemic, Rishi Sunak borrowed upwards of £400 billion to rescue the economy and no one asked ‘how are you going to pay for it?’.
The fact is that as a country with its own sovereign currency, the UK government can never run out of money. The Bank of England spends money into existence at the command of parliament and will always be able to do so.
However, this does this not mean that the government should spend unlimited amounts. The real constraint on government spending is not the threat of bankruptcy, it is inflation. Rishi Sunak was able to borrow vast amounts during the pandemic because the economy was in recession so had the capacity to absorb the huge new spending without causing inflation.
On other hand, when Liz Truss and Kwasi Kwarteng announced £45 billion of tax cuts at a time when inflation is already at 10%, the markets correctly judged that this would further push up prices. International investors saw the obvious truth that allowing rich people to go on a £45 billion spending spree will of course drive up inflation, and so they dumped UK assets.
Thus, the UK needs to begin dealing with the real crisis it faces: inflation. The government can reduce inflation by increasing taxes because this reduces overall consumer spending. So, the government must introduce an emergency 60% top rate of tax for those earning over £200,000 a year to cut their spending and reduce inflation. It would be morally abhorrent to get control of inflation on the backs of the poorest in society. Instead, the wealthiest people must accept their patriotic duty to take a temporary cut in pay to get inflation in check, just as they did during the Second World War.
The government must also act now to restrain the vast profits of some corporations. Oil companies are self-proclaimed ‘money printing machines’ due to the global oil price shock. Banks are making a killing off the sky-high mortgage and interest rates that the British people now face. The government has no choice but to place windfall taxes on the inordinate profits of these corporations.
The Tories have a different strategy to face the economic crisis of their own making. Jeremy Hunt, the new Chancellor of the Exchequer (for now), has said that he intends to fill a ‘£60 billion black hole’ in the public finances, partly by cutting government spending. This £60 billion figure is pure nonsense. It is based on the assertion that the government must cut its deficit to zero within three years. However, the deficit hasn’t been that low in 20 years. Why Mr Hunt thinks we need to cut the deficit so rapidly, when the economy needs support to get through the energy crisis, is incomprehensible.
But Mr Hunt is right that government borrowing does need to be reduced, even if not by £60bn, because reducing government borrowing will cut inflation and restore confidence to the financial markets. The chancellor is signalling that he will achieve this by cutting public spending. Such a course of action would be economically illiterate.
David Cameron and George Osborne already tried to balance the books by cutting public spending. It did not work. It lead to a decade of lost economic growth. It caused widespread poverty and the near collapse of the NHS. And it did not even get down the debt.
The impact of their austerity policies is still being felt today. One of the main reasons for this country’s weak economic growth is that hundreds of thousands of people cannot work due to long-term illness caused by the underfunding of the NHS. If the Tories had not shut down Gordon Brown’s home insulation programme, the British people would be saving £3.7 billion on their energy bills every year. This reflects the essence of all Tory economics: saving money in the short term, just to lose it in the long term.
So what should the government do instead? It should reject public spending cuts and instead hike taxes for those who can afford to pay a bit more. And, once inflation has settled back down, the government must recognise that it will then be able to afford to borrow more. A strong economy depends on the government borrowing to invest in projects that will lower inflation in the long term. If the government borrows over the long term to invest in insulating every home in Britain, retraining our workforce for the 21st century and building a new wave of green infrastructure, then they will get the economy growing and keep the confidence of the markets. Assuming that Jeremy Hunt is still set to make his fiscal statement on 31st of October, he can take the opportunity of Halloween to bury the zombie economics of austerity by choosing to tax the rich and set out a plan for the green future of our economy. If he does not, the British economy will slide further into global irrelevancy.
Image: CC2.0//William Murphy via Flickr.