The demise of Trussonomics was a welcome victory for decency and common sense in a minor battle within a broader class war. Sadly, the class that Liz Truss tried to bolster with copious tax and regulatory gifts will win this war by deploying an even nastier, blunter, dirtier weapon: austerity.
Britain’s wealthy owe a debt of gratitude to the Truss-Kwarteng circus. By destabilising the markets so spectacularly, and turning instability into the dragon that the latest Tory government must slay, they have released the “adults” – Treasury officials and the stealthier Tory class warriors behind Rishi Sunak and Jeremy Hunt – from the political constraints imposed on them by an austerity-averse population.
Under the Tories, all roads after the Covid-19 pandemic led to austerity. The only real difference among their squabbling crew concerned the chosen path, not the destination. As chancellor, Rishi Sunak understood the choice they were facing once the pandemic subsided and inflation surged.
The first option was interest rates of above 6 per cent to contain inflation, which would, however, finish off the financial and corporate zombies on which his class depended for their wealth and power. The second option was punitive austerity that would achieve the same objective at lower interest rates made possible by the economy’s rapid slowdown.
Sunak, along with the Treasury, clearly favoured the latter but Boris Johnson, savvy enough to sense that austerity was political poison, would not allow it.
Borrowing from Johnson’s playbook, Truss defeated Sunak by campaigning against austerity while, furtively, planning to impose it later once her wealth transfer to the ultra-rich was complete. She and Kwasi Kwarteng knew that austerity would have to follow because they understood that the only way to stem inflation without austerity was to embrace a progressive agenda: higher green investment to reduce energy prices, a windfall tax on the banks’ profits, rent controls and new social housing.
Long before “partygate” ended Johnson’s premiership, Sunak had embraced a clear sequence. Impose austerity to control inflation and deter workers’ wage claims and only then transfer more wealth to the rich via tax cuts.
But Sunak’s embrace of fiscal conservatism made him an easy target for Truss. By reversing his proposed sequence of austerity first and tax cuts later, Truss succeeded in, at once, beating Sunak and becoming the shortest-serving prime minister ever.
In fairness to Truss, most pundits also believed that the markets, lulled into a false sense of security after a dozen years of socialism-for-financiers, would remain calm for a few months by which time the Truss-Kwarteng duo would slowly but surely tighten the austerity screws as necessary. Setting aside some silly and easily avoidable errors, such as firing the Treasury’s Sir Humphrey and silencing the Office for Budget Responsibility, no one had an inkling of the landmine Truss’s reverse sequence would set off, causing enough market turbulence to test the nerves of even the International Monetary Fund.
The landmine in question was, as we all know by now, the derivatives UK pension funds had massively invested in to hedge against inflation and higher interest rates – derivatives they could not afford except by borrowing against their stock of UK government gilts. When the news came in that Truss was planning to issue more gilts to pay for large tax cuts, without frontloading austerity, the price of gilts fell and, suddenly, pension funds had to post more cash to cover the debt they had incurred to buy the derivatives. In a state of panic, they sold the only liquid asset they had: gilts! And so the doom loop began until the Bank of England intervened and Liz Truss left 10 Downing Street in disgrace.
Even before Sunak’s coronation, the Treasury had got itself a Chancellor of its liking: Hunt who was credited with calming the markets through austerian propaganda that everyone knows to be false: the imperative of balancing the books, the evil of unfunded commitments. The markets, undoubtedly, know that this government, just like previous ones, is never going to balance the books. They know that the point of fiscal policy is to keep the underfunding of government expenditure at a level consistent with long-term debt sustainability. So, why are they calmed by Hunt’s and Sunak’s austerian prose?
The answer is that the corporate and financial zombies kept alive for so long by low interest rates need austerity. The alternative is interest rate rises that will drive a stake through their heart. By contrast, large cuts to the real value of Universal Credit payments will depress workers’ ability to demand higher wages and thus help the Bank of England suppress interest rates as it fights inflation. Austerity, through this prism, is a cynical means of shifting as much of the economic pain as possible from owners to non-owners, both in the labour and in the housing markets.
Sadly, the living standards of the bottom 50% will not be the only victim. Investment in things Britain desperately needs will be the long-term casualty. By reducing public expenditure in real terms at precisely the moment private real expenditure is falling like a brick, the state accelerates the decline of economy-wide expenditures (i.e., the sum of private and public expenditure). But, in any economy, collective expenditure always equals collective income. Consequently, by choosing to suppress real wages and benefits via spending cuts, the Sunak-Hunt government signals to businesses that they would be mad to spend money into building up the capacity to produce stuff that consumers out there won’t have the money to buy. That’s how austerity slayed investment under George Osborne, but also across the Eurozone during decade following the 2008 financial crash.
Watching this drama unfold from southern Europe, it is hard not to spot the similarity of Sunak to Mario Draghi and Mario Monti of Italy and Lucas Papademos of Greece. Besides sharing, along with Sunak, strong ties with Goldman Sachs, all these Prime Ministers were tasked by the “adults in the room” with imposing austerity on populations that never had a chance to vote for them.
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