Liz Truss’ Economic ‘Shock Doctrine’ Is Pushing the UK to the Brink
As the Bank of England takes alarming steps to stabilise the economy, the Prime Minister is preparing for a devastating new era of austerity, reports Adam Bienkov
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The Bank of England made another huge intervention in the UK economy this morning to prevent what it described as a “material risk to UK financial stability”.
The intervention in Government bond markets – the second it has made in as many weeks – followed a collapse in market confidence after Liz Truss and Kwasi Kwarteng’s disastrous mini budget.
In an alarming statement, the bank said that “dysfunction” in the market meant that it had been forced to intervene to prevent a “self-reinforcing ‘fire sale’ dynamics” from taking hold.
Following its announcement, the International Monetary Fund (IMF) issued its own statement, warning that Truss’ economic plans – which it had already urged the Prime Minister to “re-evaluate” – would only “complicate the fight” against rising prices.
Statements like these would normally be expected to trigger alarm in Downing Street or, at the very least, an immediate commitment from the Chancellor to take action. No such commitment has come.
The Chancellor told the House of Commons on Tuesday afternoon that he remained committed to his existing plans. Meanwhile, a spokesman for Truss told reporters that the Bank of England’s latest intervention had not even been discussed at this morning’s Cabinet.
Asked by Byline Times whether Truss was confident in the bank’s ability to stabilise the economy, her spokesman said that the “fundamentals” of the UK economy remained strong.
It is becoming increasingly difficult to justify this confidence.
The Chancellor’s announcement of significant unfunded tax cuts spooked the financial markets for the simple reason that they are no longer convinced that the UK Government is able to pay for them. In the weeks following Kwarteng’s announcement, international ratings agencies have downgraded the UK economy from “stable” to “negative”, while the surge in the cost of Government borrowing has led to a subsequent surge in mortgage and rental costs.
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This combination of higher borrowing costs, and unfunded tax cuts, has caused a huge hole in the Government’s spending plans, which the Chancellor has committed to filling when he makes another “fiscal statement” at the end of this month.
Of course, the most obvious way to fill that hole would be for the Chancellor to scrap his planned tax cuts. However, with those cuts forming the centrepiece of Truss’ entire economic strategy, this remains unlikely. The Prime Minister’s spokesman told Byline Times that she is still committed to dramatically cutting the tax burden in the UK.
But, without a reversal of those cuts, and without a massive and inexplicable surge in economic growth, only one option appears to remain.
As the Institute for Fiscal Studies outlined today, without any reversal of the tax cuts imposed by the Chancellor, we are likely to see truly devastating public sector cuts over the coming few years. According to its analysis, the Chancellor’s tax cuts require annual cuts to government spending of around £62 billion in the coming years. To put that into context, that is around half the Department for Education’s entire budget.
Even if we assume that the cuts are spread more widely, we are still looking at truly colossal cuts. If Truss’ Government, like David Cameron’s before it, protects health and defence spending at current levels, then that implies cuts of around a third to the budgets of all other remaining departments. This would be an even bigger reduction in spending than under the austerity budgets of George Osborne and would follow a decade of continued low growth and cuts to public services.
It would, in short, be utterly devastating. Certain basic and essential public services would simply cease to function while the welfare state would be cut right to the bone.
But the important point to remember here is that, disastrous as this would be, it would not be an accident. As the Levelling-Up Secretary admitted last month, it is in fact a deliberate strategy by the Government to slash the size of the state in order to fund tax cuts.
As Simon Clarke told The Times, Truss’ Government believes that the UK is living in a “fools’ paradise” in which the UK’s “extremely large” public sector now needs to be brought “in full alignment with a lower tax economy”.
Truss has yet to admit to what this actually means in practice. Her spokesman this morning told Byline Times that she remains committed to maintaining Boris Johnson’s commitment not to bring in a new wave of “austerity”.
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Yet a reckoning is surely coming. Either Truss will have to reverse her planned tax cuts, and potentially impose further tax rises, or she will feel compelled to implement the most painful set of public service cuts this country has seen for decades. If she fails to do either, the instability we are currently seeing in the UK economy risks tipping over into a major financial crisis.
As we head towards that reckoning, Truss’ Government will no doubt attempt to convince voters that it is all an inevitable result of ‘global’ factors, such as the war in Ukraine. But, while such factors are undoubtedly affecting most Western economies, the particular crisis affecting UK financial markets right now is – as the Bank of England itself has a made clear – overwhelmingly the responsibility of Truss and her Chancellor.
As Sam Bright has set out on these pages, the economic and social disaster we are currently seeing unfold is a direct result of the extreme libertarian economics which Truss, Kwarteng and the right-wing think tanks which supported their rise to power have been pushing for more than a decade.
At fringe meetings at this year’s Conservative Party Conference, hosted by the Institute of Economic Affairs and TaxPayers’ Alliance, it was notable that representatives from these groups emphasised the need for slashing the size of the state, even above tax cuts. For these groups, which boast of having previously hosted Truss more than any other UK politician, austerity is the number one political aim.
The economic ‘shock doctrine‘ of tax cuts and subsequent cuts to public services, is not an accident, but a deliberate and long-term political aim. In this view of the world, the likely new wave of austerity will not so much be a means to an end, but an end in itself.
It is not yet too late for Truss to avoid this disaster. A moderate programme of tax rises and support for the most vulnerable people in society could help prevent most of the social harms and economic turmoil which the Government’s current plans are leading us towards. And while the Prime Minister is unlikely to change course out of her own free will, it remains possible that Conservative MPs, fearful for their own futures, could force her to reconsider.
But with the UK economy in an increasingly alarming place, it remains to be seen whether that change, if it comes, will come soon enough.