The UK: Out the Unfunded Spending Fire and into the Austerity Frying Pan

Blain’s Very Late Porridge – Monday 17 October – The UK: Out the Unfunded Spending Fire and into the Austerity Frying Pan

This evening: If you thought Unfunded Spending was a bad idea, don’t be fooled Austerity is going to be any more successful. It’s Anti-growth, regressive and will push the UK into deep recession, but is about the only policy option left open to the discredited Tories.

Apologies for no comment earlier this morning. I was running round London. I decided to hold off till after the new (n+1) UK Chancellor had presented his new “emergency statement” undoing absolutely everything Liz Truss has announced, but unfortunately not the damage she has inflicted on the economy and our pockets… Its too late for that.

But let me start with a Limerick:

There once was a PM named Truss

Who politics caused quite a fuss

But instead of departing,

She called in Mr Kwarteng

And pushed him right under a bus…

This week is the 35^th anniversary of the Great Crash of 1987. I remember it well. As I expounded on Friday in What comes next? Markets are mean reverting, are you prepared? It’s looking like deja vu all over again.

The UK has demonstrated the risks of massive policy mistakes by the main actors in this unfurling global financial crisis are immense. Politics is a danger because Kwarteng and Truss demonstrated its entirely possible for the lunatics to be given the keys to the asylum. Don’t discount similar political dumbf***ery in other nations. That Liz and Kwasi have collapsed the UK’s financial credibility is hardly a great insight into markets and politics. They are fated to be scapegoats for a much wider series of crises this way coming.

The current economic debacle facing the UK is more than just a polycrises or omnishambles of domestic issues, including, but not limited to: leadership misjudgements, failing services, anaemic growth, tumbling productivity, sub-optimal investment, surging mortgage rates and consumer price misery.

There is a wider global angle whereby rising interest rates, unsustainable government, corporate and personal debt levels, and persistent inflation may combine into a global activity/trade meltdown, resulting in recession/depression could will feature high inflation for decades. (Don’t discount the inflationary effects of the de-facto withdrawal of China from the eco-sphere..)

We don’t yet know just how destructive and destabilising the consequences may yet be. (Clue – horrible! But remember: things are never as bad as you fear, but never as good as you hope.)

It’s not worth repeating the cataclysm of failure and policy mistakes since Truss was appointed Prime Minister by a small number of rich, aged, white conservative men in her party.

The upside is Jeremy Hunt has “courageously” stepped into the breach, playing his new chancellor “can’t be sacked” card to unwind the illiteracy of Trussonomics, but he can’t wipe away the indelible stain its left on the economic outlook for the nation. He clearly upset Truss – No 10 started actively briefing against him almost from the start. The only Truss “policy” to survive was the removal of the banker bonus-cap… why? Did his script writer miss it?

The problem is – Hunt may be equally illiterate when it comes to understanding the markets and what they want to hear. We may be jumping out the proverbial fire and into the frying pan of worse economic policy.

Hunt, and many traditional, orthodox Tories, believe Truss and Kwarteng failed because they didn’t balance the budget, thus upsetting the markets. That’s a massive mistake. Take your pick of the many reasons markets lost confidence in the gruesome twosome:

• Markets sold off because the mini-budget was chaotic and dangerously ill-informed.
• Markets sold off because it was patently unfair and regressive.
• Markets sold off not just because there were unfunded spending plans, but because the proposed tax cuts blithely assumed “trickle-down” economics would up UK growth by 2% per annum.
• Markets sold off because there was no clarity or vision of the policies to drive growth.

The new problem is Hunt has ditched Truss’s growth plans and presented a new mini-statement committing the UK to financial conservatism – effectively switching policy from Growth to Austerity. Hunt and the rest of his party have hunkered down, convinced the only way to restore the financial stability of the UK is to address the £70 bln hole in the accounts (they created) is tax hikes and spending cuts.

Austerity is never a route to growth.

One of my chums is fellow Scotsman Professor Mark Blyth is Rhodes Professor of International Economics at Brown University in the USA. His 2013 book, Austerity: The History of a Dangerous Idea, picks apart the notion of austerity will boost growth by slashing debt. ““In general, the deployment of austerity as economic policy has been as effective in bringing us peace, prosperity, and crucially, a sustained reduction of debt, as the Mongol Golden Horde was in furthering the development of Olympic dressage.”

Blyth goes on to show how Austerity doesn’t work, it increases inequality, and that it can’t work in a competitive global economy where prices and currencies are volatile. He asks:  “Is everybody supposed to run current account surpluses? If so, with whom—Martians? And if everybody does indeed try to run a savings surplus, what else can be the outcome but a permanent global depression?”

I spoke to Mark following Hunt’s statement and his disbelief was palatable: “The UK’s growth model, such as it was, was built around asset protection for the south and nationalism for the north. When you can’t even do the asset protection right any more, what’s the point? And if you think further cuts to a welfare state that is already one of the worst in the OECD will bring back growth I would ask you to look at what happened the last time you tried this with Osborne for a bit of a reality check. Benefit Street and ’strivers vs skivers’ makes for good tabloid headlines but does nothing for GVA (Gross Value Added).” 

The real issue is Austerity is not the only way forward. It is for the Tories – because they can’t now be trusted with anything economic policy related.

But – and this will surprise readers – let’s give Truss and Kwasi Kwarteng some credit: their objectives were good; recognising the UK needed new, disruptive approaches and policies to drive growth and improve productivity.

Their goal was to smash the orthodoxy and transform the UK’s lethargic low-growth, low-wage and low-productivity economy into a hi-energy hi-growth economic powerhouse. (Conveniently they skipped over how Conservative Party has been in power for the last 12 years, during which time the value of the UK economy has fallen from 90% of Germany’s to 70%. Brexit? Let’s not even go there!)

Then it got messy.

Recognising the UK is a lethargic stifled economy was a hardly a Sherlock Holmes moment for anyone remotely familiar with economic reality. But Truss and Kwarteng thought they’d uniquely stumbled on the obvious truth as some great economic insight – and naively decided only they were qualified to propose solutions. It was dangerously destructive arrogance that led them to sack the Treasury secretary, leave out the OBR, ignore the Bank and dis the DMO. What they did may have condemned the UK to penury for a generation.

Their strategy and policy announcements were beyond shambolic – untested, regressive, ill-advised and downright pig-ignorant of any economic or market reality. There was no strategy, no grand plan, just desperate hopes expressed as irrefutable facts. The UK’s financial reputation took a millennia to establish. It took Kwasi Kwarteng less than 30 minutes to demolish. He expected to be praised as a visionary. Doh!

The really upsetting thing is – prior to September 23^rd 2022 (the date of Kwarteng mass-suiciding the UK economy) it would have been entirely possible to have presented a cogent, credible and workable plan to bailout the UK energy crisis, promote growth via a series of specific taxes, borrowing and policies, and even begin a progressive redistribution of wealth that could have retained lower earning voters. That opportunity has now been lost – for ever.

On Sunday morning before Hunt presented his plan, Tesco Chairman John Allan, a highly respected British business leader, told the BBC’s Laura Kuenssberg the Conservatives have no growth plan, but: “We have seen the beginnings, I think, of a quite plausible growth plan from Labour. At the moment their ideas are on table, and many are actionable and attractive.”  His views are generally shared across the City of London – where previously support for Labour was considered a capital offence.

We all know how it played out for Truss and Kwarteng. They have left the UK as a global financial laughing stock. By focusing the eyes of the world on our financial crisis, umpteen doors and policy options that could have offered effective ways for the UK to navigate its way through the multiple crises now upon us are now closed.  They have made finding a solution so much more difficult.

Yet cutting debt and services provided by Big Government is default libertarian conservatism and will appeal to all 81326 party members who voted for Truss as Prime Minister of the UK. The may be happy.

The rest of us are not. 12 years is a long, long time in politics. Time for a change.

Out of time, and back to the day job…

Bill Blain

Strategist – Shard Capital