Thursday, May 23, 2024
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The cowardly Conservative Party has created the worst of all worlds


WE NEED to take a step back. The last two weeks, since Kwasi Kwarteng’s infamous mini-Budget, have perhaps been the most extraordinary in modern British political recollection.

Truss and Kwarteng were condemned, with an almost religious certainty, by a host of commentators from the IMF to the German Chancellor, from the usual suspects like the Institute for Fiscal Studies (IFS) and the BBC, to even notionally Conservative voices like Gove and Friends. These voices have got their way, with Kwarteng shown the door in record time and replaced by the declinist consensus in the name of Jeremy Hunt. They say the Budget was irresponsible, that it was unfunded and has caused chaos. What they all parrot is that things were OK until these two philistines ran the good ship Britannia aground. Really? Do they really believe that?

The truth is that Truss inherited one holy mess. The timing of the Budget was extremely ill-advised, certainly, but the economic mess facing her was created entirely by our political class and over many years. It is absolutely not true to claim all was well before Truss. It plainly was not. 

We should be living in a land of milk and honey. At every level our civilisation has created wonders which previous generations would simply not believe, from every labour-saving convenience to global travel, as well as huge advances in the fields of science, technology and medicine. These advances were largely created by private innovation, not public direction. The gift of the Western mind to the entire world is immense.

But our Albion does not feel like a land of milk and honey today. The nation is riven with discontent, division and rancour like never before; a rupture which, in my view, is predominately down to disastrously poor policy choices over many, many years across almost the entire West, but particularly here in the UK. Politicians have meddled, often out of short-term news-flow management and expediency, deluding themselves that they can create a liberal, egalitarian utopia. Instead they have created an unhappy and increasingly impoverished divided land.

The catalyst for the latest of these economic woes was the fundamental breach with sound money. Governments taxed (usually too much) but they were constrained by the simple law of economics that Government spending was based broadly on the productive success, or failure of the nation. Gordon Brown changed that by adopting novel quantitative easing in March 2009. Perhaps it was justified as an emergency measure to quell the impending banking crisis. Whatever one’s take, it was expedient and primed a time-bomb that is now exploding globally.

The real damage, however, was done during Mark Carney’s tenure as Governor of the Bank of England from 2013 to 2020, and immediately after. In common with the Fed and ECB, central banks failed to normalise interest rates and end QE, creating a new normal of near-free money. This encouraged Governments to borrow in a fashion unprecedented outside wartime. British debt increased fivefold in just 15 years to an eye-watering £2,400billion (or around £85,000 per household). And if money was elastic and increasingly unrelated to real economic activity, why not just do even more? Build that school, duplicate that railway, spend £500billion locking down the economy.

Of course it was a delusion. A convenient one, for sure, as what’s not to like about rising asset prices and endless spending? But this policy was without precedent in the 300-year-plus history of the Bank of England and it could not last. The only question was when would it blow?

The answer, unfortunately, is now. Not with the Budget two weeks ago, as the architects of free money would have you believe, but with the decade-long unsustainable fiscal and monetary response coming to a necessary global end. The lockdown was one major error too many and caused immense economic harm with supply chain issues, work disruption and ‘free money’ starting to fuel inflation. The consequences of war in Ukraine and subsequent cancelling of Russian hydrocarbons, without ready competitive alternatives, made matters much worse.

As inflation soared, the ‘free money delusion’ came to an abrupt end globally. With the Fed tightening and the Bank of England and ECB doing the same, albeit more timidly to try to quell inflation, the game was up. Worse, ‘free money’ over so many years had gravely distorted economies. It made housing increasingly unaffordable, diverted wealth into unproductive areas and gave Governments the power to do as they pleased without apparent sanction from global markets as central banks suppressed the yield curve globally.

The state grew out of all proportion. In the UK public spending increased by 24 per cent between 2019 and today for an inferior service. Regulation increased exponentially with barely an industry untouched by the hand of government. Within a short period Britain moved from a moderately taxed and regulated economy into one which is increasingly unstable with a state of almost half of GDP, taxes at a 70-year high and micro-regulation in almost all spheres of life, meanwhile tossing carbon security aside for unproven and currently uneconomic alternatives. It is thus no surprise that growth declined markedly and on a per capita basis became almost non-existent. 

There is no doubt that Kwasi Kwarteng’s Budget was ill-thought out and poorly timed. It was half a Budget. Tax cuts and deregulation needed to be balanced with real spending cuts. It is also true that as central banks tightened it made running large deficits unsustainable. However, we must not however be fooled by the crowd into forgetting the instinct of reducing taxes and regulation was right and indeed critical given the mess we are in.

The alternative proposed by former central bankers, Starmer, Gove and others is entirely the wrong approach. Their remedy is more tax, more spend, more decline and even less freedom.

This cowardly Conservative Party has created the worst of all worlds. A sacked Chancellor, alockdown-loving new Chancellor, total U-turn, a captured PM and whether there is another coup or not doesn’t really matter as it’s more of the same for two years. It now seems the Tories have accepted the declinist school of mediocrity and control. Thus in all likelihood we can look forward to a super-charged Labour Party increasing the tax, spend and control ratchet yet further.

This will crush the remaining damaged private sector engine of growth of this country, lead to weak investment and accelerate decline. That must be obvious. It leavesLabour riding high, promising an even more extreme form of state control than that of Johnson and Sunak.

This is a not-so-slow-motion car crash with very real consequences. The left-liberal consensus that ‘tax cuts and deregulation that did it’ is complete nonsense. The crisis is global; Kwarteng’s now abandoned tax cuts of £45billion were small beer compared with £500billion on lockdown and, in any case, they took tax as a proportion of GDP only back to where it was in 2021. Hardly radical. He didn’t even fully reverse Sunak’s tax rises to pay for Johnson’s foolish lockdown. However, misunderstand the illness and you get a quack cure.

We have got used to wealth but have forgotten that to create it requires a complex web of stable, restrained government and the rule of law, a high degree of liberty but also innovation, free competition and hard work. Prosperity, civil discourse and quiet governance cannot be taken for granted.

Argentina, before Peron ruined it, was one of the wealthiest nations on earth. For 70 years they have failed to recover their mojo. Yes, they have nice wine and decent food, but they stumble from one crisis to the next with the middle classes destroyed and mediocre care for the poor. Once equilibrium is lost it is hard to regain as recriminations, blame and the illusory search for utopia create discord, disharmony and decay.

Make no mistake: Sir Keir Starmer, if elected, will exacerbate this crisis and with £2,500billion of debt he too will be forced to cut the cloth. His solution will be to tax, regulate and nationalise yet further. Growth will wither, interest rates will rise to fund unsustainable debt and with that the remaining wealth of the nation will decline, perhaps materially.

There is no doubt that this is a turning point and to compound the error the price to all, rich and poor, will be very high indeed. 

If we are to have any future the country has to regain a sound monetary policy, it has to trust the family unit, encourage enterprise and control the state. That means unwinding the excesses of the Sunak/Johnson years, reducing materially the size and scope of the state, freeing us from micro-regulation and cutting tax gradually but consistently over time. The good news is while for all in the West the next few years will be tough – the end of free money will result in a major asset price readjustment – reducing tax, regulation and growing the private sector works, and very quickly.

Blair expanded the state to around 40 per cent of the economy, then the Conservatives took it to the next level, almost ten points higher. Now it seems that is not enough for our Establishment, but they could not be more wrong in their analysis. Installing Jeremy Hunt as Chancellor says all we need to know about how our political class thinks. But ultimately their consensus is doomed to fail. 

If we wish to live in a prosperous land there is no alternative to blood, sweat and tears. Money does not grow on trees.

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Ewen Stewart
Ewen Stewart
Ewen Stewart is a City economist who runs the consultancy Walbrook Economics. He is director of the think tank Global Britain and his work is widely published in economics and political journals.

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