The Bulletin World Weekly is a newsletter by Peter Bale exclusively for Spinoff members, covering and analysing the most important stories from around the globe. In this excerpt from the latest edition: the UK’s spiralling economic disaster.
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New Zealanders of a certain age may recall what it is like to be living in an economics test tube or at least in the wake of the Chicago School of Economics. In this country it was Rogernomics, the radical attempt to make Aotearoa a model of 1980s economic theory: that meant ending subsidies, privatisation and other economic shock therapy.
People in the United Kingdom are now living through a period that may be just as disruptive and painful – without having elected a new government with a mandate to carry it out. It is a full-blown crisis that threatens the pensions, savings, and livelihoods of millions.
The pound is collapsing, government borrowing is skyrocketing, and the UK – a G7 economy which started this crisis as the sixth-largest economy in the world – is fast becoming an economic basket-case.
It’s all happened in not much more than a week since prime minister Liz Truss and her chancellor of the exchequer Kwasi Kwarteng launched a tax-cutting mini-budget with a single-minded focus on economic growth. It was what Kwarteng’s aides called a “shock–and-awe” approach to the economy which included firing the top civil servant in the Treasury on day one.
Markets were certainly shocked, selling the pound sterling and dumping British bonds. That combination – especially the risk of a run on bonds and even on stocks and shares to shore up pension funds – compelled the independent Bank of England to intervene with an immense programme to buy bonds, dramatically reversing its emerging strategy to combat inflation.
In what may become a crisis between the central bank and Kwarteng, the Bank of England said it was acting because of a “material risk to UK financial stability” triggered by the government’s own actions.
As the crisis unfolded the Financial Times (paywall) noted dryly: “Kwasi Kwarteng made headlines in 1995 when he twice uttered the word ‘fuck’ on University Challenge; the same word reverberated around trading rooms on Monday as the pound gyrated in response to the UK chancellor’s new economic policy.”
The pound fell to its lowest-ever level against the US dollar (which has been strengthening against most currencies this year) and UK bond yields skyrocketed as prices fell sharply – increasing the cost of borrowing for everyone eventually. Analysts in the City of London predict the central bank may raise interest rates to 6% from the current level of 2.5%.
Truss and Kwarteng appear to be heavily influenced by the fringe economists Gerard Lyons and Sir Patrick Minford who endorse what is sometimes over-simplified as “trickle down economics”. Lyons this week called Bank of England fears of inflation “utter rubbish” while Minford said only “idiots” were worried about the fall in sterling.
This crisis plus the lingering impact of Brexit could spell a economic disaster for Britain that rivals the global economic crisis of 2008. What’s worse is that it’s almost entirely self-inflicted. The ideas driving it were outlined a decade ago by Kwarteng and Truss in a book they helped co-author named Britannia Unchained, which proposed huge tax cuts and a dramatically smaller role for the government. That last shoe has yet to drop but Kwarteng has talked about a further budget in November – which analysts and many in government say will be too late to avert the oncoming crisis.
“This inept madness cannot go on,” Conservative MP Simon Hoare tweeted.
As the crisis gathered pace early in the week, Kwarteng tried to give the impression he was unruffled by the market reaction to his mini-budget, telling the Financial Times: “Markets move all the time. It’s very important to keep calm and focus on the longer-term strategy.”
That was before the Bank of England intervened to try to stem a run triggered by the Kwarteng announcements of tax cuts funded by extensive borrowing. The International Monetary Fund and the US Federal Reserve weighed in with their own warnings about the risks to the UK economy and the potential for contagion given the UK’s size.
“The UK is behaving a bit like an emerging market turning itself into a submerging market,” former US Treasury secretary Larry Summers told Bloomberg TV as the crisis developed and before the Bank of England moved. “Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time.”
Recommended reading
What is the Bank of England doing in bid to stabilise UK economy? A valuable explainer from The Guardian on what the central bank is trying to achieve.
Britain’s market rout stokes contagion fears around the globe A Reuters analysis of the global risks from the UK crisis, including handy charts on currencies including the NZD.
Britain’s economic crisis is a warning to the world – This is a sign of a failed fiscal orthodoxy An analysis in The Spectator by Wolfgang Munchau explaining just how weird the UK crisis is and how baffling the economic direction of Kwarteng seems.