In chess they call it zugzwang – a situation in which any legal move leaves the player worse off. Both the chancellor, Kwasi Kwarteng, and the Bank of England are searching for a winning way out of their predicaments, given the constraints imposed by public opinion. They are unlikely to find one. “Trussonomics” – a mixture of tax cuts, sharp reductions in public spending and higher interest rates – has arrived as Britons back higher investment, nationalised industries and lower levels of inequality. Voters are getting the opposite of what they want, with trust in ministers plummeting.
No government has sabotaged its economic reputation as quickly as this one. The Bank has had to step in three times since the chancellor’s mini-budget to stop a big sell-off in UK debt caused by the government announcing a fiscal package that borrows, according to the Institute for Fiscal Studies, £370bn over the next two years for little obvious economic gain. The mayhem was entirely predictable. Mr Kwarteng is spending more than the government gets back in taxes; the difference is funded by selling government debt at a price determined by auctions where finance houses determine the yields. The more debt that is issued, the higher the interest rate investors demand to hold government IOUs – a process that leads ultimately to higher mortgage payments.
The Bank had wanted to hike rates – by shrinking its QE gilt portfolio by £80bn through bond sales – to fight inflation. It was the only major central bank to do so – an act the economist Daniela Gabor described as “an open invitation for gilt market disruption and financial instability”. Mr Kwarteng’s plan is similarly an outlier. Instead of public spending to counter price shocks, the chancellor thinks that the rich getting richer will see the economy outrun inflation.
If this continues unabated, Britain could end up suffering financial collapse and social devastation, followed by a long political crisis, as happened in some big middle-income countries 25 years ago. Both the Bank and Mr Kwarteng appear to think that certain sectors of the economy will fail because they are not competitive enough – thereby setting the stage for even more neoliberal reforms.
Britain needs stability to fix what ails its economy. The Bank should align its policy with the government’s fiscal plans by continuing to buy bonds to calm markets and control interest rates at tolerable levels. It will have to make a decision on this by Friday – when the Bank is due to end its daily bond purchases. Higher borrowing costs won’t lower energy and food prices. That is the job of the government, which should also replace its current growth plan with one that sees managed wage increases, lifts living standards and seeks to boost investment levels to raise productivity.
The alternative is to carry on with Trussonomics and witness the deliberate creation of unemployment and the collapse of businesses in a painful recession. It is cynical to think that politicians orchestrate ways to permit cash-rich businesses to pick up bargains amid the economic wreckage without sparking a popular revolt. But it is hard, with the present government, to discount such ideas.
