Imagine if a British explorer – Helen Sharman or Tim Peake – had left Earth on a space mission that left them unable to communicate between, say, 2006 and today. What is their reaction to the desperate state of their country’s economy? What was their first question? I was thinking something like, how did this happen?
This is a question we may be asking ourselves today: how did this happen?
In 2006, the UK economy grew by 2.6 percent – not spectacular, by any means, but a fairly useful figure. By the way, it’s one pip more than the chancellor, Kwasi Kwarteng, who said he was targeting as he embarked on the round of debt-funded tax cuts for the rich that were disclosed in his pathetic mini-budget last Friday.
The worst growth recorded over the previous year’s Blair/Brown was 2.1 percent. There are some that do much better than that. What has happened was created by a combination of an international crisis and very poor domestic policymaking. Some hits are unavoidable, but not all of them.
Things started to go haywire in the second half of 2007, when deep thunder in the newspapers’ financial pages hit their front pages after it emerged that Northern Rock, a mid-sized lender, was being propped up by the Bank of England. People began queuing outside its branches for withdrawals as the country experienced its first “run” at the bank in decades.
The following year saw a recession of historic proportions (at least until Covid came), in which the UK economy fell 4.2 percent as contagion from America’s sub-prime lending crisis delivered a severe dose of financial flu. The government ended up borrowing billions of pounds to prop up British banks.
The UK economy took a bigger hit in the resulting recession than most of its big rivals, due to its disproportionately large financial sector. It’s also slow to get out of it.
The 2010 general election led to a coalition between Conservative David Cameron and Liberal Democrat Nick Clegg, which resulted in an austerity program designed to balance the country’s books. This proved far more challenging than George Osborne, chancellor had hoped. UK “growth trend” is slowing. Critics say the decision to cut spending was the main reason. GDP growth below 2 percent becomes normal as the country moves down a slow path. But something worse was to come.
The next economic shock is the courtesy, of course, of Brexit. All the government’s gaslighting – and the opposition trying not to talk too much about it – can’t make the harmful effects of the 2016 referendum go away. The referendum was held by David Cameron, in an attempt to quell the internal debate that had been raging in the Tory Party – and Leave’s unexpected victory did not initially deliver the scale of shock that some had predicted.
However, investor confidence was shaken when Britain found itself in a political stalemate, which was resolved by a general election that brought Boris Johnson to power. The hard Brexit he made to pay off to the hardliners who provided the foundation of his support immediately made his presence felt.
It kicked up the economy, dealing a crushing blow to international trade. Then the pandemic hit.
Once again, Britain suffered disproportionately, this time in large part as a result of its government’s indecision. The late entry into force of the lockdown in March 2020 left him at risk of a public health crisis turning into a jobs crisis. It was avoided under the auspices of one Rishi Sunak. The Chancellor then summoned the TUC and CBI, which led to the creation of the Coronavirus job retention scheme.
Per the House of Commons library, 11.7 million employee jobs were laid off through the scheme, which pays up to 80 per cent of employees’ salaries up to a maximum of £2,500 per month, at a cost of £70 billion.
With the entire sector in forced hibernation, the resulting recession still saw GDP contract by 9.3 percent, much worse than what the UK experienced during the financial crisis. Tax revenues collapsed, leaving a gaping hole in public finances. However, those responsible for maintaining the economy can at least comfort themselves with the prospect of a quick revival.
At first, that’s what happened. The economy picks up as non-essential retailers, pubs and clubs, cinemas, sports establishments, theaters, concert halls and more reopen. Those lucky enough to be able to save through the pandemic are starting to shop again. Then Vladimir Putin put a stop to everything, with his brutal attacks on Ukraine – which sparked a spike in energy prices and left Western countries facing an energy crisis along with rising inflation.
Once again, Britain felt uncomfortable being near turmoil. While not one of Russia’s biggest customers, Russia remains heavily reliant on imported gas – and gas prices are rising overall as the Kremlin retaliates against Western economic sanctions by suppressing supply.
The UK domestic energy price cap of £1,042 in October 2020 has reached £1,971 in April and is scheduled to hit £3,549 in October. Some estimates have the future limit rising to £6,000 before the government intervenes. Businesses and institutions such as schools, which are not protected by these restrictions, feel the greater shock.
It is at this point that pure self-inflicted wounds begin. Faced with the need to prevent a crisis, Truss chose to guarantee energy prices for all. But this will definitely benefit the home that consumes the most energy. It was not without reason that the Institute for Economic Affairs, a “free market” think tank, criticized the plan as “the welfare of the upper middle class on steroids”.
Truss could argue that targeting would be very complicated, could lead to poor results and might prove very expensive in the midst of a crisis. But he and his chancellor, Kwasi Kwarteng, multiply by poor policymaking and avoidable mistakes.
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They rejected windfall taxes on energy companies, which could help meet bills some put up to £100bn. They put the debt directly on the books of the state, rather than creating a mechanism by which energy companies will pay back subsidies for, say, 20 years.
Steps like these will help convince the market. Instead, the couple went a step further. Several £30bn debt-funded tax cuts trailed through media leaks. The Chancellor added £15bn more to his mini-budget, and closed the Office of Budget Responsibility – which normally assesses government spending plans and provides estimates – out of process.
The market is scared. UBS Wealth Management chief economist Paul Donovan likened the Tory government to a “doomsday cult”, arguing that the tax cuts were unlikely to provide the boost Truss and Kwarteng had hoped for. He’s not alone.
In an unprecedented intervention, the International Monetary Fund said the same thing, albeit in more polite terms. Will Truss and Kwarteng finally knock on his door, close hands for the bailout? This is unimaginable.