What joy it brought to the left when Kwasi Kwarteng mini budget crashed and burned, taking with it the former Chancellor, along with Prime Minister Liz Truss and their team of economic advisers. But gradually, the penny drops. The end result will be far more displeasing to the left: an autumn declaration involving deep cuts in public spending.
In the fantasy world of many on the left, the events of September dealt a fatal blow to a petty free market economy. Government, they believed, should now do what the markets demanded; and adopt instead a soft social democratic model of high public spending financed by higher taxes on the wealthy.
But that’s not really what bond investors wanted, of course. Markets don’t tend to rebel against free markets. What has investors worried is the prospect of public finances falling further into the red. They did not want to lend to the British government so cheaply as they feared its ability to repay its debts. Given that Truss had just announced the biggest welfare scheme in UK history – subsidizing everyone’s energy bills with possibly over £100billion of taxpayers’ money – it did not boost confidence when Kwarteng announced unfunded tax cuts the following week.
This will now be fixed. While Rishi Sunak and Jeremy Hunt favor lower taxes in the long term, they understand that the priority is first to bring government spending and revenue back into some kind of balance – which they haven’t. been for two decades. Bond markets will like it – but the left certainly won’t.
Listen, for example, Polly Toynbee bleat in the Guardian this morning that Britain needs to ‘get out of a recession’ – and try to quote John Maynard Keynes and his ‘paradox of thrift’ to support his cause.
The little she forgets is that Maynard Keynes also advocated having a surplus during good times to provide the funds needed to stimulate the economy during a recession. No UK government has run a surplus, in good or bad times, since 2001/02, which is why we now have a deep structural deficit and the government is learning that the appetite of global investors to finance our debt is limited.
The truth is that Toynbee and his traveling companions are in a sense Truss and Kwarteng’s bedfellows. They have all come to believe that public debt doesn’t really matter, not when the Bank of England can be called upon to turn on the printing presses at any moment.
It was not in Keynes that they drew their faith, but in modern monetary theory. It’s a faith that could be summed up as follows: governments have spent far more than they take in revenue over the past two decades, and got away with quantitative easing over the past 13 years with nothing don’t go too badly. – so maybe we can keep doing it forever.
Then, as someone memorably put it, the day after the mini-budget, the bond markets decided it was time to turn around modern monetary theory, push it into a dark corner and empty. Truss and Kwarteng happened to be in charge at the time – but duffing could have happened any time in recent years, and certainly would have happened under a Corbyn government if such a thing had happened.
Those on the left who wanted big spending to continue should have encouraged Truss and Kwarteng. They may not have liked the tax cuts, but they were certainly getting the spendthrift fiscal policy they craved. Now they’re about to get something very different – and already they’re bleating about “austerity” again. Bond markets, however, seem to be much happier.