On the 17th of November, barely over a month in office, the UK’s Chancellor of the Exchequer Jeremy Hunt presented a career-defining autumn statement. But whether he agrees or not, it also put to bed four decades of economic orthodoxy.
A moment of reckoning was reached in the wake of September the 23rd, when Hunt’s predecessor Kwasi Kwarteng presented his so-called ‘mini-budget.’ It announced £45bn in unfunded tax cuts alongside government spending to protect British consumers from sky-high energy bills caused by Russia’s de facto natural gas embargo. The top rate of income tax was slashed from 45% to 40%, duties to be paid on house purchases were slashed, and a planned hike on business taxes was cancelled. In a paroxysm of ideological purity, the short-lived prime ministership of Liz Truss denounced ‘handouts’ and refused to implement a windfall tax on energy producers while committing to a bonfire of EU-origin legislation by the end of 2023.
When the permanent secretary to the Treasury, Tom Scholar, voiced his concerns, his misgivings were dismissed as ‘abacus economics.’ He was fired from his job. It was thus that the Thatcherite revolution had begun to eat its children. After a near-decade of austerity and six years after Brexit, common sense Girondins and Mensheviks of the cooperative trade and sound public finances kind were seen as unacceptable, market-unfriendly traitors to the cause. Libertarian Jacobins and Bolsheviks ran around shouting feel-good catchphrases such as ‘growth, growth, growth,’ ‘Singapore-on-Thames,’ ‘Britannia Unchained,’ and the Brexiteer mantra of ‘taking back control’ from shadowy experts and elites. Thatcherism was no longer simply an approach to macroeconomic management that puts markets at the centre. It had morphed into a religion that would brook no infidelity.
Yet the markets, funnily enough, weren’t having any of it. The pound plunged to a 37-year low. The yield on the benchmark 10-year bond shot above 3.7%. As of the end of September, the UK government’s ten-year borrowing rate was roughly half a point above US Treasury rates. Global finance treated the UK almost as though it were a fragile emerging market. Britain was being charged a ‘moron risk premium,’ according to Dario Perkins of TS Lombard. The Bank of England had to launch an emergency bond-buying programme to calm investors’ nerves.
This was unprecedented: the neoliberal worldview had outlasted even the crash of Lehmann Brothers and the global financial crisis of 2007-09, with austerity-on-steroids insisted upon both in London and by Berlin. Despite British incomes falling by 2% since 2008 and despite the tragedy of Greece’s sovereign debt crisis, Hayek’s ‘Road to Serfdom’ and Austrian school dogma reigned supreme. But this time around, its seductive powers failed to impress neuralgic investors and gilt traders. Reeling under the aftereffects of a global pandemic and Russia’s invasion of Ukraine, they had very little appetite for further unpredictability and made their displeasure known. Like in Italy where Mario Draghi was installed by the bond markets, Brexiteer delusions of sovereignty were tempered as the financier Rishi Sunak was practically ushered into 10 Downing Street by gilt traders and the managers of pension funds. His specific mandate: to put a check on fiscal profligacy.
The immediate after-effects of the ‘mini-budget’
Much of this saga stems from a misunderstanding of the Reagan-Thatcher years themselves and the subsequent hagiography surrounding both politicians. In the US, underlying growth was more or less constant in the 1970s and 1980s. The double-dip recession of 1979-82 was followed by a rapid recovery. But by the end of Reagan’s second term, the economy was roughly where it could have been expected to be based on extrapolation of the 1973-79 trend. Bill Clinton’s undoing of the Reagan tax cuts actually increased growth and by the end of his presidency US GDP outperformed extrapolations of the 1973-1989 trend. If anything, it was Clinton’s 1999 dismembering of the Glass Steagall Act- which separated investment banking from commercial banking and protected against excessive financial speculation- that brought on the crash of Lehmann Brothers and the Great Recession. Margaret Thatcher, for her part, launched her ‘Medium Term Financial Strategy’ in 1980. This was a monetarist experiment where high interest rates (the Bank of England was not an independent entity back then) and tight fiscal policy combined to push the economy into a deep recession, generated more than 3 million unemployed, and decimated the manufacturing industry of the north of England. The recovery that followed in the late 1980s was geographically concentrated in London and the southeast, spurred on by rapid consumption growth resulting from a house price surge and the bonanza of North Sea oil. Thatcher’s broadsides against the European Community at the Dublin European Council in November 1979 and the infamous Bruges speech of September 1988 sowed the seeds of toxic Euroscepticism that led to the 2016 referendum. More than the work of agents of chaos like Nigel Farage who profited off the 2015 Middle East migration crisis, Brexit was a child of her libertarian revolution. At the Conservative Party conference in October 1987, Margaret Thatcher asserted: ‘we haven’t worked all these years to free Britain from the paralysis of Socialism only to see it creep in through the back door of central control and bureaucracy from Brussels.’ Déjà vu ?
Now the chickens have come home to roost. The Bank of England, in raising its interest rate to 3%, has warned that the UK risks entering its longest recession in a century. Britain can no longer operate under the illusion that it is an economic superpower with a GDP of $20 tn and a population of 330 mn, able to scoff at a market of hundreds of millions of people in Europe. The Office for Budget Responsibility has calculated that Brexit has resulted in a 15% reduction in trade intensity and will reduce British GDP by 4% over 15 years. The pound has fallen consistently against the dollar since 2016, business investment hasn’t returned to its 2016 peak, and unlike other advanced economies, British exports haven’t bounced back after Covid. The British economy has fallen from 90% of the size of Germany’s in 2016 to 70% now. Rows over the Northern Ireland protocol have led to the EU scrapping 115 grants for British scientists and academics and the UK threatening to pull out of the £80bn Horizon Europe programme. Meanwhile, growth has been slowing since the 1970s and productivity has remained stagnant since the 1980s.
Social misery is palpable. As inflation seems set to peak at 13%, pay rises could trail inflation by 8% later this year. This would be the biggest drop in UK wages and living standards since the decline of 13.3% in real terms in the fourth quarter of 1922. Mirroring the Winter of Discontent of 1978-79, workers in several sectors of the British economy are contemplating or taking part in industrial action, beginning with strikes organised by railway workers in June 2022. The toxic formula of ever-decreasing capital spending, underfunded social care, culture wars over immigration and Europe, and unsustainable housing market bubbles is now being seen to fail- in real time. Britain is on the verge of becoming the second most unequal country in Europe, after Bulgaria.
To his credit, Jeremy Hunt seems to have read the writing on the wall. Just as the 1956 Suez crisis shattered British delusions of imperial grandeur, the economic turmoil brought on by Trussonomics and the prospect of being wiped out by Labour at the next general election seem to have unmoored the Chancellor from some of his own militant free-market a prioris. While saying that growth remained a priority to avoid a ‘doom loop’ of higher taxes and lower dynamism, his autumn statement read like a white paper on 21st century social democracy. On personal taxes, the threshold for the 45p additional rate of tax was brought down from £150,000 to £125,040. Windfall taxes of 35% were levied on energy producers, up from 25% earlier. National insurance contributions from employers were frozen for 6 years, constituting a major effective tax hike on bosses, alongside cuts to capital gains and dividend allowances. The pensions triple lock was preserved and benefits are set to rise in line with inflation, with a £3.3bn increase in funding for the National Health Service and an increase in the schools budget by an extra £2.3bn a year. Despite the fact that King Charles III was blocked from attending COP27 and his current boss only decided to attend at the very last moment, Hunt also underlined his commitment to COP26 and a 68% reduction in UK emissions by 2030.
Had the US Democrats’ vision of a Green New Deal finally taken over London? Or was this a desperate attempt by free-market Gorbachevs to enact last-ditch perestroika to shore up a bankrupt worldview? As long as politically difficult measures such as streamlined planning, higher immigration, and ensuring a healthier relationship with the UK’s largest trading partner have not been taken, one has to conclude the latter.
It is too soon to tell whether the Labour party will win back power- and what policies it is able to enact if and when it does- or whether the Tories will defy odds and grimly hang on for a while yet. What is clear this autumn is that Britain, and the world, have witnessed the twilight of Thatcherism.