The demise of Trussonomics was a welcome victory for decency and common sense within a broader – and intensifying – class war. Sadly, the class that Liz Truss tried to bolster with copious tax and regulatory gifts will win this war by deploying an even nastier, blunter, dirtier weapon: austerity.
Britain’s wealthy owe a debt of gratitude to the Truss-Kwarteng circus. By destabilising the markets so spectacularly, and turning instability into the dragon that the latest Tory government must slay, they have released the “adults” – Treasury officials and the stealthier class warriors behind Rishi Sunak and Jeremy Hunt – from the political constraints imposed on them by an austerity-averse electorate.
Under the Conservatives, all roads after the Covid-19 pandemic led to austerity. The only real difference among their squabbling crew concerned the chosen path, not the destination. As chancellor, Sunak understood the choice the Tories faced as the pandemic subsided and inflation surged.
The first option was high interest rates that would, however, finish off the financial and corporate zombies on which his class depends for its wealth and power. The second option was austerity, which would reduce inflation and thereby enable lower interest rates.
Sunak, along with the Treasury, clearly favoured the latter but Boris Johnson, savvy enough to sense that austerity was political poison, would not allow it.
Borrowing from Johnson’s playbook, Truss defeated Sunak by campaigning against austerity while, furtively, planning to impose it once her wealth transfer to the ultra-rich was complete. She and Kwarteng knew that austerity would have to follow because they understood that the only way to stem inflation without austerity was to embrace a progressive agenda: higher green investment to reduce energy prices, a windfall tax on the banks’ profits, rent controls and new social housing.
Long before “partygate” ended Johnson’s premiership, Sunak had embraced a clear sequence. Impose austerity to control inflation and deter wage claims, and only then transfer more wealth to the rich via tax cuts.
But Sunak’s embrace of fiscal conservatism made him an easy target for Truss. By reversing his proposed sequence of austerity first and tax cuts later, Truss succeeded in obliterating Sunak, and then herself.
In fairness to Truss, most pundits also believed that the markets, lulled into a false sense of security after a dozen years of socialism-for-financiers, would remain calm for a few months before the Truss-Kwarteng duo tightened the austerity screws as necessary. Setting aside some silly and easily avoidable errors, such as firing the Treasury’s Sir Humphrey and gagging the Office for Budget Responsibility, no one had an inkling of the landmine Truss’s reverse sequence would set off, causing enough market turbulence to test the nerves of even the International Monetary Fund.
The landmine in question was, as we all know by now, the derivatives that UK pension funds had massively invested in to hedge against inflation and higher interest rates – derivatives they could not afford except by borrowing against their stock of UK government gilts. When the news came in that Truss was planning to issue more gilts to pay for large tax cuts, without front-loading austerity, the price of gilts fell and, suddenly, pension funds had to post more cash to cover the debt they had incurred to buy the derivatives. In a state of panic, they sold the only liquid asset they had: gilts! And so the doom loop began until the Bank of England intervened and Truss left 10 Downing Street in disgrace.
Even before Sunak’s coronation, the Treasury had got itself a chancellor of its liking: Hunt who was credited with calming the markets through austerian propaganda that everyone knows to be false: the imperative of balancing the books, the evil of unfunded commitments. The markets undoubtedly know that this government, just like previous ones, is never going to balance the books. They know that the point of fiscal policy is to keep the underfunding of government expenditure at a level consistent with long-term debt sustainability. So, why are they calmed by Hunt’s and Sunak’s austerian prose?
The answer is that the corporate and financial zombies kept alive for so long by low interest rates need austerity. The alternative is interest rate rises that will drive a stake through their heart. By contrast, large cuts to the real value of Universal Credit payments will depress workers’ ability to demand higher wages and thus help the Bank of England suppress interest rates as it fights inflation. Austerity, through this prism, is a cynical means of shifting as much of the economic pain as possible from owners to non-owners, both in the labour and housing markets.
Sadly, the living standards of the bottom 50 per cent will not be the only victim. The investment in goods that Britain desperately needs will be the long-term casualty. By reducing public expenditure in real terms at precisely the moment private real expenditure is plummeting, the state accelerates the decline of economy-wide expenditure. But in any economy, collective expenditure always equals collective income. Consequently, by choosing to suppress real wages and welfare benefits via spending cuts, the Sunak-Hunt government signals to businesses that they would be reckless to spend money building up the capacity to produce stuff that consumers out there won’t have the money to buy. That’s how austerity slayed investment under George Osborne but also across the eurozone in the decade following the 2008 financial crash.
Watching this drama unfold from southern Europe, it is hard not to spot the similarity of Sunak to Mario Draghi and Mario Monti of Italy, and Lucas Papademos of Greece. Like Draghi and Monti, Sunak once worked for Goldman Sachs. And, aside from this, all four prime ministers have another thing in common: they imposed austerity on populations that never had a chance to vote for them.
This article appears in the 02 Nov 2022 issue of the New Statesman, The Meaning of Rishi Sunak