Budget 2022: Blowing the bloody doors off

The budget over a week ago sent a shock wave across the UK economy and brought it to the brink of disaster. A substantial intervention by the Bank of England was needed. Interest rates rose sharply and government bonds and gilts had to be rescued. TEFS reported its initial reaction with ‘Budget 2022:  Everyone for themselves’.  Since then, the situation has deteriorated further and the outlook for the least advantaged is becoming bleak. Education may not be an effective solution for promoting social mobility if those of lesser means cannot afford to compete on equal terms. Spending cuts will see to that. This is a policy of deliberate division of our society.

Public reaction.

There are two very different views about the current conservative government and its leadership.

Firstly, the views held by two taxi drivers I met this week seem to align with many working people and others across the UK. That Liz Truss and Kwasi Kwarteng do not understand what they are doing and are hopelessly incompetent.

The second less popular view is that both Truss and Kwarteng know full well what they are doing and the consequences. Bearing in mind that both sport Oxbridge degrees. Truss in Philosophy, Politics and Economics from Oxford in 1996 and Kwarteng in Classics and History from Cambridge the same year, followed by a PhD in economic history. They are hardly lacking in understanding of economics. It is also of note that Truss and Kwarteng ‘sacked’ the most senior Treasury civil servant as soon as they took over. Tom Scholar’s experience went back to the last Labour government and he might have been singing from a different hymn sheet. Instead, the ‘Disruptor’ Antonia Romeo is lined up as the Treasury’s new top civil servant.  She conveniently studied Philosophy, Politics and Economics at Oxford at the same time as Truss.

The Conservative underbelly exposed.

The change in the government’s direction in the last few days has exposed the underbelly of the Conservative party. The radical changes are not driven by a mandate from the people, rather by the prejudices of a small number of party members disaffected by the so called ‘levelling up’ agenda. Truss represented a return to what they believe to be real Conservative values. This was always hiding underneath and their agenda never far from the surface. They are driven by blind faith in markets, privatisation, low taxes, and very small government. But they are also blind to equality and fairness as they seek to entrench in place a ruling elite of the advantaged over the rest of the ‘plebs’.  Access to education, and especially university education, is seen as a right and not something to be achieved by all. Hidden from view most of the time is a belief that they are somehow genetically superior. Sometimes it surfaces in the most alarming and perverse way as reported by TEFS in January 2020 with ‘Genetics, Intelligence, Social Mobility and Chinese Whispers’

Boris Johnson knew this and he reflected the views of many of his contemporaries in his speech at the Centre for Policy Studies in 2013 (text here The 2013 Margaret Thatcher Lecture – Boris Johnson – The Centre for Policy Studies’ ). He referred to equality with, “it is surely relevant to a conversation about equality that as many as 16 per cent of our species have an IQ below 85, while about 2 per cent have an IQ above 130”. Then, to rub it in, he refers to “the natural and God-given talent of boardroom inhabitants” to support the idea that in the economy “some measure of inequality is essential for the spirit of envy”. This seems counter to ‘levelling up’ as an aim. 

They know what they are doing.

TEFS takes the second view about the abilities and motives of the new Conservative leadership, believing that the shock to the economy will eventually cause massive cuts to public spending and herald a seismic shift in favour of private enterprise in nearly every public service.  This is a long game that accepts a shock at the start. The government is fully aware that its measures will exacerbate inequality across the UK and effectively kill off any notion of ‘levelling up’. This will infiltrate all levels of education as spending cuts inevitably kick in. Those that can pay will simply take the social high ground. It’s as crude as that.

TEFS observations on long-term effects.

TEFS recently (26th September 2022) responded to the budget with ‘Budget 2022:  Everyone for themselves’.  The main conclusion was that support for the least advantaged would dissipate and that “it could also herald a ‘dash for privatisation’ as spending on public services is cut”. This is no idle concern as cuts are planned to universal credit and workers rights. This will affect the working lives of most of our hard-working students setting out to succeed. There is also a worse longer-term impact that is over the horizon for many.

The effect on bonds and gilts are key to the sustainability of ‘defined benefit’ pensions. But the crisis this week supports the government’s long running desire to shut them down. These are pensions that guarantee an income for members after retirement and this is supported by investments in ‘guaranteed’ bonds and gilts (see Financial Times ‘UK watchdogs hold crisis talks to avert gilts cliff-edge’  and ‘Lessons from the UK pension fund shock’.  The strategy is called liability-driven investing and it is the basis of the most secure pensions in the UK. Their demise will affect the prospects of generations to come. It will become everyone for themselves.

Ignoring clear advice.

With an agenda that is at odds with the aspirations and expectations of most people, it should come as little surprise that advice was ignored. The advice was predicated on different expectations to the underlying goals of the government.

With no  Office for Budget Responsibility (OBR) projection likely soon, it seems everyone is getting the jitters. Rightly so, because tax cuts funded through greater borrowing is reaching the levels of almost ‘criminally insane’. People will not accept the wealthy getting more wealthy from raising money through loans, that the rest of us pay back in time. No wonder the UK bonds and gilts headed the same way as the pound.

However, it must be acknowledged that the Bank of England’s latest forecast in August predicted that the UK would enter a lengthy recession soon. It was emphatic in its conclusion that “The United Kingdom is now projected to enter recession from the fourth quarter of this year. Real household post-tax income is projected to fall sharply in 2022 and 2023, while consumption growth turns negative”.  Its observation that this is partly due to a “sharp fall in real incomes” might explain the move inject money by cutting tax. This seems to be a weak attempt to turn a major economy around. But maybe that is not the real aim.

Authoritative views from outside the UK.

The idea that tax cuts will fuel economic growth is an old chestnut that has been brought out again. It is generally correct that injecting money into the economy should stimulate growth. But in the current febrile climate of fear and uncertainty, it seems to be a somewhat naïve hope. TEFS also predicted that the IMF may get involved with this,

“If the economy fails to grow faster than government debt interest payments, then we are in deep trouble. The government will find it increasingly difficult to sell guaranteed bonds from a ramshackle economy heading downwards.  The IMF may even intervene to control spending.”

Indeed it appears that the ‘International Monetary Fund’ wasted little time in issuing a statement of warning with its, Latest IMF Statement on the UK (September 27, 2022)

“We are closely monitoring recent economic developments in the UK and are engaged with the authorities.  We understand that the sizable fiscal package announced aims at helping families and businesses deal with the energy shock and at boosting growth via tax cuts and supply measures. However, given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy. Furthermore, the nature of the UK measures will likely increase inequality. The November 23 budget will present an early opportunity for the UK government to consider ways to provide support that is more targeted and re-evaluate the tax measures, especially those that benefit high income earners.”

Increasing inequality is the only logical explanation for the government’s moves since last week. It has exposed the real agenda of many conservatives. But it went too far and they “were only supposed to blow the bloody doors off!”.

Added Monday 3rd October 2022. 

It appears that Kwarteng has blinked first and decided to reverse his decision to abolish the top rate of taxation at 45%. This is despite Truss publicly supporting the cut in tax for the wealthiest yesterday. But its already too late. The government’s agenda has been exposed for what it is, trust has gone. This was not mandated by voters in the election of 2019 and there will now be a demand for a general election to set the UK on a fairer and more equal course.

The author, Mike Larkin, retired from Queen’s University Belfast after 37 years teaching Microbiology, Biochemistry and Genetics.

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