The Telegraph is in buoyant mood. Kwasi Kwarteng’s mini budget represents ‘a rediscovery, in modernised form, of the ideas and ideals that rejuvenated Britain, America and others in the 1980s’. At last, we have ‘the kind of radical Conservative programme that has been promised so many times but never delivered’. Telegraph commentators have never seen anything like it. Allister Heath sums up the mood when he writes, ‘This was the best Budget I have ever heard a British Chancellor deliver, by a massive margin.
The neo-Brownite consensus of the past 20 years, the egalitarian, redistributionist obsession … the spreadsheet-wielding socialists: all were blown to smithereens by Kwarteng’s stunning Neo Reaganite peroration. Hardcore, unapologetic liberal Toryism is back.’Kwasi Kwarteng’s budget moment history will radically transform Britain’s competitiveness, its attractiveness to investors and top talent, has been transformed. Money and jobs will flow in. Growth should bounce back, the economy will be invigorated, and our finances quickly restored.
Yet the markets, along with most international analysts, do not share this optimism. Nor, evidently, does the government’s own Office for Budget Responsibility, which has been refused permission by the new Chancellor to release its forecast. Sterling plunged to a new 37-year low as investors offloaded government bonds, raising bond yields, and consequently borrowing costs, to the highest since 2011. The Bank of England is expected to raise interest rates by at least one percent at its next meeting.
As for the electorate, the response – including among conservatives – is overwhelmingly one of disgust. Never mind supply-side (‘trickle-down’) economics and the Laffer Curve (cutting taxes at the top raises total tax revenue). When millions are struggling to put bread on the table and heat their homes (an estimated 5 million are already in ‘fuel poverty’), a tax give-away to the rich, and the scrapping of the cap on bankers’ bonuses – whatever its justification in normal times – seems nothing less than a kick in the teeth.
But leaving to one side the fact that this radical and exciting supply-side budget is an electoral suicide note, who is right – the markets or the free marketeers?
Amid all the media comment, and analysis of the macro-economic implications (for borrowing, interest rates, inflation, and Sterling), there has been remarkably little discussion directed to how, or why, this supply-side revolution should raise business investment, productivity, and consequently growth – which has been, for the past decade and beyond, both historically and compared to the G7 average, lamentable. For if Kwarteng’s gamble – which is to raise our trend growth rate from 1.7 to 2.5 per cent – does not pay off, we shall, as a nation, be broke.
Two factors might shed some light on the matter:
The first is that the evidence of previous supply-side revolutions is not encouraging. True, Reaganomics raised the trend American growth rate from 2.8 to 3.6 per cent. But top tax rates when Reagan came in were 70 per cent, which made a dramatic reduction possible, and part of the boost to GDP is now attributed to a sharp rise in women entering the workforce. The Thatcherite revolution, whatever else it achieved, had barely any effect on Britain’s trend rate of growth. As for previous dashes for growth – Maudling’s in 1963-4, Barber’s in the early 70s, and Lawson’s in the late 80s – the booms merely fuelled subsequent busts, with inflationary pressures and balance of payments deficits necessitating deflationary measures that catapulted the economy into recession.
Reaganomics fuelled record borrowing and a trade deficit too – but because the economy started from the position of a balanced budget and trade surplus, and because America has no trouble attracting foreign money, the policy could be sustained. Whether Britain today, which is starting from the position of a record balance of payments deficit and ballooning government borrowing (Mark Carney warned back in 2016 of Britain ‘relying on the kindness of strangers’ to finance it) can sustain Reaganomics, or produce anything like the same effects, is highly questionable.
The other factor, which has been ignored, is the underlying cause of Britain’s chronic lack of productivity. The proximate cause is our low level of business investment – not foreign direct investment, which largely comprises foreign purchases of British companies and other assets, but domestic investment, that is, capital investment by British firms which raises productivity.
Economists cannot identify the precise causes with certainty, but key contributory factors seem to be these: (1) the City of London’s historic preference for quick returns over long-term investments and over more innovative, but risky, start-ups; (2) the ease with which firms that do invest long-term can be taken over and asset-stripped by predatory buyers in search of higher short-run returns to shareholders; (3) our historic failure to invest in the high-quality apprenticeships needed to provide a skilled workforce – that is, in vocational training; (4) uncontrolled immigration, which makes it cheaper for employers to take on foreign workers than to training our own workers; and (5) the absence of any industrial strategy – that is, of active state support for key industries and technologies.
The most successful advanced economies, the ones leading the field in investment, productivity, and growth, are not Britain or America, but the likes of South Korea, Japan, Singapore, Germany, The Netherlands, Denmark, and France, all of which feature a significant degree of state involvement to ensure that the market functions in the interests of the country as a whole – whether through properly funded vocational training, a sovereign wealth fund, industrial clusters, state investment in new technologies and growth sectors, close links between industry and the banks, or the protection of strategic assets from foreign takeover. In one form or another, they have industrial strategies.
The question, then, is whether this new ‘leave it all to the market’ Thatcherism will address any of our underlying economic deficiencies. I think the answer is obvious. The only industrial – or de-industrial – strategy Britain has, and is going to get, is to promote the interests of financiers in the City of London; and its only investment strategy is to make Britain as attractive as possible to foreign investors and private equity sharks, so that they can continue to asset strip established firms to make a quick profit, transfer innovative technologies abroad, and milk our utilities for high returns to shareholders – with the City taking a nice cut on every deal.
Is it blind ideology, or pure greed? I think, most probably, it is a happy coincidence of the two.
Not exactly traditional “Toryism”.
Money-manipulation and migrant-invasion.
National debt and foreign war.
Kwasi – look at the latest “Private Eye” for his background.
Liz – a wooden marionette.
If only Keir had a serious policy, a charismatic appeal, and a genuine discard of the Far Left and its BLM/LGBTQWERTYUIOP Wokery….
The high-circulation “Daily Mail”, whose infatuation for the “Prime Minister” matched its now predictably resumed hostility to her Sovereign, reports on its City and Finance page (26 September) that a side effect of sterling weakness is that it will provoke “even more predatory raids on British companies”.
Despite national importance of satellite technology innovation, fake-fogey multi-millionaire Mogg has already waved through the US £5.6bn take-over of Inmarsat, and our government part-owned One Web is in line for transfer to the French-government’s Eutelstat (so much for refusal to enter a fresh single-market arrangement with our neighbouring allies).
“US private equity barons took over British defence company Cobham…chopping up their prey within 18 months…given the green light to take over Ultra Electronics, which makes submarine-hunting technology [and] mulling a swoop on fraud prevention specialist GB Group… Much of the UK defence industry is owned by US investors… The next big deal to cross Rees-Mogg’s desk is the purchase of the semi-conductor firm Newport Wafer Fab by Chinese-backed Nexperia… But real growth requires backing for British tech, innovation, research and jobs. Fire sales to foreign marauders are no route to prosperity.”
“Environmental consulting firm RPS has been the latest London-listed company to fall victim to a US takeover – as the pound’s weakness attracts overseas predators.”
Neil Wilson, chief Markets.com, said: “Kwasi’s budget is a big boost for American bankers…”….
And so on and so forth.
Clement Atlee, Harold Wilson and Jim Callaghan would have made mincemeat of this lot. Whatever their socialistic faults, they were honorable men, patriots, cared about working people and put the national interest first. It is often forgotten that Big Jim led Mrs Thatcher in the polls right up to the Winter of Discontent in 78/79.
Policies of taxing the rich ’till the pips squeak’ and nationalising the utilities might go down a treat right now.
If you think Harold Wilson was an honourable man you don’t know much about him. He was one of the most devious and dishonest operators in the history of recent politics.
He may have been devious but he was also a patriot who stood up for working people – something that the electorate instinctively recognized.
The man who cancelled the TSR2 programme and then bought expensive US Phantoms, very supportive of the working class.
I regret to make an exception for Harold Wilson who had a domestic-hearth and seaside-holiday ordinary-ness which exuded a comfortable appeal, but his actual policies at home and internationally were “Left speaks to Left”. The chief problem was his positive view of Soviet Russia; his arrangement to buy timber from the USSR instead of Canada; his numerous visits to Moscow, including a private meeting with Molotov; his admitted close friendship with the Kosygin family; his GRU codename OLDING; his transfer of military end-use technology to the Kremlin; and (as they say) “much, much more”.