The last two weeks since Kwasi Kwarteng’s now infamous budget have been perhaps the most extraordinary in modern British political memory.
Truss and Kwarteng condemned, with almost religious certainty, from a range of commentators from the IMF to the German finance minister, from the usual suspects like the IFS and the BBC, to conservative voices like Gove & Friends.
Those voices caught on with Kwarteng being sacked in record time, replaced by the Declining Consensus on behalf of Jeremy Hunt.
They say the budget was irresponsible. It was unfunded and wreaked havoc.
What they all repeat is that everything was fine until these two philistines wrecked the good ship Britannia. Oh good? Do they really believe it?
Truss inherited quite a mess. The timing of the budget was certainly extremely ill-advised, but this mess was created entirely by our political class over many years. It is absolutely wrong to claim that everything was good before Truss. Clearly this was not the case.
We should live in a land of milk and honey. At every level our civilization has created wonders, previous generations just wouldn’t believe in all the labor saving conveniences of global travel, as well as of course huge advancements in the fields of science, technology, medicine and communications. These advances were largely created by private innovation, not public leadership.
Almost all of them saw an extraordinary advance compared to what was offered to our grandparents. The gift of the Western spirit to the whole world is immense.
But our Albion today does not look like a land of milk and honey. The country is torn apart by discontent, division and rancor like never before and, in my opinion, this breakdown is mainly due to disastrously poor policy choices made over many, many years in most of the West, but especially here.
Politicians have meddled, often for the sake of management and opportunism in the flow of short news, fending off the arsonist in the belief that they can create a liberal and egalitarian utopia. Instead, they created an unhappy divided land.
The real catalyst for our economic woes today has been the fundamental breach with sound currency. Governments taxed (usually too much), but they were constrained by the simple laws of economics whereby public spending was largely based on the productive success or failure of the nation.
Gordon Brown and Alistairr Darling changed that by adopting further quantitative easing in March 2009. Perhaps this was justified as an emergency measure to ease the impending banking crisis? But no matter what, it was timely and set off a ticking time bomb that is now exploding globally.
The real damage, however, was done during Mark Carney’s tenure from 2013 to 2020 and immediately after. Like the Fed and the ECB, central banks failed to normalize interest rates and end QE, creating a new norm of near-free money.
This encouraged governments to borrow in ways unprecedented outside of war. Britain’s debt has quintupled in just 15 years to £2.4 trillion (about £85,000 per household).
And if money was elastic and less and less linked to real economic activity, why not do even more? Build that school, duplicate that railway, spend £500 billion to shut down the economy. It seemed to recall Poussin’s great painting ‘and in Arcadia ego.’
But of course it was an illusion. Handy, for sure, because what was not pleasing about rising asset prices and endless spending? But this policy was unprecedented in the Bank of England’s 300-year history and it could not last. The only question was when would it explode?
The answer is unfortunately now. Not with the budget of two weeks ago, as the architects of free money would have you believe, but with the unsustainable fiscal and monetary response of a decade coming to its necessary global end.
The (x3) lockdown was one major mistake too many and caused immense economic damage with supply chain issues, labor disruptions and ‘free money’ starting to fuel inflation.
The aftermath of the war in Ukraine and the subsequent cancellation of Russian hydrocarbons, with no competitive alternatives ready, only made matters worse.
As inflation soared, the “illusion of free money” came to an abrupt end, globally. With the Fed tightening and the Bank of England and ECB doing the same, albeit more tentatively, the game was won.
Worse, the “free money” for so many years had seriously distorted the economies. It made housing increasingly unaffordable, diverted wealth to unproductive areas and gave governments the power to do as they pleased with no apparent sanction from global markets as central banks flattened the yield curve at worldwide.
The state has grown out of all proportion. In the UK, public spending has increased by 24% between 2019 and today for a lower service. Regulation has increased exponentially with barely any industry spared by the government.
In a short time, Britain has gone from a moderately taxed and regulated economy to an increasingly unstable economy with a state consuming almost half of GDP, taxes at their highest in 70 years and micro regulation in almost all spheres of life, while discarding carbon security in favor of unproven and currently unprofitable alternatives.
It is therefore not surprising that growth has declined markedly and, on a per capita basis, has become almost non-existent.
There is no doubt that Kwasi Kwarteng’s budget was poorly thought out and poorly timed. It was half budget. Tax cuts and deregulation had to be balanced with real spending cuts.
It is also true that as central banks have tightened, it has made running large deficits unsustainable. Instinct was good but it was not budget wise at that time.
We must not, however, be fooled by the crowd into forgetting that the instinct to cut taxes and regulation was right and even critical given the mess we find ourselves in.
But the alternative offered by former central bankers and politicians like Starmer, Gove and others is entirely the wrong approach. Their remedy is more taxes, more spending, more decline and even less freedom.
This cowardly Conservative Party has created the worst of all worlds. A chancellor sacked, a complete turnaround, a prime minister captured and whether there’s another coup or not doesn’t really matter because it’s more or less the same for two years.
It now seems that the conservatives have accepted the declinist school of mediocrity and control. So, in all likelihood, we can expect a frenzied Labor Party to raise taxes, spending and control even further.
This will crush this country’s still-damaged private sector growth engine, lead to low investment and accelerate decline. It should be obvious.
Labor is riding high promising an even more extreme form of state control than Johnson and Sunak. The left-liberal consensus that “tax cuts and deregulation did that” is complete nonsense.
The crisis is global, Kwarteng’s now scrapped £45billion tax cuts are a small beer compared to the £500billion on lockdown and in any case just take the tax back, in proportion to the GDP, where it was in 2021. Barely radical. But misunderstand the disease and you get a quack remedy.
We have become accustomed to wealth, but we have forgotten that its creation requires a complex web of stable government and rule of law, a high degree of freedom but also innovation, competition and hard work. But prosperity, civil discourse and quiet governance cannot be taken for granted.
Argentina, before Peron ruined it, was one of the richest nations in the world. For 70 years, they failed to regain their mojo. Yes, they have good wine and good food but they stumble from crisis to crisis with destroyed middle classes and poor care for the poor.
Once the balance is lost, it is difficult to regain it because recriminations, reproaches and the illusory search for a false Rousseauist utopia create discord, discord and decadence.
Make no mistake, Starmer, if elected, will exacerbate this crisis and with £2.5 trillion in debt he too will be forced to cut the fabric. His solution will be to tax and regulate even more.
Growth will wither, interest rates will rise to finance unsustainable debt, and with that, the nation’s remaining wealth will decline, perhaps substantially.
There is no doubt that this is a turning point that compounds the error – the price for all, rich and poor, will indeed be very high.
Basically, if we are to have a future, we must return to sound monetary policy, trust in family unity, encourage enterprise, and reshape the state to a sound, efficient, and manageable size.
This means unraveling the excesses of the Sunak/Johnson years, substantially reducing the size and scope of government, freeing ourselves from micro-regulation, and reducing taxes gradually but consistently over time.
While the end of free money will cause a major readjustment in asset prices, the good news is that while the next few years will be difficult for all of the West, supply-side changes that reduce taxes and regulation allow the private sector to develop very rapidly. We just have to hope that there are some left after today.
Blair expanded the state to about 40% of the economy, but the Tories took it to the next level, almost ten points more. This is not enough for our establishment, but they are completely wrong in their analysis.
Hunt’s appointment as Chancellor says all we really need to know about how our political class thinks. But ultimately their consensus is doomed. If we wish to live in a prosperous country, there is no alternative to blood, sweat and tears.
If you enjoyed this article, share it and follow us on Twitter here – and like and comment on facebook here. Help ThinkScotland publish these articles by donating here.