During the Covid pandemic, the UK government has borrowed a huge sum – ultimately around £375bn.
The argument was that supporting millions of British families and businesses was vital. But some people, far from worrying about our mounting national debt, took the opportunity to claim that the gargantuan sum proves successive British governments have been tight-fisted in borrowing so little after the 2008 financial crash and had implemented “austerity measures” instead.
That was – and is – nonsense. We lent out over £700 billion between 2010 and 2019. Indeed, for two decades, UK governments had spent more than they took in taxes every year, borrowing a total of £1.4 trillion since 2001.
There is a grim echo of this economic fake news in the short-sighted and cynical narratives being circulated by the Left and the BBC in recent days: that renewed economic turmoil in the UK can only be attributed to the mini-budget of Liz Truss and Kwasi Kwarteng in the are attributable to last month.
Despite their clumsy efforts, Truss has not solved the problems of high inflation, high taxes, low growth, and high debt that plague our country. But she didn’t cause them either. The truth is we’ve spent two decades drunk on cheap money
It’s naked political scoring. For two decades Britain has sown the winds of a new financial crisis by borrowing ever larger amounts of money – and now we are reaping the hurricane.
Well before the pandemic, I was concerned about the “emergency” economic policies – ultra-low interest rates and money printing – that had been put in place after the crash and remained in place for years barring a real emergency.
When a real crisis hit in 2020, I feared it would push us over the edge.
To be clear, the pandemic would always have triggered enormous government spending.
But extending lockdowns well beyond what was needed to “protect the NHS” aggravated Britain’s already precarious financial situation, not to mention money wasted on silly schemes like Rishi Sunak’s Eat Out To Help Out.
In mid-2020, however, it was considered eccentric to argue that eating up vast amounts of newly printed money, coupled with the near-global shutdown of key industries, would ever lead to inflation and its devastating consequences.
Central bankers had persuaded themselves that inflation was a thing of the past, and since they saw interest rates only as a price control tool, the days of high interest rates were also over.
The danger of inflation disappeared from public memory. A 30-year-old taking out a mortgage in 2022 would have been a kid when interest rates were last at a historically normal level of around 5 percent. He or she wasn’t even born when inflation last topped 6 percent.
Fast forward to 2022 – now the inevitable has happened.
Incidentally, disbelieving commentators today like to paint Britain as an outlier, but in January inflation was 5.5 percent here, 7.5 percent in the US and 5.1 percent in the EU.
Remember: all of this was before Russia invaded Ukraine.
We lent out over £700 billion between 2010 and 2019. Indeed, for two decades, UK governments had spent more than they took in taxes every year, borrowing a total of £1.4 trillion since 2001
By September, the pound had fallen from $1.37 to $1.13. The “yield,” or interest rate, on 30-year government bonds had risen from 1 percent to 3.5 percent. The Bank of England’s interest rate had begun to climb steadily. A recession, or something very similar, had already begun.
That was the real background to Truss and Kwarteng’s September 23 mini-budget. Its cornerstone – once again, despite claims from the Left – was not the £2 billion lost in government revenue from normalizing the top income tax rate.
Instead, it was the colossal energy price cap: yours at around £150bn. In addition to this generosity, the Chancellor added cuts to income tax, social security and stamp duty. He also froze the corporate tax.
Truss and Kwarteng made a mistake here. Much of their growth plan has been commendable. But tax cuts alone would never bring the targeted 2.5 percent growth.
The hapless duo’s mini-budget was to be followed by a series of “supply-side reforms” – measures to make markets and industries more efficient and productive and to jump-start the economy. There was little sign of that.
By September, the pound had fallen from $1.37 to $1.13. The “yield,” or interest rate, on 30-year government bonds had risen from 1 percent to 3.5 percent. The Bank of England’s interest rate had begun to climb steadily. A recession, or something very similar, had already begun
Previous governments had at least paid lip service to balancing the books. Truss did not – and the markets, and then her own party, punished her mercilessly for it.
My point is that Liz Truss may have played her hand exceptionally poorly, but she was dealt a terrible hand in the first place. And this fact has been completely lost in recent discussions about the economy.
Although the broadcast media has treated every day since the mini-budget as if it were another Black Wednesday (when a collapse of the pound forced Britain to withdraw from the European Exchange Rate Mechanism in 1992), it is simply not true to say that Truss’ has crashed the economy”.
Far from it. The economy had collapsed long before she took office – and much worse is to come, regardless of who is in power.
Banking giant Goldman Sachs has already revised down Britain’s 2023 GDP forecast by 0.6 percent, partly due to a rise in corporate tax.
There is nothing to celebrate about the return of an “orthodoxy” – embodied by new Chancellor Jeremy Hunt – that has brought us an insane housing market, double-digit inflation, taxes at a 70-year high, and exponential spending on a dismal health care system. £4 trillion in debt and lower real wages than 2008.
Now we should draw two obvious lessons from all of this, although I fear we will not.
First, as history has always shown, printing too much money causes inflation.
Second, the international experiment in ultra-low interest rates has resulted in governments, corporations and individuals taking on large amounts of debt.
The more people get into debt, the more vulnerable they become to rate hikes.
This leads to a kind of “doom loop” in which central bankers hesitate to address inflation, arguing that raising interest rates will make people poorer. That means inflation will continue and people are getting poorer anyway.
It seems almost unthinkable that we could emerge from this economic crisis without understanding these elementary points. But you can already see the seeds of an alternative narrative taking root: that everything was fine until Russia caused inflation and Liz Truss and Kwasi Kwarteng crashed the economy.
That just didn’t happen. The couple may have mortally damaged the Conservative Party – but they’re not to blame for the tough days ahead.
Despite their clumsy efforts, Truss has not solved the problems of high inflation, high taxes, low growth, and high debt that plague our country.
But she didn’t cause them either. The truth is we’ve spent two decades drunk on cheap money.
Now the bill has arrived.
Christopher Snowdon is Head of Lifestyle Economics at the Institute of Economic Affairs.