After 2008’s financial crisis, life went back to normal. Will it this time?
Watching the Conservative party candidates spray money around as they vie to win the keys to No 10, it seems churlish to ask where the cash will come from. Running a 21st-century economy is not cheap and, unfortunately for those in power, gets more expensive every year.
More immediately, to prevent a cost of living crisis translating into a calamity this winter for low- and middleincome households, a bigger bailout is on the cards.
Treasury officials are under no illusions that rising energy bills, coupled with the extra cost of food and travel, will force the next chancellor to dig deeper than their predecessor to fund generous energy subsidies. Tax cuts, if the Liz Truss bandwagon rolls to victory, will only add to the need for extra borrowing.
The bill will be large whatever, and yet will amount to no more than spasms of generosity while the rising tide of demands on the exchequer lap at the chancellor’s feet.
It is easy to see how Conservative politicians can ignore all the warning signs and believe that the economic touchstones they grew up with will soon return to pre-pandemic norms, making all their spending affordable.
Look back to the 2008 financial crash: it was supposed to reveal the fundamental flaws in a global, neoliberal economic system and begin a debate about how to build an alternative. Books such as The Price of Inequality by Nobel prize winner Joseph Stiglitz were supposed to get us all thinking about how a postwar consensus had run its course. Stephen D King’s award-winning opus When the Money Runs Out: The End of Western Affluence appeared a year later, in 2013.
Like Stiglitz and so many other commentators, King, a former chief economist at HSBC, wrote and published his book during the post-crash period of high oil prices. Just like today, Brent crude above $100 a barrel was having a crippling effect on the global economy.
Alongside the pressing issue of inequality, there was talk about climate change and how high fuel prices would spur a switch to low-carbon energy, force manufacturers to cut their emissions and make obvious the benefits of insulating Britain’s homes against colder and hotter weather.
It didn’t take long for the Cassandras to be sidelined. By 2015, prices for oil and gas had dropped like a stone, along with those of most commodities. EU economies were still struggling with debts, but the majority of voters could shop for cheap clothes, cheap food and cheap flights to myriad destinations.
In the same year, David Cameron scrapped Ed Miliband’s strict housebuilding rules, allowing developers to build flashy estates with as much insulation as a wedding marquee. By 2019, diesel-guzzling SUVs accounted for more than a quarter of new cars sold in the UK and Ryanair had recorded four years of bumper profits.
Tens of millions of people were still affected by the aftermath of the crash. They were reluctant to change job for fear of losing what benefits they had accrued. Banks were more circumspect about giving out loans, excluding young people from taking out mortgages unless they had mum-anddad cash. But they could kid themselves that their lives had returned to something like normal.
Truss appeals to voters, much as Boris Johnson did, with a confidence born of experience – that if we just wait a little longer, the usual terms of economic life will return.
After a brief downturn, runs this argument, the war in Ukraine will end, gas prices will decline along with other commodities and inflation will fall back to 2% or below.
Central banks, including the Bank of England, will cut interest rates back towards zero and we can carry on borrowing to purchase property or to buy the kitchen/patio/conservatory we have always dreamed of.
This optimism is a trap for Labour, which can only appear miserably austere in response.
If you believe the money is running out – and it is – then quite radical changes to the mix of tax and spending are needed.
Keir Starmer is already talking about shifting the tax burden on to the better paid to fund the long list of demands that always lie in wait for a Labour prime minister – higher spending on education, health, social services and international aid among them. Then there is the transport agenda at the heart of levelling up.
There was a time when much of this could be funded out of defence cuts. Yet even that is off the table in the current spending arms race.
Starmer is probably hoping, like Truss, that we will have reverted to the old laws of economics by the next election. That seems unlikely.
If you believe the money is running out – and it is – then quite radical changes to the mix of tax and spending are needed