Austerity 2.0 will just deepen the hole the economy is in
ONE thing that really angers me about Rishi Sunak and Jeremy Hunt is that they understand what is needed to sort out the UK economy and, at the same time, are planning to do the exact opposite.
Austerity 2.0 will deepen the hole the economy is in by reducing the amount of money fuelling the economy, it will impoverish millions of people, and it will benefit only those able to take advantage of an economy in recession, i.e. a small number of people all of whom are already multi-millionaires.
Rishi Sunak studied PPE at Oxford; he was a Fulbright scholar; he has an MBA from Stanford; he was an analyst at Goldman Sachs for three years and has been a partner at two separate hedge funds. I have not one iota of doubt he has been thoroughly immersed in neoclassical economics and fully understands just about every aspect of how the economy of a nation state that controls its own currency works.
He will know that private wealth in the UK has ballooned over the past 12 years, and that the UK has enjoyed persistently low interest rates for all of that time. He will also know that the UK has seen very low private sector investment throughout that period, and that that is the main reason UK productivity has flat-lined and growth has been anaemic.
If private investors aren’t motivated to invest in UK productive assets at a time when they are flush with cash and interest rates are low, then it is not because they are paying too much tax. Releasing the economy from its supposed tax fetters will not generate even a ripple of fresh growth, let alone a wave. That is one of the reasons why, when Liz Truss tried to do exactly that, the bond markets reacted so hostilely. Just as Rishi Sunak told her they would.
Sunak will know that in the absence of private sector investment, a government has two main options if it wants to revive the economy and get it motoring. The first is what all mainstream economists will tell you to do – boost public sector investment. Use public sector money as fuel to get the economy motoring again. That is what the US government did in the form of Obama’s $750 billion stimulus package after the 2008 financial crash, and that is what pulled the US economy out of its nosedive.
In contrast, the Tories brought in Austerity 1.0. That was a huge antistimulus package at a time when the economy needed a hefty stimulus. That is why the UK took so much longer to recover from the crash of 2008 than did the US.
Bringing in Austerity 2.0 now will have the same economic effect. It will act as an anti-stimulus package, it will take money out of the economy, that will slow the economy down and that will ensure that the economy fails to grow.
The question is, why is a PM who clearly understands macroeconomics knowingly adopting fiscal policies that will so obviously exacerbate the country’s problems? The answer, no doubt, is exactly the same as the reason Cameron adopted them in 2010 – Conservative ideology. Once again, the vast majority of the UK population will be forced to live through a nightmare so Conservative ideologues can chase their never-ending dream of a smaller and cheaper state.
What’s the other option to revive the economy and get it motoring, I hear you ask? A very significant redistribution of income and wealth. That is clearly much too large a step for a Conservative PM to take. So while we wait for a new nonTory PM, we will have hunker down and hold tight while our Tory politicians fail the country all over again.