The Technocratic Centralist Orthodoxy prevails

 

Hi All,

So after a brief reign, Truss and her libertarian wishlist is no more. Now we have gone full Italy and have a de facto ‘technocratic’ government as in the real Prime Minister Jeremy Hunt, who in line with the Treasury Orthodoxy is hell bent on balancing the budget- it is one thing to axe the Truss mini-budget to deciding even that is not enough. So austerity is back. And this time it will be worse, for two reasons. The first is that much of the low hanging fruit of Austerity One has been taken – as has the political consequences. Thus the conservatives cannot get away with no political consequence for  getting rid of the triple lock for pensions, in the same way they attack other welfare claimants. The other thing is that Austerity Two is being done in conjunction with the Bank of England raising interest rates, thus both fiscal and monetary policy are tightening at the same time : during Austerity One the Bank of England kept Monetary policy extremely loose as it poured billions into the financial markets, which reached back to people in the form of soft loans and increasing house prices .  It is also worth noting that Austerity One never eliminated the budget deficit and even George Osborne was still borrowing billions of pounds in 2016, let alone reduce the overall national debt. All Austerity One achieved was a reduction in the rate of borrowing, despite the cuts and tax increases.

The Bank admits that their actions will create a deep and long recession, but they have to in order to keep inflation in check. The thing is if there is a recession this automatically means that they government is going to 1) have less revenue as businesses and people go under/bankrupt/loose their jobs and 2) the welfare ‘automatic stabilisers’ will also kick in, unless the government intends to cut these payments as well, thus meaning the government pays out more in welfare. In both cases the government will have to borrow even more, because it has less revenue and has to pay out more money, even after other cuts have been made. When this happens and the government decides to cut even more, this will create a ‘doom loop’ of higher taxes and greater cuts, which will create a longer recession and less revenue, resulting in budget deficits and an increase in national debt.

Finally I have to say I find it difficult to understand why the left is gloating over all of this, well, yes I do get it to some extent. However the long term implication is that the Orthodoxy of the Treasury prevails and that is to try to have a balanced budget, via tax rises and spending cuts, with little time for radical innovations from either the right or the left.  I think Labour, when it comes to power, is going to have a big shock as to what it can and cannot do, without being bought down by the financial markets. Good thing we are a democracy.