Recent days have seen two factions of Neo-liberalism going head-to-head in a bruising encounter, with mainstream Neo-liberalism moving quickly to crush a rebellious (and even more right wing) tendency led by Prime Minister Truss and Chancellor Kwarteng. Mainstream Neo-liberalism ( in the UK, also referred to as ‘Treasury Orthodoxy’ and most recently associated with defeated Tory leadership candidate Rishi Sunak is able to mobilise a powerful array of forces, from the IMF, the ‘independent’ Bank of England (particularly it’s governor), the ‘neutral’ Office for Budgetary Responsibility, charged with modelling government economic policy, but also the leadership of the Labour Party and of course, most of the national media – even, it seems, The Daily Telegraph!
The guiding principle of mainstream Neo-liberalism is to liken the economy to a ‘household’ where (despite the souring levels of consumer debt) you are lectured about only spending what you can afford and on the importance of ‘balancing the books’. Thus, mainstream Neo liberalism marches under the banner of ‘sound money’ and ‘fiscal responsibility’. As Sunak argued in his campaign, tax cuts are only allowable when growth has been achieved. ‘Supply-side’ Neo-liberals like Truss and Kwarteng are slated for ignoring these fundamentals and encouraging a misplaced optimism. Failure to grow the economy will, it’s feared will necessitate not only a further round of ‘austerity’, up to £60 billion of public spending cuts has been rumoured, but also sharp increases in mortgage rates.
Of course, mainstream Neo-liberals are egged on by the red wall Tories who know that only a U-turn will give them any chance of survival. Truss and Kwarteng have already backed down on proposals to cut the higher rate of income tax and facing further pressure from ‘the markets’ are likely to make further concessions if they want to survive. There are rumours, as Kwarteng scuttles back from the IMF meeting, the proposed cuts in corporation tax, if not the whole mini budget could be reversed by the end of this week
But the splat over the £45 billion worth of tax cuts has also proved a diversion from more major issues, notably funding the package of energy subsidies that will cost at least twice as much. The emergency Covid measures (like the energy crisis, the pandemic was considered an ‘external shock’ by orthodox economists) were largely funded by a Quantitative Easing (QE) programme (where the Bank bought debt from the Treasury to allow government far more leeway over what it can spend) on the insistence of Boris Johnson (if not really a big state Tory, then a Neo-liberal maverick).
A scaled down version of this ( a mere £65 billion) has been allocated to reduce pressure on interest rates and provide liquidity for pension funds, but Andrew Bailey the Bank’s governor, (reflecting Neo-liberal hostility to any idea of a ‘magic money tree’ https://education-economy-society.com/2021/01/07/shaking-the-magic-money-tree/ ) has been adamant this will not continue and should, on the contrary, start to be reversed. And at the very time it’s most needed (QE has become integral to macro-economic management since the 2008 crash).
When they took over the leadership of Labour Jeremy Corbyn and John McDonnell proposed a ‘people’s QE’ to fund both investment and much needed improvements to public services. This quickly fell by the wayside and post-Corbyn Labour though supporting Covid furlough measures has been quiet on the issue of funding the energy cap. It has (correctly) called for a windfall tax, but without really saying how the excess profits would be identified or addressing the problem of how quickly it could be collected.
As economies slow down, fall into recession and fail to generate enough tax revenue to secure basic living standards, never mind finance a Green New Deal, it’s essential that Neo-liberal ideas about budgets, borrowing and ‘economic competence’ are challenged.