BBC Breakfast, like most of mainstream media, obsessed over the Conservative Party leadership contest and who it will throw up as our next Prime Minister throughout the weekend just gone, giving a platform to contenders and their supporters and critics, and also to various talking heads from the opposition Labour Party who were all keen to describe in detail what the government had got wrong, but rather coy when required to detail how Labour would have done things differently and how their policies would have produced a better outcome.
However the most significant comments on the many headed crisis that awaits the new
Prime Minister came from a guest who is not linked to any political party: Lord Mervyn King, who was governor of the Bank of England between 2003 and 2013. Asked about the narrative being spread by some Liz Truss supporters, perhaps in a bid to undermine her successor and set in train events that will lead to another gangland execution, that financial markets ‘bullied’ Truss out of her plans and out of office, King gave a clear explanation of what had gone so badly wrong for Liz Truss and her hapless Chancellor Kwasei Kwarteng:
“Markets are not in charge. Governments and central banks are. Markets respond to the announcements made by government and central banks. And central banks have lost control of inflation, government lost control of the public finance; not surprising that markets respond to that.
“I think all central banks in the west, interestingly, made the same mistake. And during Covid, when the economy was actually contracting because of lockdown, central banks decided it was a good time to print a lot of money. That was a mistake. That led to inflation. We had too much money chasing too few goods. And the result was inflation. That was predictable. It was predicted, and it happened. So that’s one problem we have to try to get out of. But the public finances both in the United States and the United Kingdom were not put on a sustainable track. And markets responded to that.
King’s words highlighted several important factors that
led to the mayhem that followed on the heels of the ill - fated mini-Budget, reportedly authored by Kwarteng and Truss themselves, and the economic chaos it plunged the country into. He stressed that the economic crisis is global, that the UK is
not the only country experiencing higher interest rates or borrowing
costs, as the economic climate is changing for everyone (albeit it’s
happened faster in Britain, with far more international attention). This will not be well received by the people who still cannot accept that in a democratic vote we chose to leave the European Union and thus try to twist every negative news story in a way that enables them to blame it on Brexit. Unfortunately for them, Joe Public is all too aware that all the economically significant EU member states are as far or further up shit creek than we are.
The former central banker's verbal lashing did not spare the central banks. King made it crystal clear that mistakes had been made by all central banks in the west, though it was obvious he rated the Bank of England’s decision to dither and dally on actions to curb inflation as the biggest of all central bank cock ups, also lambasting their decision to print uncontrolled amounts of money in order to appease politicians and purveyors of 'The Science.'
While the cost of wrong headed and utterly ineffectual COVID reponse schemes like furlough (paying people to stay off work,) – roughly £70bn in total – did require the Bank and Treasury to work hand-in-hand, it has been a point for contention for a while now just how much money printing took place (the Bank created more money in the first year of Covid than it had in the decade leading up to it).
NB when we say 'printing money' in relation to governments and central banks, it is not a case of simply turning the speed of the printing presses up to eleven, money is created by selling bonds - in effect a contract to pay interest at a fixed rate on a certain sum for a specified number of years before redeeming the bond at face value.
Not only did the Bank oversee an astoundingly huge increase in the money supply; government policy saw cash flow into the national economy through furlough, business support support schemes, etc), yet central banks meekly went along with political denials that such reckless economic management would have no inflationary consequences, which was bollocks of course.
At one point in the show King blamed on the economics profession directly: 'If I were to blame anyone,’ he said, ‘I would blame the economics profession for encouraging [central banks] to print money [like] it didn’t matter.’
He also stressed that markets are not political in the way party politics are, forming policy and reacting to world events but instead are responding to a particular tax cuts or set of performance statistics – on the wider scale they are responding to the sustainability of financial plans, the ‘sustainable track,’ as King called it.
The recent mini-Budget that sank the government of Liz Truss was evidence that politicians are not taking fiscal discipline seriously after the loonytoons public spending splurges of the pandemic responses. It was a time when public debt has skyrocketed and deficits in peacetime hit record highs. It appeared to be a tipping point beyond which the philosophy of debt driven economies and rational behaviour parted company. All politicians are having to grapple with the consequences now, unfortunately few seem to realise that.
But perhaps the biggest impact of King’s appearance was not simply what he said, but how his contributions influenced what followed. Asked by The BBC's Laura Kuenssberg what direction the UK ought to be taking, King was warning about the ‘more difficult’ decision to come, including austerity and possibly ‘significantly higher taxes’ to fund public services, both to get the books in order but also to avoid passing on a staggering bill to future generations.
His comments echoed as unsuccessful Tory leadership contender refused to comment on any public policy, economic and otherwise, insisting that she would ‘not being drawn into the detail’ on decisions that presumably she would need to start making in less than a week, were she to become leader and by tradition Prime Minister. This included not talking about how she might reduce the UK’s deficit, which is thought to be required to regain market confidence and get things back on track – no doubt in part due to the serious lack of popularity spending cuts will have at a time when the cost of living crunch is worsening.
‘You heard from Penny Mordaunt,’ King pointed out, ‘we will probably hear in a minute from Keir Starmer (leader of the opposition Labour Party), that public expenditure isn’t going down, if anything it will go up. Therefore taxes will have to rise to fill the gap which is there at present. That doesn’t make a very happy picture for the next few years.’
Indeed, that’s exactly what happened when the Labour leader sat down in the hot seat, refusing to be pulled in on discussion of spending cuts, while insisting that some areas, including the usual Labour Party sacred cows, needed a funding boost. Starmer singled out healthcare, declaring ‘of course the NHS needs more money’ (he followed up later with vague talk of reform as well). With healthcare spending on track to account for almost 45 per cent of day-to-day government spending in the next few years, at some point Starmer will have to lay out just how high he thinks that number should go, and where exactly the money might come from.
King’s main point, that these are difficult times indeed, has been echoed by our new Prime Minister, Rishi Sunak, and by every politician of every party who has been given chance thecise their vocal cords in public since . Very few of those politicians however, are ready to discuss the remedies publicly, nor are they prepared to seriously discuss spending cuts.