Common sense now has it that “the markets” are Britain’s new rulers. The chancellor, Jeremy Hunt, is co-governing with them, so the story runs, in contemplating “eye-wateringly” difficult decisions to cut public spending, as would a putative Labour successor, Rachel Reeves. Thus, just as libertarian dreams of stupendous unfunded tax cuts to drive growth are now over, so are social democratic hopes of building a just society. Allegedly, the implosion of Trussonomics has made the lights go out across the political spectrum; the future offers only variants of austerity.
I disagree. Britain is not yet an emergent economy. It still has vast resources if it chooses to access them. It possesses a fabric of institutions ranging from the UK Debt Management Office to the Bank of England that, given the right constitutional framework and proper economic and political leadership, are more than capable of being the markets’ master rather than their servant. Economic and political choices remain.
Nor are “the markets” hegemonic forces that always and everywhere blindly impose austerity and economic suffering. They are simply our creditors, holding our debt and to whom we have to sell more – therefore, they have to be carefully managed. Liz Truss and Kwasi Kwarteng, their heads full of Brexity libertarian arrogance and delusion, chose to ignore that reality. The lesson is not that there are no choices but austerity – it is that successful economic management requires seeing straight.
It is true that some market participants, generally the hyper-short-termist hedge funds and day traders, are fiercely pro-free market, anti-regulation and pro-Brexit. But there are many more market actors who, for example, take green and socially responsible investment seriously, are pro-EU, understand the case for regulation as long as it’s not too onerous and get that governments tax, spend and borrow to achieve varying political ends. They don’t automatically veto a social democratic government any more than they would a libertarian one. They veto a stupid government.
If there is any shared ideology, it is that they want the government of the day to accept the rules of engagement with any creditor. Their fiduciary obligation is to conserve the assets for which they are responsible, which affects anyone, for example, with a private or occupational pension. Quite right. They look for credible fiscal plans that will be delivered within a well-understood, predictable and above all solid framework that can’t be overturned by political whim. Yes, the Truss-Kwarteng growth plan was intellectually risible, but what really spooked, and continues to spook, market actors is that the British constitutional and political system could allow such cultish nonsense to get so far. Even now, the constitutional arrangements of this, a G7 country, are so primitive that they allow a group of Tory backbenchers in the 1922 Committee to set the rules for who will become prime minister. Small wonder that, as Boris Johnson’s ghoulish re-emergence as a leadership contender surfaced on Friday afternoon, sterling and bonds weakened.
Britain’s uncodified constitution, in which so much depends on unwritten protocols being respected, has always been vulnerable to one political party going rogue, in which case not only the economy but the rule of law and even democracy itself are threatened. The proroguing of parliament in September 2019 at Johnson’s discretion was a forerunner of what has been happening over the past six weeks. The summary sacking of the permanent secretary of the Treasury with zero process and the overruling of the legal requirement to publish independent economic forecasts with the mini-budget came from the same roots. A minister, exercising regal prerogative power, can do whatever he or she damn well pleases. Now the same principle is written into the financial services and markets bill: a minister is to be given the powers to “recall”, rewrite or veto any dimension of financial regulation that may displease him or her with no parliamentary process. It was one of many reasons for the credit rating agency Moody’s citing “unpredictability in policymaking”, lowering the UK’s credit standing on Friday from stable to negative.
Any successful social democratic government thus has to do two foundational things. It needs to reform the constitution so that the presumption becomes that significant changes to our institutional arrangements have to be validated by both houses of parliament rather than left to ministerial fiat. Democratically elected governments set out their proposals in their manifesto and legislate for them; they can respond to changing circumstances by proposing reforms and new regulation but ministers should not be able to govern by whim with no recourse to parliament. Happily, Labour is halfway there with Gordon Brown’s constitutional review, proposing replacing the Lords with a newly powerful upper house democratically recruited from the UK’s cities, regions and nations. To his list of proposed reforms, Brown should add ending “Henry VIII” prerogative powers.
Second, there must be a recasting of the UK tax system, far too biased to tax income and not capital, property and wealth. For example, Britain’s housing stock is worth more than £8tn. Council tax – in England, extraordinarily, based on 1991 property values – yields £40bn, a derisory 0.5%of the value of the stock, well below what domestic rates proportionally used to yield before their abolition by Margaret Thatcher. Taking action on this, along with revisiting the taxation of the super-rich and their capital, and the government could comfortably raise the £40bn needed to plug the fiscal black hole.
Marry that with a commitment within a new constitutional settlement to respect the independence of the Office for Budget Responsibility, the Bank of England, the Financial Conduct Authority and the yet-to-be-established Audit, Reporting and Governance Authority. Also offer a credible medium-term plan for spending, taxing and borrowing – borrowing only for capital and science investment – and the “markets” will happily hold and buy more UK government debt at reasonable or even falling interest rates. On top, it will offer a credible framework for growth driven by public and private investment. Don’t believe the financial Eeyores. The death of Trussonomics is just that. Britain can have high-quality public services and social justice if it chooses. It just has to choose.
• Will Hutton is an Observer columnist
