Britain now resembles a patient undergoing medical treatment in the 18th century, harassed with leeches, noxious compounds and primitive surgery, so that the overall outcome is more likely to aggravate ill health than to effect a cure. Simultaneously ratcheting up interest rates, increasing taxes and cutting public spending could have the same effect on the economy as an overdose of incompatible medicines. 

If the latest kite-flying from inside the Treasury is correct, the Chancellor is also said to be considering an alarming rise in the headline rate of Capital Gains Tax and dividend taxes, measures which that would hammer small businesses, landlords and savers in the forthcoming Autumn Statement to help fill the so-called fiscal “black hole.”  

The premise that our current economic crisis is due to the fiscal incompetence of the short-lived Truss administration is untenable. Certainly, the Truss/Kwarteng axis behaved stupidly and irresponsibly by failing to take markets or the public into its confidence, acting radically at the moment when the UK economy was least fit to sustain reform and leaving the OBR out in the cold. That was the occasion that triggered the crisis, but not its underlying cause.

In allocating blame, what about the culpability of MacCavity, the former spendthrift prime minister, largely absent on sun-drenched beaches, for throwing taxpayers’ money around like confetti? 

“Flying blind is not a way to achieve sustainability,” said Bank of England Governor Andrew Bailey, in a clear rebuke to Kwasi Kwarteng. Neither is an addiction to quantitative easing when it is doing more harm than good or an aversion to early, moderate interest rate increases at the time when they would have been most beneficial. The Bank of England, under Bailey, has been a fiasco.

Just 18 months ago, in May 2021, the Bank was complacently forecasting that the Consumer Prices Index would not rise above 2 per cent this year. On the eve of the mini-Budget, it raised interest rates by just 0.5 per cent when the markets had already priced in a 0.75 per cent increase, so that the MPC’s action, so far from reassuring markets, helped to drive the panic provoked by Kwasi Kwarteng’s growth package. Even after that, the Bank, whose remit is to create stability, further stampeded the bond markets with Bailey’s three-day ultimatum to pension funds, even as he whispered contradictory reassurance out of the corner of his mouth.

If there is one thing calculated to implode market confidence it is a central banker sending contradictory messages simultaneously. The underlying problem is that the Bank of England is not just an acolyte of Treasury orthodoxy, it has long been in thrall to central bank orthodoxy of the Mario Draghi/Christine Lagarde tendency. That is why, in tandem with Boris Johnson’s laziness, it neglected to exploit the opportunities of Brexit, just as, now, it has signed up to the Sunak/Hunt austerity programme.

Too many medications are being applied to Britain’s economic wounds, some of them by discredited quacks. This week a former US Federal Reserve executive openly blamed Andrew Bailey for the UK’s inflation crisis. The Bank seemed unable to hear the increasing warnings about the threat of inflation above the noise of the printing machines. Liz Truss and Kwasi Kwarteng have paid the price of their mistakes, but Bailey remains in place. Independence for the Bank of England has metamorphosed into unaccountability.

Britain’s economy is now caught in a perfect storm. To appreciate its destructiveness we need only look at the predicament of those most vulnerable to the tsunami of conflicting remedies – punitive interest rates, tax hikes and spending cuts – who constitute the key element of our economy and the chief motor of growth: our SMEs. A statement by the Federation of Small Businesses (FSB) on 3 November spelled out the problems.

The BoE’s interest rate rise of 0.75 per cent, to 3 per cent, will heavily impact small businesses already burdened with many kinds of debt. Even before the latest increase, the availability of new credit worsened in Q3 of this year. The already punch-drunk hospitality sector registered a business confidence rating nearly twice as negative as the overall score for all sectors in Q3.

In tandem with the decline in confidence among businesses, the equally crucial consumer confidence on which business depends was only slightly above its September all-time low in October. The FSB fears that, if small businesses lose out on consumer spending in the “golden quarter” including Christmas and New Year, a wave of closures could follow if spending remains weak for the rest of the winter.

At the same time, inflation – which the rate rises are intended to tame – is running at almost twice the rate for business inputs as for consumers. In 2020 and 2021 Britain lost a total of nearly half a million businesses, not, for the most part, due to capitalist “creative destruction”, but as a consequence of a pandemic and the accompanying lockdown devastating business activity.

The FSB made one particular appeal to the Government: “Action on late payment at least would be a godsend for small firms, opening up flows of working capital to keep them able to trade. The long-running scandal of large corporates’ poor payment practices must end, and the sooner the better.” Unnecessary liquidity problems are notoriously responsible for driving small businesses to the wall: the Government must heed that appeal and act on it without delay.

Apocalyptic voices are chorusing Corporal Fraser’s mantra: “We’re a’ doomed!”. Jeremy Hunt is delivering menacing hints about decisions of “eye-watering” difficulty. (Come to think of it, have you ever seen Jeremy Hunt and George Osborne in the same room?)

Elliott Management, the influential hedge fund, has warned its clients that hyperinflation could cause “global societal collapse and civil or international strife”. While the fund is right to condemn central banks for having been “dishonest” in deflecting blame for price rises from their prolonged use of ultra-loose monetary policy, that would not justify a response of prolonged austerity measures.

Inflation is a global phenomenon, but it needs to be addressed differently by each nation according to local economic circumstances. While rate rises are needed and 3 per cent, historically, would not have been thought oppressive by a generation that experienced 15 per cent, the challenge, for governments and central banks alike, is to apply remedies pragmatically, with a light foot on the pedal, carefully monitoring the interplay of bank rates, tax increases and public spending austerity on major elements such as the housing and labour markets.

The prospect of a two-year-long recession is daunting (if correctly forecast), but it is likely to be relatively shallow. Even this week, the Bank of England gave a broad hint that it does not expect interest rate rises to be as high as the markets expect. Everything depends on the fine-tuning, on the Bank, the Treasury and the Government coordinating their response as harmoniously as an orchestra.

But does the recent record of those three institutions induce optimism on that score? Can they even attain the honesty to admit that supply chain disruptions, caused by Covid and prolonged by the war in Ukraine, have more to do with Britain’s current predicament than Liz Truss allegedly frightening the bond markets? That war will remain, for the indefinite future, a massively disruptive force in the global economy and it is likely to impede the best efforts of bankers and politicians to restore stability. Even if stability is achieved within a reasonable time frame, recent political events have created a deeply depressing prospect: that the establishment narrative that Liz Truss’s attempt to free up the economy to generate growth has, for all time, discredited free-market capitalism.

Britain is now in the tight grip of the technocrat Keynesian establishment, the guardians of Treasury orthodoxy, the central banks cartel, the IMF and all the other managers of decline who prefer an inert economy to a venture capitalist dynamo. It remains to be seen how their stale prescriptions cope with the present crisis. There is now a very real danger that the medicine-men will turn what could have been a shallow into deep depression. 

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