Triumphant Treasury must not revive Osborne’s terrible China policy

This is Iain Martin’s weekly newsletter, exclusively for Reaction subscribers. 

Congratulations to the Treasury on winning the battle for supremacy in British national life. Along with its partner the Bank of England, HMT is back in charge under the new Chancellor Jeremy Hunt and the Prime Minister, Rishi Sunak, who was at the Treasury until July, when he resigned from the government led by Boris Johnson.

During the brief interlude of the Truss-Kwarteng dynasty, there was talk of ending “Treasury orthodoxy.” Critics say the low growth Treasury is too focused on projections from the Office for Budget Responsibility, and on raising taxes to fill black holes that, if you’re not careful, end up becoming self-fulfilling when those higher taxes whack confidence, activity and growth. Those of a more centrist disposition are simply pleased some orderly policy-making has been restored under Hunt and Sunak, after the wildness of the summer and autumn.

The ineptitude of the Truss-Kwarteng experiment has certainly discredited, perhaps for decades, the case for lower taxes to encourage business growth. The rebellion has been squashed and the Treasury orthodoxy is where it’s at. 

Last week, Hunt unveiled an Autumn Statement that has stunned what is left of the Tory party. Even before it, the party was in a state of bewilderment following the year-long saga of shenanigans since Johnson accidentally began dynamiting his premiership. Now, many Tories, emerging blinking from the rubble, will wonder what the point of their party is.

Critics fear the Autumn Statement represents a return to the game-playing favoured by George Osborne. The former Chancellor, now an investment banker, is back advising Hunt. The tax-raising Autumn Statement did sound a bit like Gordon Brown, remixed by George Osborne.

I’m finding it difficult to join those outraged, or even wearily condemnatory, on the pro-market side. Hunt had few decent options and he has designed a strategy pitched in the hope they will get lucky. Many experts, the Bank of England included, miscalled inflation on the way up. The Bank envisages it falling away. If that happens much quicker than anticipated, and rates don’t have to rise as high as feared, the economy gets a boost. Perhaps the war in Ukraine will end. Perhaps not. 

What I’ll be watching is China policy. Before 2016, Osborne was the architect of the so-called golden era that sought to make the UK and China indispensable allies. This was hopelessly naive and Western policy has been retooled in recent years. China under Xi Jinping is a totalitarian state determined to get back Taiwan, a critical player in the microchip market at the heart of the global economy.

I’ve now heard several times in odd contexts in recent weeks that senior Treasury officials want to get the China show back on the road. Britain is hard up and needs investment, runs the argument. We cannot afford to be too hawkish on China, was the old Osborne position. It’s okay for the Americans. We Brits could do with Chinese dosh, say China doves. That view is not shared in some other parts of government. Last week, the sale to China of a key microchip facility in Wales was blocked.

Much will hinge on the view of the Prime Minister, and whether he wants to stick close to the US. The Biden administration is determined to be robust on China. The aim is not war. The aim is to deter or delay China from starting what could turn into a world war. In that context, talking to China is one thing. Reactivating a pro-China investment policy would be extremely dangerous, and risk blurring the signals sent to the Chinese regime by the West.

HMT is triumphant, for now, but history shows Prime Ministers usually end up diverging from the Treasury at some point. China could be the flashpoint.

Labour abolishing the Lords is very smart politics

Some of my best friends are in the House of Lords. The current system of appointments, and the way in which it draws in folk not just from politics but also from business and even the media, means there is a good chance, if you work in the British media as I do, that some of the people you know and like will end up as members of the second chamber.

Those in the Lords tend to be proud of the institution and defend its existence on the valid basis that among its members are figures who have accumulated experience and wisdom. Reform would be complex, and a distraction, runs the argument in favour of leaving well alone.

That argument is no longer going to work, although the penny does not seem to have dropped, yet, with peers. Labour is going to abolish, or replace, the appointed House of Lords. Short of a Tory revival and Sunak victory at the election, we are living through the final years of the old system.

There was some bafflement at the weekend when Sir Keir Starmer announced his commitment to introduce an elected second chamber, if he wins the next election.

Why major on this now? Isn’t Starmer allowing himself to be diverted from what really matters to voters? Who cares about the Lords?

On the contrary, this move by the Labour leader is ultra-smart politics that is likely to prove very popular in the run-up to the general election. It is a policy that is easy to communicate because it runs with the grain of public anger with institutions.

In the looming general election, to maximise the backlash against the Tories, Labour will seek to present the Conservative party as remote, rich and out of date. Regardless of the merits of individual peers, the Lords is going to come in handy as the embodiment of old politics by a party trying to capitalise on the idea it is time for a change. It creates a clear dividing line and forces the Tories to defend the unreformed system.

In doing this now and making it a manifesto commitment, Starmer is ensuring the unreformed Lords cannot block reform if Labour wins a majority.

Although Lords reform may not be a subject of much interest to voters this minute, part of the job of the opposition is to lay traps for tired governments. It will quickly become a hot topic if there are any scandals related to the Lords in the next 18 months, and Labour’s increasingly ruthless media operation gets going on linking all this in the public imagination.

Look, Labour will say, it cannot be right that Boris Johnson is rewarding the staffers who stayed by his side during his “Downfall” experience in the Downing Street bunker. Knighthoods, fine. But a place in the legislature? Not for much longer. In the latest edition of Private Eye there’s a spoof Boris resignation honours list. It reads like a postscript, encapsulating the end of an era and featuring peerages for Lord Wilf of Johnson (age 3) and Baroness Fruitella of Tottington (age 23), formerly deputy assistant head of wine suitcase replenishment in Number 10, March 2021 to May 2021.

No wonder Britain is skint

A couple of numbers among many caught my eye last week during the coverage of the Autumn Statement. The BBC ran a graphic on energy costs that was so extraordinary I had to check it was not some elaborate, deep fake, artificial intelligence spoof. It seemed to suggest total energy costs this year would be around £100bn higher than just three years ago.

It is true. In 2019, Ofgem reported: “Households and businesses together spend around £55 billion on energy each year.” Note the implied assumption – “spend around” – of a steady state.

Fast forward a couple of years. The excellent House of Commons library reported last month: “Total spending on all forms of energy by all groups of customers (domestic and non-domestic) reached a record £147 billion in 2021.”

That was before, yes before, the attack on Ukraine by Russia in February upended energy markets. Total spending on energy is likely to be a good bit higher this year, though presumably the slowing economy and everyone getting poorer will reduce demand and offset the total. Let’s see.

There is a lot of discussion about what is to blame for Britain’s economic malaise. Those most opposed to Brexit say it’s down to Brexit. Those in favour of Brexit dispute this.

Looking at those energy numbers, it is hard to see Brexit as anything other than a blip in the epic context of a pandemic, war and global energy crisis. An extra £100bn a year to keep the lights on, and that’s in addition to the government having overspent by perhaps as much as £100bn on its Covid  response. These are giant numbers. No wonder the country feels skint. 

The overpowering sense is of opportunities missed and a failure of state capacity, particularly on energy, where politicians preen at eco-summits and refuse to tell voters the truth that if you desire prosperity there is no way to do it without plentiful and cheap energy. That means lots of gas and oil, at least in the interim, which will be a long interim. Energy is what has powered human development and improvement since the industrial revolution. Fail to provide it and you won’t get growth.

In 2010, Nick Clegg, now of Facebook, once deputy Prime Minister, made one of his silly little videos in which he criticised the idea of investing more in nuclear power. Clegg said confidently that new nuclear power was not the answer because it wouldn’t come on stream until 2021 or 2022. 

Well, that’s now.

Last week, the Sizewell C development in Suffolk was given the go ahead by the government, at last. EDF owns the project. A Chinese firm had 20% of it but ministers have pushed to squeeze out Chinese involvement.

There have been concerns expressed about the cost of Sizewell C, which will power the equivalent of six million homes for 60 years. Might it cost more than the estimated £20bn? Gosh, it is suggested the final bill will be £30bn.

Britain should have built three, four, five, six, seven, of these projects, and would now have cheaper energy and better growth prospects. Even if Sizewell C costs £30bn in the end, spread over many years, that’s likely less than one third of the extra we’ll spend on energy as a country – this year. That’s the price of failure. Well done, everyone involved.

What I’m reading

I still can’t stop reading about Sam Bankman-Fried and what he’s unleashed.

Imagine you are John Ray III. You will be forever remembered in the accountant community as the guy who was sent in to sort out the Enron wreckage when the energy trading firm collapsed in 2001. As an insolvency professional, Ray must have thought he had seen it all. And then, a few weeks ago, he got the call to clean up after Bankman-Friend, founder of FTX, the doomed crypto currency exchange.

Ray has been appointed as emergency CEO of FTX, now under bankruptcy protection. Founder Sam Bankman-Fried, the tousle-haired twit who convinced Bill Clinton and Tony Blair to appear alongside him at one of his crypto conferences, is now the subject of multiple investigations into what happened at FTX. The whole thing is like a contemporary version of Anthony Trollope’s The Way We Live Now, that perfect satire of British financial, political and social chicanery in the 1870s.

Billions may be missing from FTX. As much as $10bn of customer deposits seems to have been funnelled out to an investment vehicle. FTX is based in the Bahamas and until recently was worth $25bn or perhaps $32bn. It is not worth that now.

Ray and his team dived in, trying to get a grip on the company and its assets. What they have discovered so far was made available in various filings to a court in Delaware. Ray says he has never encountered anything like what he found at FTX in terms of incompetence and lack of controls.

For historians and those interested in financial crises, the FTX case is a peach. Indeed, Michael Lewis, the author of Liar’s Poker, seems to have spent a few weeks interviewing Bankman-Fried, before it all blew up. That’s Lewis’s next book sorted. Can’t wait to read it.

Have a good week.

Iain Martin,
Publisher and CEO,
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