Brexiteer fantasy of low-tax, Singapore-style economy gets slapped down by markets

In the early 1980s, France went on a solo run economically, adopting a strongly socialist agenda of increased spending, nationalisation and tax hikes, only to find itself whipped back into line in the most brutal of fashions.

The then government led by François Mitterrand came to power promising to jump-start France’s ailing economy and reduce unemployment, which had been elevated for several years.

In contrast to Margaret Thatcher’s doctrine of privatisation in the UK, the French government went on a nationalising spree. Up to 11 large industrial corporations and several private banks were brought under state control while factory layoffs were made subject to state regulation. Social benefits were expanded, tax rates for high earners were increased and a special wealth tax was imposed on the very rich.

Within two years, surging inflation and a foreign exchange crisis brought the economy to its knees. Mitterand’s short-lived socialist experiment – as it was dubbed – was forced into reverse. He ended up adopting a more market-orientated austerity programme than some of his centre-right predecessors.

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Right-wing economists saw the episode as a failure of Keynesian economics (the doctrine that in a recession, growth and employment can be bolstered through government spending even if it means taking on more debt).

Left-leaning ones blamed the role of international capital which cold-shouldered France’s deviation, precipitating a collapse in the value of the franc.

The episode revealed how integrated the global economy was becoming and the limits this placed on countries trying to act independently or against the prevailing market orthodoxy.

“The markets” are like a form of hardline religious police, hunting down economic apostates for reprogramming. Their current quarry is the UK, not for a Mitterand-like pivot to the left but for a hyper-capitalist jaunt to the right.

The turmoil caused by finance minister Kwasi Kwarteng’s mini-budget 10 days ago forced the Bank of England to take emergency action to stem a possible meltdown in the UK pensions sector.

The new government’s controversial plan to reignite the UK’s underperforming economy through a series of unfunded tax cuts has triggered a financial crisis on a par with the Brexit crisis itself, hammering the value of the pound and driving interest rates (and by extension borrowing costs) to levels not seen in decades.

The turmoil caused by finance minister Kwasi Kwarteng’s mini-budget 10 days ago forced the Bank of England to take emergency action to stem a possible meltdown in the UK pensions sector.

The plunge in the value of UK government bonds held by some of these pension funds was so rapid and so sharp that they began receiving margin calls to stump up more collateral.

To avert what some analysts were calling a “doom loop”, the bank stepped in with a £65 billion bond-buying programme to avert a mass sell-off of gilts (government bonds).

Approximately 40 per cent of mortgage products have been taken off the UK market amid expectations the bank will be forced to lift its base rate to 6 per cent in a bid to quell the inflationary impact of the new government’s controversial strategy.

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Truss was selected as leader by Conservative Party members earlier this month to run the country on a low-tax agenda which vowed to challenge “Treasury orthodoxy”, which is seen as too focused on reducing public borrowing and debt and not focused enough on raising investment and productivity.

One of the first things Kwarteng did on becoming Britain’s new chancellor was to fire the Treasury’s top civil servant.

Truss and Kwarteng are on a crusade against what they see as “failed Whitehall group-think”. Their belief is that large tax cuts for the rich and well-off and big companies combined with less regulation (they’ve reversed the UK’s fracking ban) will spur investment and boost growth for the benefit of everyone: their version of “trickle-down economics”.

“Singapore-on-Thames” is Brexit shorthand for Britain becoming a low-tax, lightly regulated economy. But borrowing heavily and cutting taxes when interest rates and inflation are already high can be self-defeating.

Income inequality is also collateral damage.

“For too long in this country we’ve indulged in a fight over redistribution,” Kwarteng told parliament as he slashed the UK’s top rate of tax, abolished the cap on bankers’ bonuses, cancelled the proposed hikes in corporation tax and national insurance.

Truss, Kwarteng and fellow Brexiteers Priti Patel and Dominic Raab flagged their low-tax, deregulation agenda in a book they published back in 2012 – Britannia Unchained: Global Lessons for Growth and Prosperity.

Part of the issue this time, and what seems to have spooked markets, was Kwarteng’s effective gagging of the Office for Budget Responsibility from doing an assessment of his tax plan.

It didn’t generate much debate but courted controversy for describing British workers as “lazy”. Its authors were promoted by former prime minister Boris Johnson to the highest offices in the land and are now steering the ship.

Ironically, there was little mention in the book of the EU, which later became (for the authors) the main chain holding Britannia back.

Brexiteers don’t like process, however. At the start of the Brexit journey in 2016, when the high court in London ruled that parliament – not the prime minister – would need to trigger Article 50 to start the UK’s exit, the judges involved were vilified. Johnson later subverted centuries of parliamentary process by proroguing parliament for five weeks at the height of the Brexit crisis.

Part of the issue this time, and what seems to have spooked markets, was Kwarteng’s effective gagging of the Office for Budget Responsibility from doing an assessment of his tax plan.

Running in parallel to the increasingly messy Brexit politicking, which has delivered four leaders in six years, and perhaps underpinning it, is the problem of the UK’s low-growth, low-productivity economy. The new government’s low-tax remedy, however, appears to be making the markets sick.