There might at some point in history have been a moment when it would have made sense to appoint Rishi Sunak as prime minister of the UK. What I can say with certainty is that this is not that moment, if his inclination for austerity is confirmed within the next week or so.
Sunak arrived in Downing Street saying we faced a moment of economic crisis. He then did his best to suggest that this was all the fault of Liz Truss and that it was his job to correct her mistakes. If only things were that easy.
There is no doubt that the policies Truss and Kwasi Kwarteng tried to deliver, and the way in which they sought to deliver them, were crass. Once and for all they have demonstrated that the free-market fundamentalism of 55 Tufton Street is never going to appeal to the British electorate or the City of London. But the crisis we are in has much deeper roots than that.
We face trouble on multiple fronts. We remain outside Europe, so growth is not going to happen because Brexit does not and never will work.
Covid, despite the official pretence that it has gone away, is crippling the NHS with more cases than ever and is reducing the size of the UK workforce and its productivity dramatically.
Action on climate change is not happening.
And in the middle of all that there is inflation on a scale not seen for forty years, at the same time public services are in meltdown and strikes are becoming increasingly common, as people desperate to make ends meet reach the end of their tethers and take industrial action.
All of this will get worse if the government lets the Bank of England increase interest rates. Already, with base rates at 2.25%, mortgage rates are running at well over 5% and are rising steadily. If Bank of England base rates get to 5%, as is still expected even after Sunak’s arrival, mortgage rates for the two million or more households who have to renew their deals in the next year could exceed 7%, with the additional cost coming to maybe £500 a month. Very few will have the capacity to pay anything like that.
Those rates also spill over into rental markets, where the crisis arising from inability to pay will be felt first.
And high-interest rates also impact small businesses, in particular, very heavily, and in two ways. Firstly, their borrowing costs go up. Secondly, households unable to pay their basic bills do not go out, and nor do they spend on anything but the essentials in life. This hits sectors with high employment rates like hospitality, leisure and retail especially hard, and unemployment could increase rapidly if interest rates continue to rise and businesses fail as a result.
Sunak faces something worse than a crisis then. What he faces is an avoidable recession. There are, however, many ways he could avoid this. First, he has to go for growth. This means that he must keep national income up. The formula for national income is this:
GDP (gross domestic product) = C + G + I + (X – M).
C is basically household consumption. G is government spending excluding payments like pensions and benefits, which deliver consumption instead. I is investment in real new items for long-term benefit. X is exports and M is imports. So X-M is the net balance of trade.
Right now Brexit has killed exports. Investment won’t happen because business thinks the economy is in crisis and interest rates are high. And households can spend no more: they are already at their limits. So, the only thing that can turn the economy around is more government spending.
For that reason, Sunak simply cannot do cuts. He has, in fact, to spend more. Nothing else can save us now, except interest rate cuts – and on those, he has to tell the Bank of England to stop trying to trash the economy and to hold rates where they are.
What should he do? I suggest:
1. Announce there will be no cuts.
2. Increase public sector pay and benefits by the inflation rate – to make sure people still have spending power so the rest of the economy does not collapse.
3. Increase public saving, with the government – as happened in wartime – to provide the funds that could be invested in a green new deal, to deliver jobs in every constituency and make us sustainable. Providing attractive savings options could do this, very easily, and overnight.
4. Tax banks and energy companies on their windfall profits.
5. Keep energy subsidies in place for the long term, but only for those who really need them.
5. Increase taxes on the wealthy because they are just doing fine in the current situation, as they always do. This means increasing income tax, capital gains tax and national insurance for them, and council taxes too. But wealth taxes can wait: they would take far too long to organise.
The point is simple. Sunak can do austerity, as he is obviously inclined to do. And he can let interest rates rise, as the Bank of England is inclined to do. But if they do one or either of those, let alone both, our economy will go into a deep recession and millions will not only be unable to afford the basics of living, they may not be able to afford housing either.
Alternatively, Sunak can do what a good Keynesian would do in this crisis, and spend his way out of it as he did when Covid hit. It’s that or crash the economy. The choice is his. But only one option will stop angry parents unable to feed their children from forcibly venting their anger, and that’s what I fear will happen if he goes for austerity.