Since the last issue of Revolutionary Perspectives the political and economic turmoil in the United Kingdom has surprised the rest of the world.⁽¹⁾ It began in late September with the ill-fated ‘mini-budget’ of Liz Truss and Kwasi Kwarteng which, by proposing a £45 billion tax cut and spending increases, temporarily crashed the pound, destroyed investor confidence in UK treasury debt, and added a ‘moron premium’ onto government borrowing of around 1.4% compared to early 2022.⁽²⁾ It ended with an ‘austerity 2.0’ budget from Rishi Sunak and Jeremy Hunt in mid-November comprising £55 billion of tax rises and spending cuts. While the international financial press reacted positively to this exercise of financial restraint in Hunt’s Autumn Statement, for the British working class the new budget simply means an all-out, prolonged attack on their already difficult living and working conditions, disguised by a winter fuel allowance, due to “the war in Ukraine”. For a start, inflation means that the freezing of nominal income tax thresholds for the next six years (the longest since 1955) ensures that more of the lowest paid workers will have to pay income tax for the first time, whilst the wages of others higher up the ladder will fall into a higher tax bracket. The Chancellor’s estimate is that this will bring in £100bn for the Treasury over the next 5 years. On top of the tax rises, the highest rate of inflation in decades spells a much more direct assault on working class living standards. Even the Office for Budget Responsibility is saying that “households will have to draw on savings as the cost of living crisis bites” and recognising that “living standards will still be below pre-pandemic levels by 2028”.⁽³⁾

In response to this, the sporadic strikes against declining real wages which have been asserting themselves over the past year are continuing to grow, with the tabloid press having a field day recalling the ‘Winter of Discontent’ back in 1978/9 (which presaged the era of Margaret Thatcher). Faced with a government that is not even giving union leaders ‘room to negotiate’, the legally-faultless strike ballots and timetables of pre-announced strike days for railway workers, postal workers, nurses and ambulance workers are only the tip of the iceberg of workers striking.

The wider context of all this is the sharpening of the global economic crisis which politicians, depending on their party allegiance, lay the blame alternatively at the feet of a few lone weirdos at the top of the Conservative Party or one isolated paranoiac in Russia. It is important to understand that the actions of these individuals do not exist in a vacuum, but have a history, and are the increasingly desperate responses of a global ruling class which has no solutions for a crisis-ridden system that is unable to return to profitability.

History and pre-history of the ‘mini budget’

In the waning days of Boris Johnson’s premiership, the global economic outlook was particularly dismal. High inflation combined with low growth is a hopeless mix, and the pessimism was ratified by Federal Reserve Chair Jay Powell’s warning of coming drastic interest rate increases in August.⁽⁴⁾ It was intimated several times and formally announced on Tuesday 20 September, three days before the mini budget, that the focus of the world financial market was going to be shifted from an expansive and inflationary phase, meant to help lift the world economy out of its post-Covid slump, to a restrictive phase in which reducing inflation was the main aim. In the Conservative Party leadership election of September, the membership rallied behind the hard Thatcherite right due to their shared aversion to the reality of Johnson’s perpetual sleaze and mismanagement. The fresh-faced pair of Truss and Kwarteng naively took this minor and highly conditional approval from a marginal section of the bourgeoisie as endorsement for a radical economic programme based on reheated Thatcherism. A week after political activity was allowed to commence following the Queen’s funeral, Kwarteng, with Truss’ full support, announced his ‘mini-budget’ on Friday 23 September which both aimed to address the energy crisis and boost the economy by respectively introducing energy price caps for households and businesses, and extensive cuts to corporation tax, national insurance, and the 45p rate of income tax.

The problems began to be noticed the following Tuesday, when by the afternoon, 30-year gilt yields⁽⁵⁾ had reached 5% from 3.5% the week before, and the pound crashed in value against the dollar to almost parity. The volatility had its roots in a variety of long-term and short-term conditions. Jacob Rees-Mogg, several days after the event, blamed the volatility on the BoE not raising rates fast enough the day before, which is a bit like someone who climbs over a safety rail blaming the architect for putting it on top of a 20-storey building. However, the point is correct in respect to the fact that the rate increase by the BoE — which was small relative to the increase by the Fed a few days earlier— drastically reduced the British government’s room for fiscal manoeuvre. In fact, due to the BoE’s dovishness, the government would have had to announce a budget cut simply in order to maintain the current dismal and inflationary conditions. When the Fed decides on a monetary tightening by increasing interest rates, then all countries have to follow suit. If a country has a rate increase lower than the USA’s, then money will flow out of that economy towards the USA where investors will be able to get better interest rates. The drain of money out of the country in turn results in a fall in the value of the currency, leading to more expensive imports, which has the impact of effectively exporting inflation from the US to the dependent country. Not only did the UK have a smaller rate increase than the US, Kwarteng also proposed a £45 billion spending increase. The mismatch between monetary and fiscal policy has already become something of a classic case, a cautionary tale from central bankers to those rogues who would question current economic orthodoxy.

Truss’s economic plan represents in some ways the political dead-end which the Conservative Party has pushed itself into. The comment that ‘Britain is a nation of idlers’ published in Britannia Unchained, a Tory Right tract which Truss, Kwarteng and others co-authored in 2012, is emblematic of how they see the economic problems of the UK. Productivity, a measure of how efficiently labour inputs are used in relation to capital expenditure to create a given level of economic output and in some ways a cypher for the rate of profit, is reduced to a moral issue of ‘laziness’ which is used as a justification for the continuing punishment of the British working class in the hopes of restoring the rate of profit (often referred to in the bourgeois press as ‘Britain’s chronic growth problem’). In fact, all advanced countries have experienced a productivity slowdown since the financial crisis, although it has been more pronounced in the UK. Different reasons are given for the cause of this slowdown, such as lack of investment and training on one hand and reduced demand due to the financial crisis and austerity on the other.⁽⁶⁾ However, the means of countering this slowdown employed by all recent governments have been remarkably consistent.

The big bang of the early 1980s plays an oversized role in the political imagination of British Conservatives. In their mythical retelling of the events, it allowed the spirits of free enterprise lying dormant in slacking proletarians to grow unencumbered by government interference. In reality, growth was entirely in the financial market, comprised of fees from selling British state property, and similarly re-organising production overseas through speculation and extreme leveraging. All of which was not made possible by the supposed daring genius of Margaret Thatcher, but by the expansion of money supply caused by the de-linking of the US dollar from gold with the ensuing oil crises and price hikes which exacerbated the crisis of profitability in the ‘real economy’ of the early 70s.⁽⁷⁾ In capitalist terms that round of restructuring was successful in that it allowed a short-term return to profitability, never mind the decimation of the ‘traditional’ working class and the decades-long economic restructuring that turned the UK economy into a service one, dominated by finance. But the financial crash of 2007-8, with the low-growth and multiplication of zombie companies that the world has been experiencing since then shows that financialisation has already run its course, and that further ‘growth’ through further financial restructuring is extremely difficult.

The precise mechanism which induced this mini-crash was in fact a result of this very same financial restructuring, which shows it is just as capable of destroying capitalist growth as it is of temporarily prolonging it. The obscure section of the financial sector known as Liability Driven Investment (LDI) began as a means of increasing returns for pension funds who were threatened by the requirements of mainly public sector defined-benefit pension schemes. These sorts of pensions, which offer some sort of guarantee on the financial remuneration of pensioners, were slowly replaced during the 1990s by defined contribution pensions schemes which did not have to guarantee this and therefore had much less onerous funding requirements. Large sectors of the population still had defined-benefit schemes which by 2004 were collapsing due to an increasing number of firms reneging on their contributions and lower returns from stock markets. In order to help these funds manage this the New Labour government introduced the Pensions Act 2004 which allowed pension funds more ‘flexibility’ in their investing strategies. Pension fund managers then began to employ the LDI strategy which had been developed by investors at US bank Merril Lynch in 2003 in order to help protect defined-benefit schemes from large movements in interest rates and inflation. Part of this involved ‘hedging’ using gilts (government bonds, the equivalent of US Treasury securities), usually considered a completely safe investment due to having price levels that are relatively unreactive to demand, allowing them to be sold en masse when large amounts of cash are required quickly.

However, this strategy of using gilts to provide liquid assets fails when the bond issuer violates the basic requirements of asset liquidity. Namely, when the issuer defies Keynes and increases the supply beyond the range where a “price inelasticity of supply” holds. The mini-budget, with its unheralded profligacy,⁽⁸⁾ was exactly this circumstance. The price of gilts crashed and pension funds, which had to answer margin calls⁽⁹⁾ on their LDI portfolios, were unable to liquidate these assets due to a ‘fire sale’ dynamic.⁽¹⁰⁾ At one point there were no buyers for long dated UK treasury bonds — the textbook liquid asset had become completely illiquid (they should have invested in ministerial positions, a commodity which has been showing great signs of liquidity). The result of the political manoeuvres of the British ruling class over the last 50 years: moving away from an export-led industrial economy but only half-heartedly committing to becoming the lapdog of American imperialism, is an economic system based on the financial services industry that therefore lives and dies on its financial plausibility. Part of the reason why the UK crashed out of the ERM in 1992⁽¹¹⁾ was due to the fact that the markets recognised that sterling, the currency of a financial services economy, had been over ambitiously pegged to the Deutschmark, the currency of an industrial goods exporter. The hard truth is that the UK economy lacks the bulwark of a massive current account surplus (Germany) or imperialist domination (USA) to weather an economic crisis in which its own financial solvency is put into question. The fact that the pound dropped in value so rapidly is proof of this; when investors can no longer rely on the British financial system, the alternative is not to invest in the British manufacturing system, but move their money outside the UK entirely.⁽¹²⁾

By Tuesday afternoon it was clear that defined-benefit schemes were within a few hours of complete insolvency. The Bank of England was forced to act decisively and announced a bond buying scheme of up to £5 billion per day for 13 days in order to keep prices high and stop the margin calls. From 10am Wednesday bond yields began to drop.

Over the next few weeks, against increasing criticism from the Labour opposition who rapidly rose to unprecedented levels of popular support with a position of fiscal orthodoxy and conservatism, the government dug its heels in ideologically, even as it offered concessions drop-by-drop. First, a week after the mini-budget, the cut to the 45p tax rate, the most obvious example of class warfare, was dropped, even though it was by far the smallest portion of the tax cuts. This itself was not primarily intended to calm the markets as the gilt purchase scheme introduced by the BoE was working well and by Monday 3 October, the day after the 45p tax cut U-turn, only £4 billion of the potential £30 billion had been used. However, once it became clear that the government was determined to not offer any concessions beyond this, exactly one week after the problems had begun, 30-year gilt yields began to rise again, albeit this time more slowly. The BoE thus began its next phase of action. A Temporary Expanded Collateral Repo Facility was launched through which banks would be able to help to ease liquidity pressures facing their clients LDI funds⁽¹³⁾ and the scale of its remaining gilt purchase operations were expanded. On Tuesday the scope of the gilt purchases operations was widened to include index-linked gilts up until the end of the purchase scheme that Friday. The next day, as 30-year gilt yields reached 5% again, it was clear that none of these operations were going to be as successful the second time around, and that some change to the government was necessary. That Friday, as the purchase scheme came to an end, Kwarteng was hastily summoned back from an IMF meeting in Washington D.C. to be sacked by Truss and replaced by Jeremy Hunt, businessman, stalwart of financial orthodoxy, and the former Health Minister who did his bit for the current crisis in the NHS. The same day the promise to avoid a planned £18bn corporation tax rise was scrapped. The market reaction was positive with falls in gilt yields the following Monday closing about £10bn of the fiscal hole that had been opened in public finances. At this point, the cat was out of the bag. Only an end to the Truss-Kwarteng regime and its policies would keep the markets happy. After a chaotic fracking vote on Wednesday evening which fully exposed the deep divisions within the Conservative Party, Truss resigned on Thursday 20 October, making her the UK’s shortest serving Prime Minister after spending only 49 days in office.

The Autumn Statement and its future

With little fanfare, Rishi Sunak became the next prime minister five days later. His cabinet reshuffle, which kept Jeremy Hunt in his position and removed almost everyone else, has solidified his reputation as a man of orthodoxy. In the Autumn Statement a new budget, released just 56 days after the old budget, was announced along with an independent OBR forecast. The budget included a slew of tax rises and spending cuts spread over the coming decade, such that by 2024/25, the tax burden will reach 37.5% of GDP, the highest since the post-war period. The OBR forecast is especially gloomy, predicting a recession for at least another year, a loss of over half a million jobs over the next two years, and a reduction in living standards of 7% over the same period wiping out the previous eight years of growth.⁽¹⁴⁾

Behind the figures, the implications for daily life are arduous. The health service and the railways are at breaking point. In both cases the pay freeze of the last ten years has produced a massive shortage of nurses (tens of thousands), doctors and train drivers. There are huge shortages of workers in social care and the “hospitality” sectors. Previous shortages were covered to some extent by EU workers but with Brexit many of them have left. Add to this the corruption of billions of pounds’ worth of contracts awarded to government supporters for PPE that never worked or arrived, and the financial meltdown which we have just described, we can see that the economic situation has been made worse by incompetence.

The consequence is that wages have fallen behind prices at a faster rate than any time since 1977. There is no surprise therefore that even before these last few weeks the number of days lost to strikes has been the highest since 1990.

The government refuses to negotiate seriously even when faced with the largest ever nurses’ strike (whose pay has been dramatically cut for a decade or more). Instead it is claiming that there is no money for it (although there is for weapons to Ukraine or bribing Rwanda to take migrants) and is basically hoping inflation will come down. If that fails they propose to remove the limited ‘right to strike’ of all public sector workers (nurses and rail workers first of all). The Labour Party is cosying up to Big Business (most of which sees it as the best team to bring the situation under control). It does not even need to promise the workers anything to win the next election so dire have the various Conservative governments been.

The present strikes thus assume a pivotal position in British politics, into which the hopes and expectations of both the working class and their class enemy are placed. For the balance of forces to swing towards the working class it is necessary for the growing number of workers who are striking sector by sector to come together to strengthen their resistance. (Ultimately this will mean uniting beyond national borders as proletarians exploited by an international capitalist class.) For many this will inevitably mean coming up against a union bureaucracy aiming at ‘social peace’ with their exploiters⁽¹⁵⁾, not to mention the danger of being co-opted by leftist figureheads vying for institutional sinecures. After decades of passivity it is time for the people whose lives depend on working for a wage to organise for themselves and fight the wage cuts, price rises and job losses carried out by the national and international organs of capitalist rule.

Notes:

(1) Le Monde 21/10/22: “After the resignation of Liz Truss, the UK plunges into a deep and unexpected political crisis.”

The New York Times 20/10/22: “The beleaguered British prime minister relinquished her office after just 44 days of political and economic tumult, the shortest tenure in British history.”

Süddeutsche Zeitung 20/10/22: “the British are rid of Prime Minister Liz Truss, who has caused so much mischief in such a short time”

(2) Five-year gilt premiums (i.e., the interest the government has to pay on its borrowing that has a maturation of 5 years) were around 1.8% prior to September 2022 and have now stabilised around 3.2%.

(3) Delphine Strauss, ‘Households braced for largest fall in living standards since records began’, Financial Times, 18.11.22.

(4) federalreserve.gov

(5) A gilt is a UK treasury bond, an agreement by the treasury to repay an investor at a set interval of time the principal plus interest (the yield). It is the main means along with taxation the government uses to raise funds. Yields vary inversely with price, so that a gilt which is less valuable due to perceived increase of risk (possibility of default) requires a higher yield to offset that risk.

(6) cepr.org

(7) See Revolutionary Perspectives #18, 1971-2021: 50 Years Since the USA Reneged on Bretton Woods, leftcom.org

(8) It’s worth pointing out that the fiscal strategy of the Truss government is, from the point of view of international money markets, identical to that proposed by Jeremy Corbyn, and as such would have engendered the same market reaction.

(9) Hedging strategies are only guaranteed within a certain range of value of the original equity. Once the price deviates beyond this, then extra funds are requested by the broker to make up the gap.

(10) The margin calls were a result of the deviation of the gilt price. However, as more gilts were sold to answer these, the price was pushed lower triggering further margin calls.

(11) See Workers Voice #63 November/December 1992 libcom.org

(12) This is historically a disciplinary response which has been meted out to many peripheral capitalist nations such as Latin American and Asian nations during the 1990s. Some commentators remarked on the peculiarity of a developed economy experiencing such a mechanism.

(13) Essentially by offering cheap overnight loans.

(14) obr.uk

(15) Such as the leftists’ man of the hour, Mick Lynch, who is clear to stress his reformist credentials, for instance in an interview with LBC on 1 August stating that he does ‘not want a revolution that destroys the important structures of our communities’. These important structures presumably include those that promote the systematic exploitation of the working class.