In Britain, 1976 was marked by three major events – a summer heatwave, a change of prime minister and a sterling crisis. In 2022 we had the first and will soon have the second. Few would be entirely surprised if the third arrived by the end of the year.
As in that year, in the summer of 1976 people were enjoying the sun and didn’t seem to care much about high inflation. According to a 2004 report by the New Economics Foundation think tank, Britain was never happier than the year Denis Howell was appointed drought minister, Concorde made its first commercial flight and Sex Pistols Anarchy was released in the UK.
However, economic problems worsened as the year progressed. James Callaghan, who took over as Prime Minister from Harold Wilson in April, has had to turn to the International Monetary Fund for financial support. An IMF team spent the fall crafting a package that included painful spending cuts. The diaries of then-Energy Secretary Tony Benn show how divided the cabinet was between those who grudgingly supported austerity and those – like Benn – who thought Britain should try to grow out of trouble.
The UK is now less than a month away from getting a new prime minister and the challenge looks just as daunting for Rishi Sunak or Liz Truss as it does for Callaghan. The economy contracted 0.1% in the second quarter of 2022, which was actually slightly better than expected, but the growth numbers don’t really reflect the underlying weakness of the economy. A better indication of this is the trade figures, which are really frightening. As pointed out by Samuel Tombs, a British economist at Pantheon Macroeconomics, the trade deficit, expressed as a percentage of GDP, was larger in the first six months of 2022 than in any comparable period since quarterly records began in 1955. The situation continues worsen in the second half of 2022 as the imported gas bill surges. Sterling looks vulnerable, says Tombs, and he’s right.
Tory leader candidate Rishi Sunak campaigns at an event in Bexhill. Photo: Peter Nicholls/Reuters
There are many things that could trigger a run on the pound. Inflation could exceed Bank of England forecast of 13%, recession could come earlier and be deeper than expected. Financial markets would react poorly to social unrest following October’s energy price cap hike. They are also concerned about Truss’s suggestion that she will interfere with the Bank of England’s independence.
In a way, the fight between Truss and Sunak mirrors that between Callaghan and Benn in 1976: one more cautious, the other more radical. With a difference. If the polls are right, the radical – Truss – will win this time. Their goal is to revitalize the right, as Margaret Thatcher did in the 1970s.
Truss’ economic approach seems to owe much to Joseph Schumpeter
That will be a task. Thatcher was leader of the opposition in 1976, at a time when post-war social democracy seemed to be being played out. Their argument that tough action was needed to curb inflation and union power was echoed. The country was poised for a period of austerity, although in 1976 it had no idea how harsh austerity would be.
Truss’s economic approach seems to owe much to Joseph Schumpeter, the economist who championed creative destruction as a means of capitalism’s perennial revitalization. Certainly there is an argument, strongly advanced by Edward Chancellor in his new book The Price of Time, that a prolonged period of extremely low interest rates has misallocated capital and stifled productivity growth by keeping zombie corporations afloat.
But neither emotionally nor intellectually does Britain seem ready for a government that allows – even encourages – companies to go bust in droves. Truss also goes against the grain when she believes this is a country that would prefer tax cuts to saving money off its energy bills. The massive support package to keep the economy going through the coronavirus pandemic has set a precedent.
Sign up for the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk
Sunak seems more in tune with public sentiment, but he too is an instinctive small-state Conservative trying to come to terms with the fact that this is now a big-state Britain. Between 1997 and 2010, when faith in free markets and globalization was absolute, Britain had a left-of-centre government struggling to find a way to conform to the prevailing orthodoxy. Since 2010, a series of right-wing governments have struggled to adjust to a world that, as far as the economy is concerned, is leaning to the left. Theresa May and Boris Johnson understood this in their different ways, which is why they talked about helping the ‘just about managing’ and ‘leveling up’.
Despite the bleak economic outlook, there’s still a chance the Conservatives could win a fifth term. Inflation will fall rapidly in the second half of next year. Growth and living standards could increase by 2024. Voters may not be convinced that Labor would be significantly different. The election could be fought on the basis of culture wars rather than economics.
But even to be competitive in the next elections, the government must avoid a full-blown economic crisis. The choice is easy. Provide massive and fast relief so people heat their homes and have a relatively mild recession or refuse to act and have a monster recession. The question is not whether the coming winter will be bleak, but how bleak. And, if Truss wins, whether the queen can be turned.
Comments are closed.