Prime Minister Liz Truss attends UNGA Prime Minister Liz Truss attends UNGA. Source: Andrew Parsons - Number 10 / Flickr / shared under license CC BY-NC-ND 2.0 / license linked below

An organised working class can defeat Truss’s class-war and force the capitalist system to recognise social realities, argues Dominic Alexander

The meltdown of the government’s tax-cutting budget has been faster than anyone might have expected, and the Bank of England has had to take emergency action just to hold the line. It is truly extraordinary for a Tory budget to receive such a negative reaction so quickly. Truss’s and Kwarteng’s actions have seemed so irresponsible to many commentators that historical parallels have been sought to explain the intentions behind the measures, and their likely results.

The common point of reference has been the ‘Barber boom’ of the early 1970s under the Tory Prime Minister Heath, with occasional additional references to the Thatcher-era, Nigel Lawson budget of 1988. On each occasion, tax-cutting and de-regulative policies led to short-lived economic booms, which ended disastrously soon after. Clearly, the parallels will only go so far.

The difference is that those earlier budgets were broadly welcomed by the capitalist class at the time. Now, however, the markets have immediately reacted badly, with the cost of long-term government borrowing up to 5% on Wednesday, before the Bank of England intervened by buying gilts to bring it down, and at least temporarily stabilise the situation. Even before then, the broad range of establishment and centre-left economists were united in their disgust with Truss’ strategy.

There were some exceptions among true believers such as those at The Daily Telegraph, but the parliamentary Tory Party is itself bitterly divided. Very few think the budget will result in a Kwarteng boom of any kind, although one investment director thought Britain ‘might quietly get some growth going over the next six to nine months’. Such a lukewarm endorsement did not convince me even a few days ago.

Some were attributing the disarray to ‘schoolboy errors’ by a cabinet of amateurs, with Kwarteng upbraided for failing to meet with leading bankers beforehand, and then signalling yet more tax cuts to come days after the ‘event’. The ruling class does like to be properly consulted, it’s certain. However, a Tory government carrying out the interests of capital should be able to ride out a patch of uncouth behaviour on its part, so the essence of the problem lies deeper.

Some of the defenders of the budget claimed that its giveaways to the wealthy (looser fiscal policy) would be matched by the higher interest rates (tighter monetary policy). If that was actually the plan, it is odd that the Bank of England seems to have been caught by surprise, initially failing to do more than saying it would look at the situation in November. That stance resulted in the panicked intervention on Wednesday.

Historical parallels and warnings

The Barber budgets of 1971 and 1972 cut income tax and sales tax, and deregulated bank lending, leading to a credit boom. Barber’s measures did result in a consumer spending bubble that caused a significant spike in inflation, but the rise in the growth rate was only sustained for barely six months before declining. The whole episode was soon overshadowed by the oil-price shock of 1973, which saw the growth rate plummeting and inflation rocketing. It is evident that although that international event was a major component of the economic problems of the rest of the decade, the Barber boom had already failed by then.

Stagflation, a period of low growth combined with high inflation, was already alarming Prime Minister Heath early in his term, and the ‘supply-side’ policies of the Barber budgets were in fact his answer to the problem. An important part of the plan was his attack on the trade unions, but it was defeated by industrial action from the miners and the dockers in particular, and by the prospect of powerful, wider union solidarity. Heath was also not able to avoid supporting industries on the verge of bankruptcy, due to fears of the consequences of mass unemployment, so had to return to limited versions of Keynesian policy.

The most important lesson the ‘monetarists’ around Margaret Thatcher took from this period was that the trade unions needed to be crushed for their preferred model of free-market economics to be viable. This they did achieve in the course of the 1980s, but winning the class war did not make Nigel Lawson’s new adventure in financial deregulation and tax-cutting very much more successful than the original Barber boom. The consumer bubble that resulted put sterling increasingly under strain. Bringing the currency into the European Exchange Rate Mechanism in October 1990 was meant to ease the downward pressure on the pound by association with the German mark. Of course, that plan led to a severe recession, with finally Britain crashing out of the ERM following Black Wednesday on 16 September 1992.

Back to the present

History didn’t bode well for Liz Truss’s government on this record even before Wednesday. Attempts to ‘go for growth’ by low-tax, free-market mechanisms have always been a superficial approach to more deep-rooted problems. Political ineptitude is certainly playing its part in the government’s disastrous formulation and implementation of its ‘supply-side’ plan, but that isn’t the most important element in what is happening. The fact that the same strategy had already failed twice, but is being used again, suggests not just ideological rigidity, but desperation on the part of the Tories.

The current situation is certainly worse than Heath’s in 1971-2; stagflation had already set in then, but the major shocks would come later. The British economy then had a growth rate much higher than it has been at any point since 2008, and a much stronger manufacturing base. A falling pound now might benefit some manufacturing, but will raise food and energy prices still further, and most manufacturers need to import components and raw materials in any case. 

Moreover, without raised budgets in the public sector, even with the fuel-price cap, the result is devastating levels of austerity passively imposed by the government. Worse, the unproductive rise in fiscal debt will be used to justify further and unsustainable cuts. At the same time, we’ve reached a point where the IMF, no less, has criticised the budget for increasing inequality. The shift in the tone of this erstwhile guardian of the strictest neoliberal orthodoxy is a sign of the impasse in which global capitalism finds itself.

The IMF’s words don’t, however, mark a change in the wider behaviour of capital. The reaction of the markets to Truss’s attempt at stoking a boom is no vote for neoliberalism with a human face. Rather, after persistent stagnation since 2008, and the huge outlays governments have had to make to deal with the pandemic, investors clearly see little scope for any kind of boom that will provide an opportunity for them. Rather, faced with persistently low rates of profit, capital wants strict fiscal rules and lower government debt, on the assumption that will give capital more space in the global economy. There is no optimism there that would support a strategy of raising government debt to ‘go for growth’. Thatcherite neoliberalism has plainly run its course and can offer no solutions that please powerful sections of capital, apart from those traders who were able to make substantial profits by shorting the currency.

The crisis may well have ended Tory hopes of winning the next election, but the discipline of the markets will be brought to bear on any modest Keynesian attempt to use deficit financing to invest in the economy. The insistence that Labour is now the party of fiscal rectitude is meant to signal a pre-emptive submission to capital’s demands. A future of active state investment where it’s needed, such as in building green energy infrastructure, is not going to come from Starmer’s half-hearted, neoliberal plans for a new state energy company.

A genuine change in direction is needed, but it is one that must confront the power of capital. There is only one force with the potential to do that, the organised working class. Capital can be forced to recognise social realities. The pandemic showed this, as markets actually welcomed massive government spending with little complaint. The more powerfully mobilised working people are, and the more willing to demonstrate this through strikes and protests, the more radical change will become possible. Heath lost his contest with the trade unions, and we must make sure that Truss loses her class war as well.

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Dominic Alexander

Dominic Alexander is a member of Counterfire, for which he is the book review editor. He is a longstanding activist in north London. He is a historian whose work includes the book Saints and Animals in the Middle Ages (2008), a social history of medieval wonder tales, and articles on London’s first revolutionary, William Longbeard, and the revolt of 1196, in Viator 48:3 (2017), and Science and Society 84:3 (July 2020). He is also the author of the Counterfire books, The Limits of Keynesianism (2018) and Trotsky in the Bronze Age (2020).