After the 2008 financial crisis, life returned to normal. Will it be this time? | Philippe Inman
OSeeing the Conservative Party candidates spraying cash as they vie to win the keys to No 10, it seems rude to ask where the money will come from. Running a 21st century economy doesn’t come cheap and, unfortunately for those in power, gets more expensive every year.
More immediately, to prevent a cost-of-living crisis from turning into a calamity this winter for low- and middle-income households, a bigger bailout is planned.
Treasury officials are under no illusions that rising energy bills, coupled with the added cost of food and travel, will force the next chancellor to dig deeper than his predecessor to fund generous energy subsidies. Tax cuts, if the Liz Truss train is rolling to victorywill only increase the need for additional borrowing.
Either way, the bill will be substantial, and yet will only amount to spasms of generosity as the rising tide of demands on the treasurer’s knees crashes down on the chancellor’s feet.
It’s easy to see how conservative politicians can ignore all the warning signs and believe that the economic touchstones they grew up with will soon return to pre-pandemic norms, making all their spending affordable.
Think back to the financial crash of 2008: it was supposed to expose the fundamental flaws of a global, neoliberal economic system and start a debate on how to build an alternative. Books such as The price of inequality by Nobel Prize winner Joseph Stiglitz were meant to make us reflect on how a post-war consensus had run its course. Stephen D King’s award-winning opus When the Money Runs Out: The End of Western Wealth appeared a year later, in 2013.
Like Stiglitz and so many other commentators, King, former chief economist at HSBC, wrote and published his book during the post-crash era of high oil prices. Just like today, Brent above $100 a barrel had a chilling effect on the global economy.
Alongside the pressing issue of inequality, there was talk of climate change and how high fuel prices would incentivize a shift to low-carbon energy, force manufacturers to cut emissions and make the benefits of insulate UK homes against colder and warmer temperatures.
It didn’t take long for the Cassandras to be pushed aside. In 2015, oil and gas prices had fallen like a stone, along with those of most commodities. EU economies were still saddled with debt, but the majority of voters could buy cheap clothes, cheap food and cheap flights to a myriad of destinations.
That same year, David Cameron ditched Ed Miliband’s strict house-building rules, allowing developers to build flashy estates with as much insulation as a wedding marquee. In 2019, diesel-guzzling SUVs accounted for more than a quarter of new cars sold in the UK and Ryanair had recorded four years of windfall profits.
Tens of millions of people are still affected by the aftermath of the accident. They were reluctant to change jobs for fear of losing the benefits they had accumulated. Banks were more circumspect about granting loans, excluding young people from taking out mortgages unless they had mum and dad’s money. But they could delude themselves that their life had returned to something like normal.
Truss appeals to voters, as does Boris Johnson, with a confidence born of experience – that if we wait a little longer, business as usual conditions will return.
After a brief downturn, according to this argument, the war in Ukraine will end, gas prices will fall along with other commodities, and inflation will fall back to 2% or less.
Central banks, including the Bank of England, will bring interest rates down to zero and we can continue to borrow to buy property or buy that kitchen/patio/conservatory we’ve always dreamed of.
This optimism is a trap for Labour, which can only appear miserably austere in response.
If you think the money is running out – and it is – then some pretty drastic changes in the mix of taxes and spending are needed.
Keir Starmer is already talking about shifting the tax burden to the highest paid to fund the long list of demands still awaiting a Labor Prime Minister – higher spending on education, health, social services and international aid, among others. Then there’s the transport agenda at the heart of the upgrade.
There was a time when much of this could be funded through defense cuts. Yet even that is not an option in the current arms race.
Starmer probably hopes, like Truss, that we will be back to the old laws of economics by the next election. It seems unlikely.