Is the absurd and destructive melodrama unfolding at Westminster all a consequence of Brexit? Social media is full of people answering “Yes”. Many who voted to remain in 2016 feel vindicated by the shambles into which the Tories have descended.
There’s an element of truth in what they say, but the reality is more complicated. Ever since Margaret Thatcher was forced out of office in November 1990 the Tories have been bitterly divided over Europe.
After the pound was forced out of the European Exchange Rate Mechanism in September 1992, Thatcher’s successor John Major was held hostage by the right wing minority on the backbenches until the Labour landslide of May 1997.
This set a pattern that has persisted. David Cameron conceded the Brexit referendum to keep quiet the right wing opponents of the European Union (EU). This gamble rebounded spectacularly, destroying his premiership. His successor Theresa May’s government was increasingly paralysed by the demands for a hard Brexit.
Boris Johnson won the premiership and the 2019 election by giving the European Research Group (ERG) of Tory MPs what they wanted and renouncing Cameron’s austerity to win the ex-Labour “Red Wall” seats in the north of England. But he didn’t need the right to destroy his government—he managed this all on his own.
The struggle of a deeply fragmented and factionalised party to replace Johnson allowed Liz Truss—a Remainer in 2016 who opportunistically shifted into the ERG camp—to win the premiership.
The Financial Times described the disastrous package of tax cuts she and Kwasi Kwarteng devised as “the culmination of the Brexit project supported by many on the right, which linked notions of ‘sovereignty’ with the idea that once freed from the EU—viewed on the right as a supranational, regulatory monster—Britain could chart a route to a future as a small state, low tax, lightly regulated economy.”
But the reason why this package roiled the financial markets does not have much to do with Brexit. Since early this year the central banks have dramatically changed the global economic environment.
To reverse the inflationary upsurge they have been forcing up interest rates. They aim to increase unemployment until it starts to undermine workers’ bargaining power.
The resulting fall in real wages won’t bring inflation down, since this is caused by, for example, increasing global competition for natural gas. But it will raise profits. This form of class warfare is happening across the advanced capitalist world. But one negative effect is that governments are having to pay more interest on the borrowing they have been making to weather the economic disruption caused by the pandemic.
The specifically British problem was that Truss’s and Kwarteng’s tax cuts meant taking on £45 billion of extra borrowing just as it was becoming more expensive. As a result, the interest paid on gilts—the bonds that the British government uses to borrow—rose above those of its counterparts such as the United States and Germany. Thanks to Truss and Kwarteng the yield now includes what the Telegraph newspaper calls a “muppet premium ”.
Investors have to be paid more to lend to a British government that has behaved so incompetently. The Financial Times Alphaville column calculates that this amounts to a quarter of the overall yield—£16.8 billion in extra public spending over five years.
The logic of the “fiscal plan” Jeremy Hunt is due to announce on Monday is to reassure financial markets by slashing public spending by a reported £30 billion. This revamped austerity will add to the misery that inflation is already causing.
As the eccentric right-wing economist Ambrose Evans‑Pritchard notes in the Telegraph, this policy of “tightening hard in the teeth of a recession” is macroeconomic stupidity. But notice that support for austerity is cutting across the Brexit divide. Hunt himself, for example, was a Remainer.
This disastrous economic turn will be reinforced by the Leaver Rishi Sunak in 10 Downing Street. Shattered by Brexit, the Tories are now swept up in a much greater storm.
Crises are on the horizon