As It Happens·Q&A

U.K. grappling with the 'economics of pandemonium,' says former central banker

The U.K.’s economy is spiralling out of control, and its newly-minted prime minister is in deep trouble, says a British economist and former central banker.

David Blanchflower blames turmoil on PM Liz Truss's ill-fated belief in trickle-down economics

In the foreground, a woman's hand holds five British five-pound banknotes, fanned out. In the background, more cash and two calculators are spread out on a table.
The British pound has taken a nosedive after the government announced unfunded tax cuts on Friday. (Dado Ruvic/Reuters)

The U.K.'s economy is spiralling out of control, and its newly-minted prime minister is in deep trouble, says an economist and former British central banker.

On Friday, U.K. Finance Minister Kwasi Kwarteng announced £45 billion ($66.6 billion Cdn) in tax cuts, on top of an energy bill bailout, all funded by a huge increase in government borrowing.

Since then, mortgage markets have frozen, corporate borrowing costs have leapt, and the British pound has fallen precipitously against the U.S. dollar.

The International Monetary Fund (IMF) is urging the government to "re-evaluate" its plans, while the Bank of England is trying to quell the firestorm by vowing to buy as much government debt as needed to restore order.

David Blanchflower, an economics professor at Dartmouth College in New Hampshire, once sat on the Bank of England's monetary policy committee. Here is part of his conversation with As It Happens host Nil Köksal. 

Is there a word or two that you would use to sum up the state of the U.K.'s economy right now?

I came up with a phrase this morning, which is not something you would have expected an ex-central banker to say [because] the job of policymaking is to calm nerves:

We're all watching now the economics of pandemonium.

That's literally where we are in the context of the U.K. And, in a sense, the great issue is now with all the craziness that's going on, moving by the hour, what's the right thing to do? And the answer is it's pretty unclear because everything is unfolding so quickly.

It's the 28th of September. Well, actually, the last time anything like this happened was the 28th of September, 1976, when the British chancellor Denis Healey went to go to the airport at Heathrow to go off to a meeting, and the markets had collapsed so badly, he had to come back to Downing Street and eventually ask for a loan from the IMF. So there's a historical precedent.

I use the word historical. In a way it feels like hysterical, in the sense of craziness and predictable craziness. This is not unpredicted at all. I mean, it seemed to me that this was going to come.

But now a government has actually lost control, and will not send anybody out. No ministers, no MPs, will even come and talk about it. 

You don't have to be an expert in this field to know that that is poison to financial markets, right? That kind of uncertainty, not knowing where things will go next?

What you saw in the U.K. was that the mortgage providers — Halifax, Virgin, Santander, HSBC — withdrew their products from the markets because they didn't know how to price them. Because of what you've said — the uncertainty over what long-run interest rates are. 

There's such uncertainty, they can't even sell you a mortgage.

The Bank of England said it would buy as much government debt as needed to restore order after new Prime Minister Liz Truss's tax-cutting plans triggered financial chaos. (John Sibley/Reuters)

It must be terrifying for people there, on so many fronts. This is all being seen as a reaction to [Prime Minister] Liz Truss's £45-billion tax cuts. How did a miscalculation like this occur?

I'm not even sure I would use the word miscalculation. I'm not quite sure what word I would use. But I wrote something like 10 op-eds over the last three months saying: You cannot possibly do this. This would be absolutely crazy. The markets will not stand for this. And I said: The problem will be the day you're in office, the chief adviser at the Treasury will come to you and say this is just not doable.

So what did they do? [On] the first day, they fired the adviser who was going to tell them that

So there were many people warning. Many journalists, other economists were warning

Why do you think they didn't listen to any of the outside advice? Did it come down to ideology?

I think so. Both Kwarteng and Truss were actually funded a lot and pushed a lot by these right-wing groups, and they wrote a thing called Britannia Unchained, which was about [how] British workers are lazy, we need to get the markets going here, we need to do, basically, trickle-down economics.

So there's a long history of ideology of these two being associated with various right-wing groups and the belief [that] the Laffer curve operates — the Laffer curve being: Give tax cuts to the rich they'll all pay for themselves. 

But of course, there's no evidence to sustain that. 

A man in a suit, holding a blue binder, seen in profile walking down the street past a brick building and a metal fence.
Britain's Chancellor of the Exchequer — a.k.a. finance minister — Kwasi Kwarteng walks outside Downing Street in London. (Clodagh Kilcoyne/Reuters)

Andrew Griffith, the financial secretary to the Treasury, was insisting today that outside factors were causing this chaos — the war in Ukraine, specifically. What's your reaction and response to that?

Obviously, there's supply shocks, which is the supply shock from the war and the supply shock coming from COVID. But you can precisely time the collapse of the markets to a half an hour after [Kwarteng] started speaking in the House of Commons last Friday.

So I think that doesn't have a lot of credibility to it, simply because of the timing. And everybody knew that these things were coming along. 

So if you know the war in Ukraine's there, and you know that there's a shock coming from COVID, why would you do such a stupid thing that's going to cause chaos around the globe?

Ms. Truss, as you know, has just been prime minister for less than a month now. Your country has already had so much political upheaval recently. Can she survive this crisis?

No, I don't think so. 

I think the possibility is that she'll try and sort of blame other people. So certainly [Kwarteng] looks vulnerable, and especially the governor of the Bank of England looks vulnerable. 

But my sense is that she will struggle to get through the month. 

With files from Reuters and Chris Harbord. Interview produced by Chris Harbord. Q&A edited for length and clarity.

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