Truss's Plan To Bankrupt Britain

Truss has announced her plan to save households from an energy crisis, and, at the same time, to reduce UK inflation, by preventing energy price rises. Well, in fact, not, because she, and the British government, have no means of preventing such rises in global energy prices, and the plan only involves preventing them being passed on into household energy bills. In so doing, it just absorbs the higher cost elsewhere, leading to higher prices just by a more circuitous route. As part of that, it involves astronomical levels of government subsidy to energy distributors, so that they can absorb the higher costs of energy from producers. That means, immediately, much higher UK interest rates, at a time when interest rates are soaring anyway, probably more Bank of England money printing, which means even higher levels of inflation, and eventually, much higher levels of taxation to repay the enormous debts that it involves.

According to ukpublicspending, the UK budget deficit is estimated, currently, to be £42.7 billion, in the year to March 2023. Truss's subsidy plan is estimated as costing up to £230 billion, which would mean a sextupling of the current deficit. Its simply not credible to think that such an increase in debt is possible, without interest rates rising, in a climate when interest rates are already moving higher all round. From a condition where there were $17 trillion of bonds, globally, with negative yields, that figure is down to just $2 trillion, all of them in Japan. Yields are still at historically very low levels, and real yields are still negative, meaning they have much further to go, and, at these kinds of levels, a doubling or tripling is easily possible. Ask anyone with a variable rate mortgage who has seen the rate triple in just the last few months.

Even at these low levels, the interest burden for the UK government was estimated at £83 billion, by the ONS, in March, for the following year. That was equal to around 5.2% of government spending. Since that time, interest rates have risen significantly. In July, for example, the actual interest burden was 63% higher than in July the previous year. On the same day that Truss announced her “plan”, the ECB raised its policy rates by 0.75% points, and the Bank of England is expected to do the same, or even a full 100 basis points, at its next meeting, with the Federal Reserve continuing in the same vein. Interest rates are soaring even without this additional borrowing, and the borrowing now adds even more fuel to that fire. And, the EU is likely to follow a similar idiotic course, meaning that global levels of borrowing are going to soar even higher, leading to even higher global levels of interest rates, with, already, many companies rushing to capital markets to borrow ahead of such rises.

Even the £83 billion of interest payments, forecast by the ONS, represents £1,900 for every household in the country, and about 2.5% of National Income. Increasing the amount of debt six-fold, means a corresponding amount of increased interest, even before the effect of that on rising interest rates is taken into consideration. The £230 billion is over two years, but that would still mean increasing the interest burden to around 6% of National Income, even before any rise in interest rates. If UK interest rates rose, even by 50% from current levels, which seems an extremely conservative estimate, given current conditions, that would mean that its interest burden would rise to around 9-10% of its National Income!

But, its more likely that interest rates are set to double, treble and more, leaving the debt burden at levels that become totally unsustainable from National Income, as with those households that end up trying to cover their current interest payments by borrowing from pay day lenders and loan sharks. The idea this can be dealt with by Britain, because it has “taken back control”, and can simply print more money tokens shows how idiotic the mantra “take back control” is, because, printing money tokens caused the inflation in the first place, and printing more of them, like confetti, simply leads to a Weimar style hyper stagflation. There is no independent national control over the laws of economics and the global market.

The UK economy is beginning to look like a banana monarchy, and, already, in financial markets, its currency is being talked of as resembling that of an emerging market rather than that of a developed economy. At least, now, with a monarch that talks to plants, it might be able to talk to the bananas in the hope of a good crop. The Pound has dropped from around $1.40 before Brexit, to around $1.14, and is headed, in a secular downward direction, towards parity. That, in itself, represents a significant problem, because many globally traded commodities such as energy, primary products and foodstuffs are priced in Dollars, and a collapsing Pound, means that the import prices of all these things rises accordingly. So, Truss's ambition that, by capping household energy prices, she would reduce headline inflation is also forlorn, because the falling Pound means that all of these other prices are going to be rising that much more, whilst businesses and households will face rising costs on their borrowing, alongside continuing rising prices of goods and services.

And, the truth is that Truss has no idea whether the open ended cost of these subsidies will be £230 billion, or £1 trillion, because she has no idea what global energy prices are going to be over the next two years. The latest harebrained scheme of NATO/G7, to impose a price cap on Russian oil and gas sales, will, in fact, lead to global shortages of both, pushing global prices higher still, and so that will mean that the current estimates in Truss's plan will be gross underestimates.

We have not, yet, seen the full debt costs arising from the idiotic lockdowns. Had the rhetoric of lockdowns been actually implemented, so that all production other than the most essential was stopped, then, already, we would have been facing a situation in which large parts of the economy needed massive state bail-outs, making the £2 trillion that Britain paid to bail out the banks and finance houses, after the 2008 crash, look minor. But, in reality, although individuals were locked down, as far as their individual liberty was concerned, the capitalist state made sure that the vast majority of them continued to engage in labour, and so to produce surplus value for capital. It was okay to get on a bus or tube to go to work, but not to go to the pub or theatre; it was okay to engage in a social gathering and booze if it was “work related”, but not if it was just a party; it was okay to sit cheek by jowl with workmates in the workplace, but not on the football terraces, or at a union meeting, and so on.

Some of that cost in additional borrowing, has been disguised by the vast amount of additional money printing undertaken by the Bank of England, which is now feeding into the high levels of inflation, and that will continue to feed through the system, in inflation, for another two years, even if no further increases in liquidity are undertaken. But, rising interest rates mean that all of the zombie companies that were only clinging to existence on the back of unsustainably low levels of interest rates, are now likely to go bust. Its estimated that between 1 in 5 to 1 in 4 companies, or about 1 million companies, in Britain, are zombie companies. That is they can only afford to pay the interest on their debt, not repay the debt itself.

As interest rates rise, huge numbers of them will go bust, and that was coming with or without an energy cost crisis. That simply means it comes faster and harder. That is bad news for the Tories, because, it is all of the small businesses and self-employed who will be the ones destroyed, and it is amongst those sections that the Tories have based themselves, over the last 40 years, and from whom came the support for Brexit. For that reason, the Tories may again try to bail them out, as they have done for the last thirty years, by providing them with subsidies, excusing them from the Minimum Wage, and other minimum standards of decency towards their workers. Its why they wanted Brexit, so as to deny workers those basic rights.

Given the nature of Starmer's Blue Labour, as itself now looking towards that reactionary petty-bourgeoisie for electoral support, and its general petty-bourgeois outlook, the Tories might expect to find support from it, for such policies, no doubt with Starmer, however, seeking to bolster it with further reactionary petty-bourgeois policies such as financing the subsidies by taxes on the larger, more progressive forms of capital.  The demise of all those zombie companies would be historically progressive, however. The rise in the social weight of the petty-bourgeoisie, since the 1980's, meant a corresponding fall in the social weight of large-scale socialised capital, and of the working-class that is both its collective owner, and employed by it, in large collectives.

It is that change in the balance of social forces that led to the Tory Party going from being a predominantly conservative social-democratic party, in which the petty-bourgeoisie had to accept the role of being foot soldier – or to enter the ranks of the NF, BNP, and then UKIP etc. - to it being a predominantly petty-bourgeois, reactionary, English Nationalist Party, in which the foot soldiers have seized control, and the bourgeois, conservative social democrats had to bite their lip, and bide their time, especially after their protégé Blair failed them in creating a more congenial second home, and the Liberals destroyed themselves by their coalition with the reactionary Tories in 2010. That day was disastrous for the bourgeoisie.

A large scale clearing out of all of those inefficient, low value, low productivity, zombie companies would free up capital and labour, for larger companies, currently facing labour shortages, and consequent rising wages. Its unlikely that any subsidies provided by the Tories or Starmer's Blue Labour would save them in the conditions now developing. That, in itself, creates further problems for Truss. The increased social weight of the petty-bourgeoisie, over the last 30 years, meant that, in large parts of the economy, it was impossible for workers to organise. Small employers can simply sack a few workers, and replace all of them, whereas a large firm employing several hundred workers cannot. The small firm encourages all of those ideas of individualism and so on that have expanded in the last 40 years, and which the Tories depend on for their electoral support. Now that is reversing. Its not just that large concentrations of workers, in all the usual places, are taking industrial action for higher wages, but workers, even in smaller companies, are beginning to unionise too.

In fact, Truss's plan will have consequences she does not intend. One plank of the strategy of states, facing rising economic activity, rising wages squeezing profits, and rising demand for capital causing interest rates to rise, has been to physically restrain that growth. After 2010, fiscal austerity achieved that, whilst QE diverted money into gambling on financial markets, and away from the real economy. Lockdowns after 2020 did it, more brutally, but were a double edged sword once the lockdowns had to be removed. The problem is highlighted perfectly by the experience in China, where the state fears allowing the economy to operate normally, for fear of it leading to sharply rising wages and interest rates, and a collapse of its serial asset price bubbles, and so where it has to continually impose lockdowns of millions of people, in its cities, as part of an otherwise inexplicable zero-COVID strategy.

Another element of this strategy, in recent months, as economies throughout the globe were growing rampantly, and workers demanded higher wages, was to appeal to animal spirits, invoked by fear of war in Ukraine, along with the fear of job losses (which never materialised as labour markets continued to strengthen), and projections of massively falling living standards and consumption, as rising energy and food prices ate into household disposable incomes. In the US, not only did recent job figures come in strong again, but the last ISM numbers showed continued strong demand in the economy, and firms responding to it. Part of the reason that the numbers came in so strong, it has been suggested, is that the actions of Biden to release oil from the US Strategic Reserve, which has helped reduce US gasoline prices, fed into household disposable incomes, so that they could again increase spending on other goods and services.

By capping average energy bills in the UK at £2,500, although this represents a hit of around £1,000 a year, to most households, it is a big reduction compared to the £6,000 bills that were being predicted, leaving households with around £3,000 of disposable income they thought they would not have. On the one hand, it means they will have no incentive to reduce their energy demand, so acting to keep energy prices high (ironically, again, benefiting Putin, thereby), but it is also likely to feed into additional consumer demand for all goods and services, especially as it goes along with rising wages, pensions and benefits, as they all respond to past inflation. In terms of pensions, pensioners have an incentive to support striking workers, because, if workers get wage rises ahead of inflation, so will pensioners under the triple lock guarantee!

Of course, as described above, the suggestions of Starmer's reactionary, petty-bourgeois, Blue Labour are no better, and, indeed worse. The idea of a price cap was one put forward by Blue Labour, though they were, as usual, late in putting forward any solution, and simply copied what the Liberals had said. Blue Labour would supplement it with a windfall tax on big energy companies. Presumably they mean the energy producers, i.e. gas and oil producers, not the energy distributors and retailers, who have to buy in these supplies at the high prices, before they can sell them on. Either way its idiotic, as I have set out before.

Britain obtains only around 50% of its gas from the North Sea, and that production is declining, as reserves run out. There are, of course, large energy producing companies who sell energy in Britain, and who are registered in Britain, and have their shares listed on the London Stock Exchange. But, most of these companies extract oil and gas from other parts of the world, and its from there that they make their profits. Of course, the bourgeoisie and petty-bourgeoisie, and their ideologists like Starmer and Reeves do not understand this, because they think that value is a consequence of exchange not production, and that profits derive from sales to consumers not from the exploitation of wage labour. Whatever they believe, however, it remains the case that a company that produces oil or gas in, say, Algeria, makes its profits there, and only realises those profits, when it sells its products in Britain, or anywhere else.

So, if Britain proposed to impose a windfall tax on the profits of such a company, it would simply be an incentive for that company to move its registered offices from Britain to, say, Algeria, or some other country that did not propose such a tax on its profits. So, then, not only would Britain not get the expected taxes, but it would lose the other tax revenues it currently receives from the company, as well as it resulting in job losses, and other costs to the UK economy, as it shut its administrative operations.

Britain could attempt to extract tax on the basis of its sales in Britain, but, then, as a global company, able to sell its products anywhere in the world, such a company could simply refuse to sell its oil and gas in Britain, which would leave Britain further up the creek. It would, in reality, mean Britain imposing an import tariff on the very energy supplies it needs, and, thereby, increasing their price. The very opposite of the result it seeks, and a replica of what it has already done by boycotting Russian oil and gas, as part of its economic war against Russia and China.

Again, this is where the failure to consider the difference between energy producers, as against distributors and retailers has been ignored in a welter of populist rhetoric. Suppose the energy producer is A, and it sells gas to a British distributor B. A, now based in Algeria, will sell its gas to B, at a price determined by global gas prices. B will forward its payment to A in Algeria, and its, there that A's profits will be realised, secure from the clutches of the British Treasury. B will now pay these much higher global prices.

Its nominal profits might rise, because if, previously, it paid £100 million for gas, with a profit margin of 1%, making, £1 million of profit, now, with a cost of £500 million, even with a profit margin of just 0.5%, it will make £2.5 million profit. But, the fact remains its profit margin has halved, and is hardly a basis for a windfall tax, considering the need to cover future investment and so on.  Its actual rate of profit would fall below the average, encouraging capital to move away from that activity, to some other, and so causing supply to decline, and prices to rise, so as to restore average profit.

That is particularly the case given that, as part of the need to move towards electric vehicles and so on, large-scale investment in charging networks and so on are going to be required, and it will be such energy distributors that already are, and will be, the ones involved in providing it. Now, of course, there is an alternative to that, which is the state could nationalise all such companies, but that is something Starmer is steering a million miles from, and would involve huge amounts of borrowing by the state, then, for such investment. And, of course, if the state did take over such companies, any windfall tax would be a tax on its own profits!

But, the same thing applies to energy producers in the North Sea. Such companies can themselves simply register in some other country, and, if Britain proposed a windfall tax on their profits, realised in sales to Britain, they could simply choose to sell their output to some other country, or into the global spot market, where no such tax/import duty was levied. Britain could, as other oil states do, respond by imposing a rent, but, again, in conditions where you are seeking to increase your gas and oil production so as to support your boycott of Russian oil and gas, that seems a short-sighted move, given that North Sea production is both reaching its final stages, and is some of the most costliest production in the world. Differential rents are only possible on the more fertile production, otherwise the rate of profit falls below the average, and producers move to more profitable/fertile locations.

All of this can be traced back to the idiocy of the NATO economic war against Russia and China. Such economic wars, as well as being the forerunner of actual shooting wars, always impact on the interests of workers. Sanctions, be they those imposed on South Africa, on Israel, or now on Russia/China, never achieve their stated aims, and always impact on workers rather than on those they are nominally stated to be aimed at. Sanctions on Russian oil and gas has simply boosted Russian oil and gas revenues, and filled the coffers of Putin's treasury, raised the value of the Rouble, whilst imposing misery on tens of millions of workers across Europe facing massive energy price rises, and actual blackouts, whilst causing famines in parts of the globe, as not only have they led to an inability to sell Russian grain, but also have massively increased the price of fertiliser.

And, examination of trade flows shows that what always happens has happened again. The oil and most of the gas that Europe boycotted, simply got sold elsewhere at higher prices, and some of it, actually, into Europe itself. It looks as though, China, whose consumption of oil has declined, as it has deliberately slowed its economy via lockdowns, has continued to buy large amounts of Russian oil, which it then turned into refined product, which it then sold into Europe, but now at much higher prices!

But, the other elements of these plans, put forward by Truss and Starmer, whilst unobjectionable in themselves, are irrelevant to the current situation. The same is true of most of the proposals of the EU, which have no chance of implementation inside a decade. Of course, encouraging further production in the North Sea, or from fracking may increase supply, but its not going to produce significant additional supplies for at least a few years, which does not help with an energy crisis this year. The same is true of increased coal production, and its use alongside nuclear for electricity generation.  The same applies to policies to insulate homes, to provide solar panels and so on. Not only do all these take years to produce results, but they imply huge immediate costs, which, if financed by the state, involves even more borrowing, causing interest rates to spike higher still.

And, those higher interest rates pose further problems for the Tories. Over the last 40 years, as well as the increased social weight of the petty-bourgeoisie, the Tories relied on a wider social layer of elderly home-owners who saw the nominal price of their homes rising year on year, giving the illusion that they were becoming wealthier, even as that same process impoverished their children, and made home ownership impossible for them, as well as making it harder and harder for themselves to move into better houses. That delusion was based on the general inflation of asset prices that came from initial falls in interest rates, resulting from a huge rise in the rate and mass of profits in the 1980's, and early 90's, and was subsequently sustained by the actions of central banks.

Mortgage rates have trebled in recent months. Zoopla has made calculations based on mortgage rates at 4%. At that level, Zoopla says, the average first-time buyer, outside London, will need £12,250 additional income to be able to buy a house than they did last year; in London it’s £35,000. But, with interest rates rising at current levels, 4% mortgages look cheap! As I have set out before, its not these rates themselves that lead to house prices crashing. Higher interest rates lead to falling asset prices, and that plays a part, because it affects land prices, and so new build costs, but the main point is that, the amount that buyers can afford to offer, falls significantly, as rates rise. Its not that existing borrowers can't afford to pay their mortgage and become forced sellers – though that does happen, and happened on a large scale in the early 90's – but simply that the houses that get sold, get sold at much lower prices, and the prices of all houses, are then marked down along with them.

So, not only will the Tories see their small business, petty-bourgeois base get hammered, but, as interest rates rise, all of its elderly, home owning supporters will see the price of their houses crash by 40, 50, 60 or 70%, and possibly more, certainly in real terms.

Truss's plan will not prevent energy prices rising, for which an end to NATO sanctions, and attempts to boycott Russian oil and gas supplies is required. The costs of the subsidies suggested will cause UK borrowing to soar unsustainably, causing interest rates to rise to levels that will eviscerate the zombie companies, and crash asset prices, including the prices of the homes of elderly Tory voters, and attempts by the Tories to try to save themselves, electorally, by ever increasing and ever widening measures to bail-out one section of society after another, will simply lead to them bankrupting the country, a country that already, with Brexit, and the other idiocies imposed upon it, looks more and more, not like Singapore on Thames, but a rapidly declining banana monarchy.