It is the bond markets that really run Britain’s economic policy, but working-class push back can help us escape capital’s blackmail, finds Dominic Alexander
Who runs Britain’s economic policy? By all accounts, it is not in fact the Chancellor and the government, but the bond markets. The slightest suggestion of raised government spending on socially necessary investment in public services, or any even small redistributive measure, is said to cause a negative reaction in these markets. The amount that the state has to spend on interest on its debt goes up, and the money available, within Reeve’s fiscal rules, for spending is squeezed. We are apparently living in a permanent fiscal crisis, demanding ever harsher austerity to curb the supposedly out-of-control spending on the welfare state.
Much of this is no more than the media and establishment consensus that austerity is necessary and inevitable. The hysterical determination to rule out even the mildest redistributive or reformist economic policy means that everything, except, of course, military spending, is seen through the lens of supposed bond-market strictures. This is the case whether or not there is any evidence that the bond markets are reacting to twitches in British domestic politics. Most often, it is really global problems, of which there is no shortage, to which they are responding.
It is nonetheless true that the government is constrained by the cost of borrowing, and rises in the interest paid on government bonds repeatedly wipe out Reeve’s fiscal ‘headroom’. Partly this is to do with the arbitrary and self-imposed fiscal rules, and the estimates of spending and revenue given by the very conservative Office of Budgetary Responsibility. The remit of the latter could be changed to favour long-term investment spending, for example. There are plenty of other technical changes to the ‘rules’ on debt and the term over which the government needs to balance the budget, which would loosen the constraints. These and other such changes could give a Chancellor more independence from the OBR’s diktat. Above all, Treasury decisions should not be tied so closely to the OBR’s unreliable estimates about the future. None of this would solve the underlying problem, but would produce a less constant supply of traction on which austerian commentary feeds.
Interest on government debt does remain, however, a hard issue. It is important to realise that this is a matter of class power, not a strictly economic problem, and there is nothing especially ‘objective’ about it. Bond markets are financial capitalists wanting the highest returns on their investments that they can achieve. Their power over policy is as much a political matter as it is an economic one. Unfortunately, we have a Labour leadership that, even in opposition, perceived the position of government to be so weak that it must genuflect constantly and abjectly before the demands of capital and abandon even the slightest pretence of acting in the interests of working people.
The particular situation with the bond markets is made worse in Britain by the fact that a third of government debt is held by overseas investors, who have no particular interest in the health of the UK economy, so long as they receive their returns. Domestic investors are much easier to influence, and could be persuaded that austerity is self-defeating; as the Tory governments of the 2010s showed, austerity leads to higher government spending, and a worse debt problem, not a balanced budget. This situation can’t be turned around quickly, but a government with a shred of dignity or confidence could persuade large investment bodies, such as pension funds, to buy government bonds preferentially. A government prepared to intervene strategically in the economy could do much to lessen our dependence on overseas capital.
Class and the Bank of England
A more immediate impact could be made by making the Bank of England change its behaviour. A significant reason why Britain has been suffering more from the bond markets is because our central bank has been engaged in an aggressive policy of selling the bonds it owns due to the quantitative-easing programme that was adopted after the 2008 crash. Selling these off is known as quantitative tightening, and it means that at the same time the government is selling bonds on the market, the Bank is too, which inevitably means that the price of bonds goes down and the interest the government has to pay to ensure its bonds are bought goes up. The Bank itself is losing money on this transaction too, because it is selling its bonds bought during quantitative easing at a lower price than for which it bought them. Estimates of the cost of all this differ, but some reach as high as £60bn, alongside higher interest rates, which further depress the economy and therefore limit government revenue, among much else. All that doesn’t take into account the Bank’s own losses, which add another £20bn a year for another five years to government spending. Stopping the Bank of England’s quantitative tightening programme would merely bring it into line with other central banks, so there is, again, no objective reason not to.
The government should also raise taxes on the wealthy; a few pennies more on the higher rate of income tax would raise billions, and obviate the need to raise income tax on the basic rate. Equalising capital gains tax with income tax, and introducing other levies on wealth, would raise further billions. Suggestions along these lines would no doubt provoke more fury from capital, but this brings matters back to the point that this is about politics and social power, rather than any objective economic reality. There are things that could be done to escape the bond-market blackmail, but it requires political will. Creating such a will requires a social force that can translate into political leverage against the social power of capital; that is, as it has been since the beginning of capitalism, the collective power of the working class.
The issue isn’t simply the ideological conversion of the Labour Party and other liberal elements of the establishment to neoliberal austerity, although, of course, that is a factor, but the lack of any fear on the part of capital of rebellion from workers. Indeed, inequality of income has grown so great that there is a new way to describe the economy: it is ‘K-shaped’. This means that one section, a minority of the wealthy and well paid, are still doing well and spending, while the bulk of people are suffering from a cost-of-living crisis and are driven ever deeper into need, and cut down even on essentials. The ‘consumer’ side of the economy, and the high valuations of the stock market, are held up almost entirely by the wealthy upper arm of the K, and the leverage of the bottom arm of the K is thus even weaker than normal in conventional estimations, because capital believes it can still function well without the majority prospering at all.
Ultimately, this is an illusion. It is unsustainable and heralds the conditions that will lead to another financial crisis, in which the government once again will be asked by capital to bail out those institutions which did so much to create the problem, just as in 2008. The only way out of this spiral into disaster is through the leverage that still remains to the majority on the bottom arm of the K; labour is still the source of all profit, and collective organisation is the key to rebuilding a social force which can challenge capital. The answer is more street and workplace political organising.
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