There is no economic crisis in the UK. Why does Rachel Reeves make people suffer?

I posted this thread on Twitter this morning:

Would the British economy really have collapsed, as Labor says, if, within days of taking office, it had not cut the winter fuel allowance for most pensioners while announcing that more “pain” was to come? Of course it wouldn’t have done it. A thread…

MP Lucy Powell, leader of the House of Commons, made the absurd claim on television on Sunday morning that the winter fuel subsidy cut had saved the economy from collapse.

I suspect she would have said the same thing about keeping the two child benefit cap. Taken together, these measures saved perhaps £4 billion. They reduced the well-being of more than 10 million low-income people, many of whom live in poverty.

“It has been made clear to me that if I do not act urgently, market confi­dence in the UK’s fiscal position could be seriously under­mined. That would have meant higher debts, higher mortgages and higher prices in stores. I wasn’t prepared for that.”

This claim is linked to her suggestion that officials had told her about a £22bn hole in Jeremy Hunt’s budget just hours after Labour’s election victory.

To be honest, I don’t believe her. She had already been meeting these officials for months, as is typical for the opposition before an election.

But beyond that, everyone knew that Jeremy Hunt’s budget was a fantasy that didn’t come to fruition in any way in March. Everyone said it. If Reeves didn’t know, she was negligent.

But let’s assume she’s right (if she can play fantasy, why can’t we?). What if this £22 billion “black hole” appeared out of nowhere? It could have easily been filled without ever having to put millions of people into energy poverty or keep children in poverty.

Firstly, the Bank of England could have simply offered the Treasury an increased overdraft facility. It did so in March 2020. It could have done it again now.

Or the Bank of England and the Treasury could have agreed to a new £22 billion of quanti­tative easing. No one would have cared if they had.

To facil­itate this, they could have canceled the quanti­tative tight­ening program, which completely needlessly sold £33 billion worth of government bonds between April and June this year without a penny going to the government to finance spending.

Alter­na­tively, a new £22 billion bond could simply have been issued. That would have been easy to do. The city would have bought it without batting an eyelid, especially if the quanti­tative stream­lining program had been elimi­nated.

The next way to raise £22 billion would be to simply have the Bank of England cut its key interest rate by at least 2%. The economy urgently needs this. There is no way interest rates can grow anywhere near where they are. This would save more than £22 billion a year.

After all, there are a variety of tax increases available on assets alone. Tax rates on capital gains could be increased. Senseless inher­i­tance tax relief could be elimi­nated. Pension tax relief could be cut. VAT could be levied on financial services. Further infor­mation can be found here.

My point is that in my opinion cuts were completely unnec­essary.

Would the financial markets have agreed with me? I think so. They don’t like quanti­tative tight­ening and would like to abolish it.

They want interest rates cut: they don’t want the stress they have caused.

They could also easily raise £22 billion for a new bond. They would rather do that than see more quanti­tative tight­ening.

And they want the growth that Reeves is delib­er­ately destroying with her cuts.

And now everyone thinks tax increases are inevitable.

In other words, was it really likely that a negative reaction to an honest suggestion from the government that it needed more resources would have caused a negative reaction that would have unsettled markets in some way? No, of course there wasn’t.

There was nothing that could push interest rates higher — especially if quanti­tative tight­ening had been abandoned — that would have caused them to fall.

And would exchange rates have collapsed when it is obvious that interest rates are falling worldwide? No, of course not, not for the tiny amounts that are involved in practice. This claim by Reeves – which generates a bogus claim about inflation risk – is absurd.

Let’s be honest: why would the markets want to create such a problem for such a small amount? There is no logical reason for this.

There would be absolutely no gain for them if they did that. In particular, Reeves’ proposed increase in UK interest rates (above the level to which the Bank of England has already raised them) reduces the value of City bond holdings, and I can’t imagine anyone would want that.

And ultimately, exchange rates are not perma­nently influ­enced by short-term interest rate changes. They change due to changing trading condi­tions, e.g. B. Brexit, and produc­tivity changes. I’m not saying interest rates don’t have an impact, but we shouldn’t overstate it.

So the two real questions to ask are, first, who told Reeves that she would crash the markets if she didn’t cut winter fuel subsidies and leave children in poverty, and second, why was she stupid enough to believe that?

If it was her advisers who told her the economy was in danger when it clearly wasn’t, she should fire them.

If it had been the Treasury, they should have ignored them. Their predic­tions are dire, as evidenced by the last fourteen years of getting almost every­thing wrong.

And if it was “someone from the city,” why didn’t she think they might want to make a small profit from having inside infor­mation about what she was going to do — which was her likely motive?

And why did she believe them and not make a decision for herself, as she makes clear she didn’t? Is this because she is incapable of doing so? Is another conclusion possible?

In this case, we must first conclude that pensioners and children in poverty are paying the price for Rachel Reeves’ incom­pe­tence and, worry­ingly, many more will do so before her term is up.

But there is a second and equally worrying conclusion. That said, Reeves doesn’t believe she’s governing on behalf of the people of this country. She believes that she governs for the benefit of the financial markets. They are the ones, she thinks, who are in charge and who she must obey.

But that is obviously wrong. The 2008 crash and Covid proved otherwise. It is not the city that funds the government. The government also does not rely on city money. It is the government that creates the money that the city uses.

Furthermore, the government doesn’t rely on the city to save money by doing this (because that’s exactly what they do: they never fund government spending). As quanti­tative easing has clearly shown, the government can finance itself.

The unpop­u­larity of the quanti­tative tight­ening has also shown that the city itself can live very contentedly with state financing.

In other words, Reeves is also lying when he says that the city and its whims limit what she can do. This is completely untrue.

So what is the truth? It may just be that Reeves wants to harm children and pensioners living in poverty for her own very twisted reasons, which seem to be a bizarre test of supposed strength. The city only provides an excuse. But in this case, is she fit for office?