The ongoing Conservative Party leadership hustings haven’t seen much agreement between candidates, but they have resulted in the creation of a new political narrative: “Gordon Brown economics”. Foreign secretary Liz Truss explained away her rejection of cost of living “handouts” for households with the phrase. But even as she indicated a possible u-turn on the issue a day later, Truss continued to reject the former chancellor and prime minister’s economic policy as “taking money from people in taxes and then giving back to them in benefits.”
The key ideological and policy choice confronting our politicians right now is not whether to intervene in the economy but how, when, and on what scale. Their chosen course of action and/or inaction will define British politics for the immediate future, including the likely outcome of the next UK general election. It is hoped that it will also save many households from fuel poverty this winter.
There is no definitive economic policy blueprint for escaping a crisis, but all economic policies require a political and ideological choice. Whether that choice is Gordon Brown economics or Truss tax cuts, every government since the 2007-08 financial crisis – Labour, Conservative and Liberal Democrat – has addressed crises by injecting large amounts of money into the UK economy. The political precedents of a £2 trillion bailout in response to the 2007-08 financial crisis, and a £407 billion rescue package to surmount the COVID pandemic, have created an expectation that the UK government will now respond to the inflationary fuel crisis with a similar scale of intervention.
Invoking Brown’s name in this discussion is not a complete surprise in the current economic environment. He has recently made public calls for an emergency budget, as well as temporary re-nationalisation of certain energy companies and the scrapping of the UK energy price cap. Brown also oversaw the response to one of the biggest economic crises of recent history during his time as UK leader.
As prime minister from June 2007 until Labour’s May 2010 general election defeat, Brown’s government responded to the 2007-08 financial crisis with a bailout of failing private banks that peaked at £1,162 billion.
Before this, Brown was chancellor of the exchequer in the New Labour Blair government from May 1997 to June 2007. The financial crisis was a direct result of the light-touch, risk-based approach to financial regulation adopted by Brown and Ed Balls, his chief economic advisor, during their decade at the Treasury. This flawed approach was pursued even though, as early as December 1998, Brown had warned of the need for wholesale reform of financial markets and to rediscover public purpose in the global economy.
Brown’s subsequent account of the crisis detailed his realisation that he might have prevented it by trusting his own intellectual judgment and political instincts to reform financial markets. Or at the very least, he could have overseen a much more radical policy response.
This legacy of personal and political regret perhaps explains Brown’s interventions in the current crisis, which has highlighted the inactivity and policy vacuum at the heart of today’s UK government – particularly during the ongoing Tory party leadership contest.
Addressing the current crisis
Rapidly rising global energy prices could see Great Britain’s energy price cap (the maximum amount consumers can be charged) rise to £3,582 at the end of August. Typical household energy bills are set to hit £4,266 next year. Discussing this approaching energy crisis, Brown has warned that “if nothing is done before yet another fuel price rise hits in January, the fuel poor could rise to 39 million people in 15 million households – 54% of the country, with big regional variations ranging from 48% in London to 60.8% in Wales and 62% in Scotland”.
Truss – the clear frontrunner in the Conservative Party leadership contest – has proposed a series of tax cuts to address this crisis. These include reversing the April 2022 National Insurance increases for employers and employees, and the proposed April 2023 increase in the main rate of corporation tax from 19% to 25%.
She also wants to impose a temporary moratorium on green energy levies on household energy bills. The latter measure would save only £153 per year for a household with average annual energy consumption. Her tax cutting measures have been estimated to cost more than £30 billion.
Truss’s leadership rival, former chancellor Rishi Sunak, has also proposed cutting taxes, this time through a drop in the basic rate of income tax from 20% to 16% – but only by the end of the decade, and only after UK inflation has returned to much lower levels. Sunak has also promised a package of financial support to families, but has not provided precise details.
It’s difficult to assess the merits of each approach without full details, but it is worth referring back to the economic policy responses to two recent major crises: the 2007-08 financial crisis and the COVID pandemic, ongoing since March 2020. The response to both was to inject more money into the UK economy.
In addition to the bank bailout in response to the financial crisis, the Brown government instructed the Bank of England to create £200 billion of new money to purchase UK government debt. Injecting cheap cash into the banking system in this way is called quantitative easing.
The subsequent Cameron-Clegg coalition government sanctioned the creation of an additional £175 billion of new money to stimulate the UK economy, followed by a further £70 billion from the May government.
In response to the COVID pandemic, the Johnson government – in which Sunak was chancellor and Truss has served as both secretary of state for international trade and now foreign secretary – created a further £450 billion of new money to help the UK economy avoid a recession or depression. It sanctioned UK public borrowing of £319.9 billion or 14.8% of GDP in a single financial year (2020-21), and spent £407 billion to support individuals, businesses and public services through the pandemic.
The political and economic precedents have been set. Labour and Conservative governments chose to hand out more than £2 trillion of cash, loans and guarantees to private banks to enable them to recover from the 2007-08 financial crisis, which their own reckless lending and speculation had fostered. This makes it entirely reasonable to expect the UK government to provide millions of individuals, households and companies with the immediate direct financial support they need to survive the cost of living crisis. All that is needed is more urgent political action of the kind Brown is calling for. Those currently in power – or soon to be – should take notice.