The End of Right-Wing Economic Credibility? Lessons of the UK Economic Crisis
Sunset over London’s financial district. Photo by Andrea De Santis on Unsplash
The response of global financial markets to the UK’s latest tax-cut giveaway “mini-budget” has been nothing short of spectacular. The economic reaction to the new low-tax regime, set by newly selected UK Prime Minister Liz Truss and her (short-lived) Chancellor of the Exchequer in charge of fiscal policy, Kwasi Kwarteng, demonstrates again why going back to the prescribed solutions of tax cuts cannot fight inflation, nor sustain an economy under pressure.
In the immediate aftermath of the new policy announcement, the exchange rate of the UK pound plunged, interest rates on long-term government debt (as bonds issued by the UK Government known colloquially as “gilts”) rose sharply, and the Bank of England was temporarily forced to reverse planned interest rate hikes to avert a collapse of much of the UK pension system in response to the government’s policy misstep.
The political turmoil was and remains equally dramatic. Almost immediately after its announcement, Truss ditched key elements of the mini budget, fired Kwarteng and has now effectively surrendered control of economic policy to her new Chancellor, Jeremy Hunt. The Conservatives are a distant second to the Labour Party in the polls and Truss may very shortly be forced to resign, despite her weeks-long tenure as Prime Minister.
At first glance, this is a massive defeat for the radical “free market” right. Truss and Kwarteng’s mini-budget gave pride of place to tax cuts, including a cut to the top personal income tax rate, easier tax treatment of bankers bonuses, an across-the-board income tax cut, and an end to a planned cut to the corporate income tax rate.
This toxic tax cut for the wealthy was justified by old-school supply-side economics: the Margaret Thatcher-esque argument that tax cuts would stimulate new business investment and economic growth. It is striking that this argument was rejected by most mainstream financial sector experts and commentators, including the International Monetary Fund, which explicitly argued that the tax package would worsen inequality.
This is a significant blow to the credibility of right-wing economics.
However, this is not necessarily a left turn or even a Keynesian turn to economic thinking among the capitalist institutions. The central argument of the mainstream and the IMF and central bankers, including the Trudeau government and the Bank of Canada, is that governments should not at this juncture be increasing deficits.
The central message from last week's annual meetings of the IMF and the World Bank was that fighting inflation through tough monetary policy is the priority of the hour and that fiscal austerity should prevail.
Following these dictates, the latest UK Chancellor offers a similarly austere agenda. While likely to maintain the current tax base, he may also resort to spending cuts elsewhere to finance the mini-budget’s enormously expensive cap on soaring consumer energy prices, instead of funding this measure with new taxes on wealth and profits.
Within the context of capitalist orthodoxy, there are no good options; only bad choices which will lead to a recession, rising unemployment and deepening poverty and inequality.
While the Conservatives have now likely lost their economic competency branding and are, as noted, plummeting in the polls, the temptation for the Labour Party to occupy the presumed centre-ground that has been opened by the Tory free market radicals.
This would be a mistake. At a minimum, UK Labour should (as it has done to a degree) promise new taxes on wealth and excess profits to expand income supports and public services, perhaps accompanied by price controls and an expansion of public ownership.
The UK’s latest political crisis has opened up the wider question of, in the absence of capital controls, how much policy latitude national governments have left given the globalization of finance and the power of the bond markets to dictate interest rates that may limit fiscal policy.
It is tempting, but not altogether convincing, to suggest that markets could distinguish between deficits incurred to finance productive public investments, and deficits used to finance ineffective tax cuts. While the former helps to expand the fiscal base and investment, the latter has led to poorer social outcomes. For some, it may be of comfort to believe that markets made the right call in rejecting the initial version of the mini-budget, but a reformed austerity program that maintains the balance sheet may still be acceptable to the invisible hand.
The crisis certainly poses a challenge to those on the left who argue that deficits do not matter. Certainly, a progressive program will depend to a significant degree on taxing wealth and corporate profits.
Andrew Jackson is senior policy adviser at the Broadbent Institute.
Why the Cambie case should concern us all
The Cambie Case is an important policy decision with massive impact on our cherished public healthcare systems that many Canadians are not familiar with. Adjudicated in British Columbia, this four-year-long trial began in 2016 and ended in 2020. Fortunately, the Provincial Court of BC recently made the decision to rule against privatizing health care financing.
Why is this case a concern to us? This case essentially challenged the rights of patients, putting fair and equitable access to healthcare in jeopardy. Briefly, the plaintiffs of the case wanted to overturn three key aspects of BC’s Medicare Protection Act (MPA):
- Extra billing and user fees, allowing doctors to charge patients more than what was listed under the public insurance plan.
- Private duplicate insurance, where doctors would be allowed to bill private insurers for patients who want faster access to hospital and physician care.
- Dual practice, giving doctors enrolled in the public plan the opportunity to choose whether to bill only the public plan, patient (or private insurer), or both for any service covered by the public plan.
These three changes would be a reversal of the progress made by the 1985 Canada Health Act which was put in place to stop doctors' extra billing. These changes would also create huge inequities in access to healthcare services, as only those who could afford it would be able to access adequate care. This would also mean doctors would have more of a financial incentive to provide access to those who have private insurance, or those who could afford to pay out of pocket, over those who cannot afford either private option.
Evidence from Australia demonstrates that shifting towards privatization actually worsens the health system. Australia introduced private duplicative health insurance with the claim that it would help to reduce wait times. However, those changes had the opposite effect. Wait times grew longer, especially for those who could not afford private insurance.
The Cambie Case not only put the healthcare system in BC at risk but health systems across Canada as a whole. Without a doubt, if the plaintiffs had won their case, the door would have been open for other provinces to follow suit and move toward privatization. Canadian Doctors for Medicare saw this push to change the BC MPA as a danger to the Canada Health Act, essentially causing it to be unenforceable among other provinces.
Recently in Ontario, private health companies have been found lobbying for the privatization of some aspects of healthcare delivery. The province’s current Progressive Conservative government has a history of working with private companies to further encroach on the health sector, rather than investing in the public healthcare system. This should be of concern for Ontarians, as a BC decision for the Cambie Case plaintiffs would have given the Ontario Government leverage to continue down this privatization agenda and endanger the province’s already resource-limited healthcare services.
The ruling against the Cambie case was a win for the medicare system, however as we see in the example of Ontario the work is far from over, according to Dr. Danyaal Raza, a Toronto-based family doctor, assistant professor at the University of Toronto, and past chair of Canadian Doctors for Medicare. Not only is there concern for the push for privatization but there is also the fear that the ruling of the Cambie Case will be challenged in BC and an appeal will be made to the Supreme Court of Canada. “The decision made at this level could have national implications, particularly if the court rules in favor of the plaintiffs,” said Dr. Raza.
The public healthcare system obviously needs improvement and protection against privatization efforts. Expansion in the delivery of services and investment in system efficiencies, rather than introducing parallel private payment, will improve access for all Canadians.
Dr. Raza also shared his insights on the benefits and drawbacks of virtual care. He explains virtual care is beneficial in connecting with patients; however, there are some concerns regarding the operationalization of this type of care, in particular, if clinics deliver virtual care only.
For instance, walk-in clinics that are virtual only raise concerns about the type of services these clinics can offer, especially services that do require an in-person visit. “If the clinics can’t offer that, then patients are directed to the emergency department, which does nothing to alleviate emergency departments and creates waste. Now the patient requires two visits when one would have only been needed,” said Dr. Raza.
An evaluated mix of virtual and in-person primary care delivery is the best way to utilize this tech tool. Giving patients the option of either type of appointment would give patients the flexibility Dr. Raza explains: “Virtual care can be a powerful tool for health equity if used properly. But then it can also be a powerful tool for profit if regulations are not enforced.”
Virtual consultations such as RACE would bridge the barrier for some patients in accessing specialists, and would also help in reducing in-person wait times. The pandemic demonstrated the efficiency of some virtual care doctor appointments. It’s possible to move some healthcare online resources to ease the burden on the healthcare system, and would be a good way for patients in rural or remote communities to access health services. However, this must be a public investment in virtual care, not a private for-profit enterprise.
We must be vigilant and continue to ensure healthcare stays public. Encroachment towards privatization is not the answer, but innovation in the healthcare system can happen through public ownership that ensures access for all.
Amal Abdulrahman is a fellow of the Diversity Youth Fellowship hosted by the Urban Alliance on Race Relations, and graduate student in International Health at Johns Hopkins Bloomberg School of Public Health.
Header photo by Greg Rosenke on Unsplash
The price of labour and the price of everything else
The economic shock of the pandemic inevitably caused a lot of the economic irregularities such as spikes in unemployment, acute losses in productivity coupled with short episodes of increased spending, and unstable price changes experienced in Canada and around the world over the past two years. In particular, this instability has enabled record profiteering under the guise of reacting to inflationary pressures.
Price inflation is a phenomenon of economic growth in a capitalist economy–an indicator of more activity being added to an economy. Typically, this means the value of goods and services increases, and under normal circumstances, the price of labour in the form of wages rises too. In the context of the COVID-19 pandemic in Canada, however, the price of everything else has increased at an accelerated pace while the price of labour has not kept up. While others have rightly pointed to corporate profiteering adding fuel to the pandemic’s inflationary fire, stagnant real wages (a measure of wages adjusted for inflation) have also contributed to the affordability crisis and cannot be ignored.
The consistent gaps between Canada’s inflation rate and wage growth rate since the start of the pandemic reveal much about today’s affordability crisis.
While average wage growth seems to have increased during the first pandemic lockdown in March 2020, this average is skewed by the loss of hours among lower-wage workers. This trend was also accompanied by a massive increase in the unemployment rate as well as a short period of time that flirted with economic deflation. While those that were forced out of the labour market were temporarily sustained by the Canada Emergency Response Benefit (CERB), wage growth continued among higher income earners and prices remained stable over the course of the first year of the pandemic.
These trends come crashing down as CERB is removed and low-wage workers return to jobs. During this time, many workers returned to jobs with lower wages than before while the inflation rate blew past the Bank of Canada’s target rate of 2 percentage points. Since the summer of 2021, wages have not kept pace with inflation and a sustained wage-inflation gap has brought the cost of living to new crisis levels. As the negative gap between wages and inflation persists, the real wage and purchasing power of the working-class is weakened as the price of work is kept low.
In recent months we have seen the Bank of Canada use old-school monetary policy to raise interest rates in a bid to reduce inflation, primarily focused on housing sector prices that make up an increasingly unaffordable part of the consumer price index (CPI) basket. There are some indications that this has helped to cool prices in the buyers market, though not enough to make housing truly affordable and has been accompanied by increases in rental market prices. Furthermore, it is a policy tool with limited effects on fighting unstable energy prices and grocery store profiteering.
This policy choice can also lead to stagnant wages, a higher unemployment rate, and greater inequality, especially when interest rates are increased without increased public investment. After more than two years of being hailed as heroes through the pandemic, healthcare workers wages have been left behind, even with some nominal wage growth in other sectors. How are we supposed to staff hospitals and clinics if healthcare workers can’t even afford groceries due to falling real wages?
Unique from previous recessionary episodes is the historically low floor for interest rates that we saw after the 2008 recession and the initial months of the pandemic. As interest rates are raised to cool inflation, will governments use the still comparatively low rates to make investments and ward off the negative effects of an increasing price for money? Using monetary policy alone to tackle some CPI indicators is not enough. Without redistributive policies, monetary policy alone can be detrimental to employment and wages. In addition to tackling profits through windfall and wealth taxes to fight price inflation everywhere else, we need to increase the price of labour. Governments must raise minimum wages to keep up with inflation, invest in decommodified housing, empower unions to defend workers' wage bargaining rights, and ensure healthcare workers are not left behind after years of fighting on the pandemic frontlines.
Clement Nocos (he/him/il/lui) is the Broadbent Institute’s Director of Policy and Engagement, working with the Broadbent Fellows network to build policy agendas that support progressive change.
Header photo by Shvets Anna.
Statement on the passing of Bill Blaikie
After a multi-year battle with cancer and time in palliative care, it is with great sadness that we acknowledge the death of our friend and colleague Bill Blaikie.
Bill proudly represented the Winnipeg area of Elmwood-Transcona from 1979 to 2008 as MP and from 2009 to 2011 as an MLA. A leading member of the New Democratic Party, Bill advocated for social and economic justice alongside our Institute’s founder, Ed Broadbent, for many years. Bill joined the board of directors in 2019, where he used his wisdom and perspective to help guide our organization. In 2020, Bill was appointed to the Order of Canada for his lifelong contributions to parliamentary service and social activism.
A theologian and clergyman by trade, Bill’s political life followed the same “social gospel” tradition of other notable progressives like J.S. Woodsworh and Tommy Douglas. Bill wrote about this unique political experience in his book The Blaikie Report: An Insider's Look at Faith And Politics.
“Canada has lost a giant of a man. Bill Blaike was one of the most distinguished social democrats of our age. His deep commitment to equality shone through at the highest levels of political life, in Parliament and the Manitoba Legislature in which he served. I will always recall his speeches. His voice ringing with passion for justice was invariably captivating, holding the attention of political friends and foes alike. He was remarkable. My deepest sympathies go out to Brenda and his children.” Ed Broadbent, Founder of the Broadbent Institute.
“Progressives across Canada looked to Bill Blaike as a philosophical and spiritual thinker. He was eloquent, steadfast in his values, and so deeply committed to making life better for all Canadians. His loss will be deeply felt in our movements,” said Jen Hassum, Executive Director.
Like others who knew and loved Bill, we draw strength and hope from his legacy now. Much of what we do at the Broadbent Institute is in keeping with the ideas Bill contributed to the world and follows the example he set. We will honour Bill by continuing this work.