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The pound crisis

2022-09-29 | UK
The pound crisis

What did the Truss government do wrong?

Last Friday the British government unveiled a new shock plan. This time it was a tax and social charges reduction of gigantic dimensions. According to the Chancellor of the Exchequer, sizeable state revenue cuts would boost GDP by 2.5 points. But, significantly, he skipped the mandatory publication of the economic forecasts prepared by the Office for Budget Responsibility (OBR).

Was it that big a deal?

Not in principle. The basic rate of income tax is reduced from 20% to 19%, the planned increase in social security contributions was withdrawn and the planned increase in corporate tax was cancelled.

But there was a catch. The income tax cap was eliminated. This means in practice the end of tax progressivity, i.e. that those with higher incomes pay a higher percentage of their income. All persons with incomes over 50,000 will henceforth pay a single income tax of 40%.

In short: the state not only renounced immediately to a substantial pool of income, it restricted itself from increasing it in the future from the personal income of the petty bourgeoisie and the bourgeoisie.

So why did the financial markets revolt?

Because by restricting their capacity to generate income, there disappears the possibility for the state to pay more for the debt without causing a cataclysm in the accounts. And that is what the investment funds in the City have been demanding.

What is more, one can only expect a brutal increase in the debt accumulated by the state. According to a study published yesterday, the impact on GDP growth would be only 0.1% until 2027. But the cost to the state would amount to £169 billion in under-collected taxes, plus an extra £82 billion to pay interest.

Seeing what was coming, the funds sold much of the government debt they accumulated as a safe part of their portfolio. So the price of debt in the market plummeted, dragging down the pound and putting the country on the brink of a full-blown financial crisis.

The immediate result was a brutal rise in the interest rate on ten-year debt, and a record low for the pound against the dollar in a tidal wave of selling that on Monday already showed signs of being able to produce knock-on effects. The situation became so critical that the Bank of England declared that there was a "significant risk to UK financial stability" and pledged to buy £65 billion of long-term UK government bonds over the next two weeks to stabilize prices.

The Bank of England's action was followed by IMF statements openly calling for a "reassessment" of the tax giveaway to high incomes and criticizing the government's tax plan as counterproductive to its stated growth objectives.

Are they backtracking?

No. The Treasury Minister made it clear yesterday: no backtracking on the tax cut.

But they are indeed looking for cuts in a hurry to reassure the speculative markets with a new wave of austerity.

Why dwell on it? What's underneath it all?

Neither the government can claim ignorance of the reactions and results, nor its insistence on maintaining the tax cut has anything to do with an alleged neoliberal Talibanism. In fact, the tax cut was the core differentiator of Truss's proposal to the Conservative Party barons who brought the then Foreign Secretary to Downing Street after the fall of Boris Johnson. It is a very particular sector of the ruling class with aristocratic roots and incomes that are directly threatened by the inflationary onslaught. For them, lowering taxes means maintaining their wealth. It is a priority.

What Truss tried to peddle as a growth plan is in reality nothing more than a direct transfer of income from the state to the estates of Britain's great personal fortunes. A feast... at the expense of the state's budget balance. For the capital funds and the City, which previously confronted this faction during the eternal Brexit fight, it is something very different. Not only do they see the government's priority shifting from providing security on debt to looking after the wealth of the big families who physically own the country, but the unfolding events have shown the weakness of British finance capital after Brexit to the point of endangering the City of London as a major global financial center.

The fact that the Truss government was well aware that it was taking sides with one sector over the other was even acknowledged by Gerard Lyons, the new cabinet's chief economist:

The chancellor appealed to the national population and appealed to a national business community, but one key group he failed to keep out was the financial market.

Is Labour a choice?

In a country where nearly 20,000 families became homeless by losing their homes through non-payment to their landlords during 2021-22, the inhumanity and immorality of transferring state income to precisely that class of millionaire landlords and landowners, is as frightening as it is significant of the historical moment.

But the alternative of financial common sense is no better. Whether self-enforcing to offset a tax cut - a la Thatcher or Trump - or devoting itself to reducing the cost of debt Blair-style as the financiers would like, the course of British capital passes through the same ports: reducing the overhead costs of exploiting labor - mutualized by the ruling class in the state - and accelerating the transfer of income from labor to domestic capital.

What do we learn from this episode?

  • It shows the direction in which British domestic capital is pointing with increasing resolve: a new austerity and consequent reduction of working families' access to basic public services (health, education, etc.).
  • Although the aim is shared by the different tendencies and factions of the ruling class, it will not fail to generate contradictions among them. We have once again seen the Brexit divide in action: on the one hand the great personal fortunes organizing a self-gift of state revenues to which they invite, to an obviously lesser extent, the petty bourgeoisie, through the most stale wing of the Conservative party. On the other hand, the left, with Labor and trade unions at the head, taking the sensible discourse of finance capital with its own logic of cutbacks.
  • The pressure on the workers and the internal squabbles of the ruling class in the end express the difficulties of national capital to sustain accumulation without sufficient markets. In fact, as the way out is to transfer income, solvent demand is increasingly reduced. So every domestic pang ends up transforming into a new outburst of external bellicosity. Another hallmark of the still short-lived Truss government.