How did we find ourselves in such dire financial trouble? The answers lie in the past

What has happened was created by a combination of international crises and desperately bad domestic policymaking. Some of the hits were unavoidable, but by no means all

Imagine if a British explorer – a Helen Sharman or a Tim Peake – had left the Earth on a deep space mission that left them incommunicado between, say, 2006 and today. What would their reaction be to the desperate state of their country’s economy? What would their first question be? I’m thinking something like, how the hell did that happen?

It is a question we may well ask ourselves today: how did this happen?

In 2006, the UK economy grew by 2.6 per cent – not spectacular, by any means, but a handy enough number. It is a pip more, by the way, than the chancellor, Kwasi Kwarteng, said he was targeting when he embarked on the disastrous round of debt-funded tax cuts for rich people unveiled in his miserable mini-Budget last Friday.

The worst growth recorded over the Blair/Brown years prior to that was 2.1 per cent. There were several which did very much better than that. What has happened was created by a combination of international crises and desperately bad domestic policymaking. Some of the hits were unavoidable, but by no means all.

Things started to go awry in the second half of 2007, when the distant thunder on newspapers’ financial pages crashed onto their front pages after it emerged that Northern Rock, a mid-sized lender, was being propped up by the Bank of England. People started to queue outside its branches for withdrawals as the nation experienced the first “run” on a bank in decades.

The next year saw a recession of historic proportions (at least until Covid came along), in which the UK economy declined by 4.2 per cent as the contagion from America’s sub-prime loan crisis delivered a severe dose of financial flu. The government ended up borrowing billions of pounds to prop up the UK’s banks.

The UK economy took a greater hit in the resultant recession than most of its big rivals, because of its disproportionately large financial sector. It was also slow to come out of it.

The general election of 2010 led to a coalition between David Cameron’s Conservatives and Nick Clegg’s Liberal Democrats, which resulted in a programme of austerity designed to balance the nation’s books. This proved a lot more challenging than George Osborne, the chancellor, had hoped. The UK’s “trend growth” slowed. Critics said the decision to squeeze spending was a major reason. GDP growth of below 2 per cent became normal as the nation moved into the slow lane. But there was worse to come.

The next economic shock was courtesy, of course, of Brexit. All of the government’s gaslighting – and the opposition trying not to talk too much about it – cannot make the harmful effects of the 2016 referendum go away. The referendum was called by David Cameron, in a bid to quell the internal debate that had been raging in the Tory Party – and the unexpected victory of Leave didn’t at first deliver the scale of shock that some had predicted.

However, the faith of investors was shaken as the UK found itself in a political impasse, which was resolved by the general election that brought Boris Johnson to power. The hard Brexit he enacted to pay off to the hardliners who provided the bedrock of his support soon made its presence felt.

It kicked the economy, dealing a hammer blow to international trade. Then the pandemic struck.

Once again, the UK suffered disproportionately, this time largely as a result of its government’s dithering. The belated imposition of lockdown in March 2020 left it facing the risk of a public health crisis turning into a jobs crisis. That was averted under the auspices of one Rishi Sunak. The-then chancellor called in the TUC and the CBI, which led to the creation of the Coronavirus job retention scheme.

Per the House of Commons library, 11.7m employee jobs were furloughed through the scheme, which paid up to 80 per cent of an employee’s wages up to a maximum of £2,500 a month, at a cost of £70bn.

With whole sectors in enforced hibernation, the resultant recession still resulted in GDP contracting by a historic 9.3 per cent, far worse what the UK experienced during the financial crisis. Tax revenues collapsed, leaving a gaping hole in the public finances. However, those in charge of stewarding the economy could at least console themselves with the prospect of a rapid bounce back.

At first, that is what happened. The economy picked up as non-essential retailers, pubs and clubs, cinemas, sporting ventures, theatres, concert halls and more reopened. Those fortunate enough to be able to save through the pandemic started to spend again. Then Vladimir Putin brought everything to a juddering halt, with his brutal assault on Ukraine – which sparked a surge in energy prices and left Western nations facing an energy crisis together with the revival of inflation.

Once again, the UK found itself uncomfortably close to turmoil. While not one of Russia’s bigger customers, it is nonetheless heavily reliant upon imported gas – and gas prices rose across the board as the Kremlin retaliated against Western economic sanctions by squeezing supply.

The UK’s domestic energy price cap of £1,042 in October 2020 had reached £1,971 by April and was scheduled to hit £3,549 in October. Some estimates had future caps rising to £6,000 before the government intervened. Businesses and institutions such as schools, unprotected by the cap, felt even bigger shocks.

It was at this point that the purely self-inflicted wounds began. Faced with the need to stave off a crisis, Liz Truss opted to guarantee energy prices for all. But this would inevitably benefit the biggest, energy consuming homes the most. Not for nothing did the Institute of Economic Affairs, a “free market” think tank, criticise the plan as “middle-class welfare on steroids”.

Truss could argue that targeting would be extremely complicated, could lead to perverse outcomes and might prove itself to be very expensive in the midst of a crisis. But she and her chancellor, Kwarteng, doubled down with the bad policy making and avoidable mistakes.

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They rejected a windfall tax on energy firms, which could have helped meet a bill some put at up to £100bn. They put the debt straight on the nation’s books, rather than create a mechanism through which energy firms would repay the subsidies over, say, 20 years.

Measures like these would have helped reassure the markets. Instead, the pair went further. Some £30bn of debt-funded tax cuts trailed via media leaks. The chancellor topped that up with £15bn more in his mini-Budget, and shut the Office for Budget Responsibility – which usually assesses government spending plans and delivers forecasts – out of the process.

The markets took fright. UBS Wealth Management’s chief economist Paul Donovan likened the Tory government to a “doomsday cult”, opining that the tax cuts were unlikely to provide the boost Truss and Kwarteng hoped for. He was not alone.

In an unprecedented intervention, the International Monetary Fund said much the same thing, albeit in more decorous terms. Will Truss and Kwarteng end up knocking on its doors, caps in hands for a bailout? It is no longer inconceivable.