6th October 2023  - Gary Mead  - in Economy

Political turmoil = Economic mess

Political turmoil = Economic mess

Democracy is remarkably good at shooting itself in the foot. In the US the lower house of Congress, the House of Representatives, has just voted to throw the Republican, Kevin McCarthy, out of the post of Speaker - the first time in history this has happened. What's puzzling is that McCarthy was removed not just by the opposing Democrats but with the support of several Republicans. How come? In the UK a government-funded multi-billion infrastructure project, known as HS2, - which has been backed at various times by governments of different hues - has just been kicked into touch. How come?

The answer to both questions is money - or rather the lack of it. In the UK interest payments on the government's almost £2.6 trillion ($3.16 trillion) national debt has just reached its highest in two decades. In the last year the government has spent £111 billion on debt interest, more than it spent on state education. Given that the proportion of the working age population is steadily falling (and thus tax revenues declining) this problem is going to get worse, unless the UK's sluggish economy significantly improves. No sign of that as yet.

In the US, where the national debt is a staggering $34 trillion (more than £28 trillion) and fast-rising, McCarthy was the victim of a group of Republicans who back President Donald Trump and want to see some serious cuts in President Joe Biden's planned spending, not least in the funding of the Ukraine in its war with Russia. The US Federal government in this fiscal year (which started on 1 October) is facing a budget deficit of $2 trillion (£1.65 trillion), much higher than pre-Covid-19 levels. McCarthy backed a Bill aimed at avoiding a government shutdown that could have impacted hundred of thousands of Americans who stand to lose benefit payments, but against the wishes of his hardline fellow Republicans. McCarthy has long been unpopular with them; and by definition no Democrat was going to save him. So he's out.

Spending appetite shrinks

According to the US Center for Strategic and International Studies the US Congress has "passed four spending packages in response to Russia's full-scale invasion of Ukraine - $113 billion in total". That sum seems huge but it's a drop in the bucket compared to the overall US national debt. For Trump-inclined Congressional Republicans however this seems like a 'forever' war which the US should stop funding immediately. Republicans are offended by what they see as President Biden's lavish spending of taxpayers' money; the Republican-dominated budget committee of the House of Representatives has accused the 'American Rescue Plan' - the 2021 package which pumped almost $2 trillion (£1.65 trillion) into the economy to prevent the worst ravages of Covid-19 - of creating the "highest inflation in 40 years". In the UK Prime Minister Sunak, in cancelling HS2, says "the facts have changed"; a former transport minister, Grant Shapps, said on national radio that the higher incidence of working from home, one of the effects of the Covid-19 pandemic, meant that demand for the high-speed rail link represented by HS2 was less than imagined when the scheme first launched in 2009.

The appetite for supporting Ukraine in its fight against Russia has weakened, just as the appetite for HS2 has weakened. Democracies are enthusiastic about new ventures but run out of energy and/or willpower when it comes to seeing such new ventures through to the end. While a poll conducted in July 2022 by the Chicago Council on Global Affairs found that 72% of Americans supported the provision of additional military supplies to Ukraine, that backing has now dropped to 63%. Republicans backing more military aid to Ukraine has dropped even more precipitously, by 30 points since the opening weeks of the conflict to 50% today. Public attitudes towards completing the final leg of HS2 have weakened too; about 40% of those sampled in a recent YouGov poll opposed any continuation of the project.

Stay honest

Part of the difficulty in seeing through such long-term schemes in democracies is that, unlike in authoritarian states, public scrutiny intervenes, quite properly. In the case of HS2 costs have ballooned from an estimated £37.5 billion ($45.6 billion) in 2009 to around £100 billion ($121.5 billion) today. Skepticism about such cost overruns - several times the cost of similar projects on the European continent - has given Prime Minister Sunak all he needed to jettison the project. There is suspicion that a government-backed project has been careless about how taxpayers' money has been used, a suspicion that will not have been eased by the awarding of HS2's CEO a salary of£750,000/year, making him the highest-paid civil servant in Britain by some margin.

The Kiel Institute for the World Economy judges that the US is much less transparent than other nations when it comes to the aid its gives to Ukraine. If everything is honest and above-board there is no need to be less transparent. Public perceptions count, fortunately, in democracies. According to Transparency International's Corruption Perception Index, Ukraine is among the most corrupt countries in Europe and near the bottom globally, ranking 116 out of 180 countries. Given this, there's perhaps little surprise that US Republicans are losing interest in supporting Ukraine. Who can blame them for having doubts about where the government is sending their taxes? If democracies are good at shooting themselves in the foot, they also allow their citizens freedom of expression; for that we should all give thanks.