Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng (PA)
(Picture: PA Wire)Concern about the Truss-Kwarteng “dash for growth” mini-budget has morphed into the threat of a full-scale financial crisis, prompting the Bank of England to do more quantitative easing to ease panic in the market for government bonds.
The trigger was the plan to cut taxes by about £45 billion a year, indefinitely, in the hope that this, and some reforms to planning and other regulations, would stimulate the supply side of the economy so that it would grow and revenues would recover, despite the fall in tax rates.
The trouble was there is no evidence that tax cuts have this effect on long-term growth, and a lot of scepticism that the reforms would do any good. This departure from basic fiscal arithmetic was compounded by the Government not allowing the Office for Budget Responsibility to comment on whether it would work. The Chancellor presumably knew what answer they would give and did not want anyone to hear it. Unfortunately, financial markets saw the plan for what it was, and started demanding a premium for government bonds to compensate them for worries about how this would all resolve itself.
This “Singapore-on-Thames” strategy could have been attempted without spooking markets. It could have done revenue-neutral tax reforms, cutting those it thought would stimulate entrepreneurship, clawing back money from other taxes. And it could have allowed time for the other reforms to show their effect on growth and tax revenues before cutting taxes further — in other words, waiting for the evidence to come in before spending the proceeds.
Some commentators are toying with the idea that markets were spooked because of the prospect of a Labour government taking over. This I doubt. It’s too early to tell exactly what Labour would do, but so far it has sounded relatively stern and conventional about borrowing. There’s a risk that Labour would be tempted to go for its own Left-wing version of the ‘dash for growth’ but so far they look like the fiscal hawks. So I would guess that Sir Keir Starmer is the anchor for markets, not what is scaring them. Instead, that is Truss and Kwarteng’s flight of madness.
