The so-called mini-budget announced last month led to weeks of market turmoil, sterling dropping, both the Chancellor and his deputy being fired, and the Prime Minister forced into a number of embarrassing U turns. How did we get into this situation?
The first issue was that things were rushed. As someone who has worked for Liz Truss I know that she likes to get things done quickly. This can often be a good thing, but there was clearly very little analysis going on. As such, the government announced an expensive and poorly targeted package of support to deal with fuel bills and a number of very expensive tax cuts. Rather than rushing to make announcements the government should have spent more time reflecting on their policies to ensure they were credible and released alongside analysis from the Office for Budget Responsibility (OBR).
This leads us on to the second reason, the government sidelined respected institutions. Going ahead with a fiscal event involving a number of tax cuts without forecasts and analysis from the OBR is one such example. The firing of Tom Scholar from his role as Permanent Secretary at the Treasury who was well respected and had experience of dealing with financial crises again signalled to the markets that best practice was going to be jettisoned by the government. The fact that Truss spent most of the Summer criticising the Bank of England and hinting that its independence might be revoked certainly didn’t help assuage fears either.
The Truss-Kwarteng approach also abandoned fiscal conservatism. Expensive tax cuts without setting out how you are going to pay for them spooked markets even further. Given high inflation and increasing interest rates now is not the time to let deficits take the strain, the UK has missed the boat when it comes to increasing borrowing. It was also a mistake politically. The Conservative Party prides itself on being the party of sound money and often criticises high borrowing and spending pledges by the Labour Party. No longer being able to claim to be the fiscally responsible party angered many Tory MPs and so Truss and Kwarteng’s position became more and more untenable.
In her press conference this afternoon Truss reiterated her commitment to economic growth and rightly pointed out that growth has been unacceptably low since the Global Financial Crisis. However, a major issue is that she has misdiagnosed the problem and so her medicine is ineffective. She put tax cuts front and centre of her growth plan and while the tax system is in need of reform, it is not the main thing holding back the country. There are deep seated structural issues which are strangling growth. The planning system, for example, stops us building enough homes, wind turbines, solar panels, nuclear power plants, science laboratories, offices, and transport infrastructure. Childcare is too expensive, meaning that women are working fewer hours. We also have massive labour shortages due to a restrictive immigration system. All of this hampers productivity and until these things are addressed, growth will remain low and tinkering with the tax system won’t help things.
If Truss wants to go for growth then she needs to restore confidence by demonstrating that she has a credible plan for growth. Radical supply side reform to fix the structural issues holding back the UK will be essential.
