An awful lot has been made of what passes for Liz Truss’s economic policy.
Obviously she’s not sharing all the details with us (at least not for now), but one of the foundations is the belief that cutting taxes for all – reversing the national insurance increase – will be self-funding because it will unleash a wave of enterprise and tax revenues will thus rise. She’s against “handouts”, ie more targeted help for the poor with their energy bills, and she’s against levying a windfall tax on the big energy producers.
In essence, it amounts to a huge fiscal boost to the economy at a time of labour shortages and rapidly rising inflation. The aim is to stave off recession – “not inevitable” she says. There’s a few other twiddly bits, such as cutting VAT on fuel and suspending the green levy (a trivial sum), but that’s about the size of it – a dash for growth via unfunded tax cuts and some specific increases in public spending, such as on defence.
All this “Trussonomics” went down very well with the Conservative party members whose votes she needed, but she seemed sincere in her rather dogmatic faith in the power of the Laffer curve (the relationship between rates of taxation and the resulting levels of tax revenue), the wisdom of Patrick Minford (who unhelpfully added that it might mean 7 per cent interest rates) and the continuing doctrine of Johnsonian cakeism. But she got ridiculed for it. Her beaten rival, ex-chancellor and Treasury man Rishi Sunak derided it as “fairytale” economics. Michael Gove called it a “holiday from reality”. Charles Bean, former deputy governor of the Bank of England and highly respected, pointed out that “supply side” reforms to promote growth take a long time to feed through.
Bodies such as the Institute for Fiscal Studies (IFS) warned at the time that such a Truss Plan would blow a huge hole in the public finances. When it was floated that Truss might cut VAT by 5 or 10 per cent, the wonks in the IFS must have fainted. City banks have revised their inflation forecasts upwards, and sterling has weakened as the world has turned to the supposed safe haven of the US dollar. Plus there’s talk of a trade war with Europe and “friend or foe” Emmanuel Macron. You get the sense that Truss is not only impetuous and single-minded, but impervious to reason.
So Truss, notwithstanding a degree from Oxford in Philosophy, Politics and Economics, and a highly developed aptitude for mathematics, doesn’t understand economics (at least going by the above). Does it matter? Are we doomed to prices rising at 25 per cent a year or more, the highest inflation since 1975? Or since the end of the First World War? Or the peak of the Napoleonic Wars? Or ever? With wages falling far, far behind?
Usually what would happen when a prime minister has some madcap scheme such as the Truss Plan (admittedly an over-dignified description for guesswork and a set of blind hopes), is that the Treasury, the Bank of England, the International Monetary Fund (IMF), the think tanks, the City banks and the economic “blob” would criticise, moderate, defang and generally get it into shape. So would backbench committees and cabinet colleagues – especially if political damage was threatened. But in Trussland this is much less likely to happen, for three reasons.
First, Truss is wilful and won’t listen. Whether she’s “Dim Lizzie” – as some Twitter wags have posited – or as bright as her academic record suggests she ought to be (and her much-maligned school in Leeds might not have let her down as badly as she lets on), it’s no use if she can’t digest arguments and moderate her policies – traits that Margaret Thatcher did have, at least in her earlier, more successful and less imperial phase in power.
Second, Truss wants to dismantle the power of those institutions likely to try to put up resistance. No 10 – do not laugh – is to be transformed into an “economic nerve centre”, no doubt with the likes of Minford and John Redwood feeding the brain with Thatcherite nourishment. An ally vouchsafes: “Liz is a serious policy thinker on the economy. She would see the clear direction and philosophy on the economy for the government to follow.
“That’s not to say Liz wants to neuter the power of any chancellor – far from it – but she does want No 10 to be the economic nerve centre, working closely with the chancellor and his or her Treasury.”
Thus, Truss has reportedly drawn back from the Dominic Cummings idea of turning the Treasury into a department of No 10. She’s also shelved for the time being the idea of splitting it into an economic growth department, under her control, and another, narrowly focused, penny-pinching public finance department. This would be roughly what they do in Germany, and the idea has been kicking around Whitehall since the 1960s, when the Wilson government tried and failed to tame the Treasury through the short-lived Department for Economic Affairs. Michael Heseltine tried the same in the 1990s, and similarly lost the battle.
Unlike in post-war Germany, however, Truss wants to bring the Bank of England under control and “review” its mandate. The governor, Andrew Bailey, has been a useful scapegoat for the recent upsurge in inflation, which in reality has more to do with Brexit and the Kremlin than Threadneedle Street. He’s said he’s happy to review the Bank’s role, but of course he has no real choice in the matter. The operational independence given to the Bank by Tony Blair and Gordon Brown in 1998, with low and stable inflation at the entire of its mission, is going to be badly eroded. Political control is going to be brought back, and interest rates set to suit the dash for growth and the electoral cycle. (This, of course, also being facilitated by the abolition of the Fixed-term Parliaments Act, which returned absolute power of discretion over the timing of the next election to the prime minister. Truss is as cynical and as likely as anyone to engineer a pre-election boom through tax cuts and slashing mortgage rates. It may well be in her mind.)
Last, we have her new chancellor Kwasi Kwarteng. He’s a very clever man, and a fine historian, and a few years ago he wrote rather a good book called Thatcher’s Trial. In it, he chronicles the crucial economic and political struggles of the first couple of years after Thatcher came to power in 1979. It was a time of trial, as he says, and of high inflation and interest rates. There was industrial unrest, mounting unemployment and huge resistance to Thatcher’s policies – direct tax cuts and supply-side reforms – from the “economic blob”. The Establishment, from the then governor of the Bank of England to the TUC to the CBI, bitterly fought back. Famously, 364 prominent economists wrote to The Times pointing out the folly of her approach. The “wets” in the cabinet tried to gang up on her. But although she tacked from time to time, she held her nerve, steadied by the constant support of her chancellor, her then-close colleague Geoffrey Howe.
You have to wonder whether Kwarteng’s obvious admiration for Thatcher and Howe has led him to the assumption that Truss and he are their contemporary equivalents. If so, then he has drawn precisely the wrong lesson from the traumas of 1979-1981. There were big cuts to income tax, true, but balanced by a near doubling in VAT, and interest rates were pushed as high as 17 per cent to squeeze inflation out of the system; the resulting slump was greeted with equanimity. “There is no alternative” was the mantra.
So what we are about to get is the exact opposite of Thatcherism: an inflationary boom where we try to live beyond our means, but delivered with Thatcheresque determination.
The Truss revolution will also be garnished with the kind of breezy optimism that Truss comes out with now, and Thatcher used in her day. You can just imagine Truss taunting Keir Starmer with Thatcher’s lines from her 1983 election rallies – “where Labour’s pessimistic, we are full of hope. Where they are bitter, we are determined to succeed. Where they fear the future, we rise to the challenge and the excitement and the adventure”. She also liked to quote uplifting passages from Kipling, which has nothing to do with economics, but everything to do with mood. I’d not be surprised if Truss started spouting imperialist poetry quite soon.
