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19 September 2022

Liz Truss’s free-market experiment is a threat to economic stability

If the Prime Minister is really serious about boosting growth she should reverse Brexit.

By Martin Fletcher

The Queen’s funeral has brought to an end ten days of official national mourning, of order, tradition and meticulously planned ceremonies. The last bugle has sounded, the vast crowds are vanishing, the bearskins and pikestaffs have been packed away. Attention now shifts abruptly from Westminster Abbey to the Palace of Westminster 200 yards away. Royal ritual gives way to political revolution, the solemnity of a cathedral to the raucousness of a casino. A new Elizabethan era begins – that of Liz Truss – and it could prove as brief as the late monarch’s was long.

The new Prime Minister has no popular mandate, but that will not prevent her taking a massive gamble, a giant leap of ideological faith, by pursuing an untested, unproven strategy of attaining growth at all costs in order to restore national finances. I choose the words “at all costs” advisedly, for it has the potential to cause enormous harm to the British economy and society.

The fanatical free-marketeer now occupying No 10 has already unveiled the biggest fiscal intervention in our peacetime history – a package to curb soaring energy bills costing upwards of £150bn, though nobody knows the real price.

This was forced upon Truss by political necessity, but she did her best to stick to her principles. She refused to finance it with a further windfall tax on energy companies lest that deter investment. She refused to consider rationing energy, or telling the public to use less, lest that smack of the nanny state. She ditched green levies on fuel bills, lifted the ban on fracking, and allowed more drilling for North Sea oil and gas, though all those measures run counter to Britain’s net zero goals.

That unpalatable task done, Truss and Kwasi Kwarteng, her Chancellor, neighbour and fellow libertarian insurgent, will now move swiftly to implement their real agenda – cutting taxes, tearing up regulations and shrinking the state in an attempt to turbocharge economic growth.

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Later this week they are expected to reverse the National Insurance increase, cancel the planned rise in corporation tax and suspend the green levy on fuel bills at a cost of £30-50bn, and to rip up fiscal rules requiring the national debt to fall as a share of national income in 2024-25. They also want to cut income tax before the next general election.

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They plan to create up to a dozen low-tax, low-regulation “investment zones” and to scrap an EU cap on bankers’ bonuses designed to discourage reckless risk-taking. They want to junk animal welfare laws, Boris Johnson’s anti-obesity package and the EU’s working time directive that ushered in the 48-hour working week. They will ditch Dominic Raab’s proposed Bill of Rights.

How long before they launch an all-out assault on environmental legislation, planning regulations and workers’ rights?

Ten years ago this month Truss and Kwarteng co-authored a tract entitled Britannia Unchained which argued that low taxes, deregulation and removing the state’s dead hand were the way to unshackle the British economy. Now they have the power to implement that extreme cod-Thatcherite credo, and they will evidently let nothing stand in their way. Truss has replaced Johnson’s advisers with neoliberals drawn from right-wing think tanks. Kwarteng’s first act as Chancellor was to sack Tom Scholar, the Treasury’s permanent secretary and the embodiment of what Truss and Kwarteng contemptuously dismiss as risk-averse “Treasury orthodoxy”.

The Prime Minister is certainly gutsy. She is going for broke, though she may break Britain in the process. She has opened a clear ideological divide with Labour. She and her advisers believe the country will respond positively to her decisiveness, plain-speaking and clarity of purpose, especially after Johnson’s political zigzagging. She may be proved right, but she is nonetheless taking an enormous risk.

She is essentially jettisoning what became the central mission of Johnson’s premiership after Brexit – levelling up. It was an interventionist policy of the sort she instinctively abhors, and she has not uttered the phrase since entering No 10. She scorns “handouts” and redistributive economic policies, believing market forces and “trickle-down economics” are the best way to help the less well-off.

But letting energy companies keep £170bn in windfall profits while household fuel bills double, lifting the cap on banker’s huge bonuses at a time when most blue-collar workers are being offered real-terms pay cuts, and reducing taxes in a way that overwhelmingly benefits the wealthy and big business, will hardly endear her to those Red Wall constituencies that are now an essential part of the Tories’ electoral coalition. She is almost the antithesis of a Johnsonian populist.

Truss will face opposition in parliament, too. Fewer than a third of the Conservative parliamentary party voted for her, and she has plenty of enemies on the backbenches. Many MPs very much doubt that tax cuts will generate the growth required to offset the government’s increased borrowing. Many will judge that there is little public appetite for unfettered “sink-or-swim” capitalism at a time of acute economic hardship and insecurity. And she is hardly a persuasive speaker.

However the greatest threat to gung-ho “Trussonomics” is that the financial markets will take fright at what Rishi Sunak called her “fairy tale” economics and Michael Gove described as a “holiday from reality”; that they will panic at the way she is cutting taxes and ballooning the national debt without simultaneously reducing public spending.

The pound has already sunk to its lowest level since 1985. It could plummet much further, driving up interest rates and inflation and plunging Britain into a Greek-style debt crisis. Were that to happen, Truss’s premiership would be finished almost before it began. 

There is, of course, a much simpler and safer way to generate economic growth. It is a step that would, in a stroke, boost GDP by approximately 4 per cent in the long run. It would ease the acute labour shortages that really are holding the British economy back, rekindle huge amounts of foreign investment and restore our exporters’ unfettered access to a single market consisting of 27 countries and 450 million consumers.

It is to reverse Brexit and rejoin the European Union.

[Kwasi Kwarteng’s mini-Budget 2022 – live updates]

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