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22 September 2022

Liz Truss risks spectacular failure with her “pro-growth” gamble

At the heart of Trussonomics is a belief in cutting taxes to achieve growth. But markets aren’t so sure.

By David Gauke

Friday’s financial statement is a big moment for Liz Truss’s government. It will not be the first time her administration has set out economic policy but the announcement of an energy price freeze on 8 September – probably the biggest fiscal intervention in living memory – did not even make it onto the evening news due to the death of the Queen. The statement by Kwasi Kwarteng, the Chancellor, and the publication of his “Growth Plan”, has the potential for the Truss government to make a clear first impression.

Truss has three things going for her. First, she knows what she is about. She has a clear priority – achieving growth – and a clear sense of how she thinks she can achieve it: deregulation and competitive taxes. This should, at least, convey a sense of direction.

Second, growth is the right priority. This has not been at the forefront of political debate since the 2016 referendum, when a majority of the electorate did not appear to be that interested in the subject. In the period running up to the EU vote, the UK was as fast a growing economy as any in the G7. Our subsequent relative decline should bring some focus to the question. Labour has historically struggled to convince the British public on this matter, so if she can win on growth, Truss can win the next general election.

Third, there is more goodwill for Truss than might be appreciated. Most Prime Ministers start off with a degree of public sympathy. The extraordinary circumstances she found herself in on her second full day are only likely to increase that. It is also the case that although Conservatives MPs are not overwhelmingly enthusiastic about her even many of her natural critics are willing her to succeed. After all, if she sinks, so will the Tories at the next election.

All of this is to her advantage and, with luck, could enable her to triumph. But it would need to be a very great deal of luck.

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The intended Truss narrative at the next general election is very obvious. “I came to office at a time of economic crisis, I took tough decisions to deliver long term growth and reinvigorate a failing economy, and we are now seeing some of the benefits – stick with me while I finish the job,” she will say.

To do this she must set out a convincing plan for growth. The bankers’ bonus cap is not a good policy (it is a populist measure brought in after the global financial crisis that is probably counterproductive in terms of the prudential regulation of banks and is detrimental to London’s competitiveness). There is a policy case for scrapping it. There is also an economic argument for not having a windfall tax on oil and gas companies, even if a well-designed tax would probably not do much harm and raise some useful revenue. In both cases, however, a great deal of political capital will need to be spent to justify unpopular decisions that will bring relatively marginal benefits to growth.

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Other ideas that have been revealed in advance are likely to have, if anything, an adverse impact. Localised low tax regimes are only likely to result in greater distortions and complexities as economic activity is displaced. But worrying about tax complexity and market distortions is considered to be part of the supposedly failed Treasury orthodoxy. (In reality, of course, the Treasury was never anti-growth, just very sceptical about bad ideas for growth. The plan for “investment zones”, as briefed, sounds like a bad idea.)

By measuring every policy on its contribution towards growth, the government can be criticised for what it does not do, as well as what it does. Truss would certainly favour planning reform but it is not clear if her measures will match her pro-growth rhetoric. More importantly still, as Martin Fletcher pointed out in these pages, the best pro-growth approach would be to rejoin the EU. This, I assume, is not about to be announced.

The unwillingness to even countenance the economic damage done by Brexit means that there is an absence of clear thinking within government. Trade bodies know not to mention the subject when speaking to ministers, recognising that such tactlessness would reduce their influence. It even hampers the government justifying their own policies. A popular view on corporation tax is that reductions in the rate failed to stimulate higher business investment. The best counter-argument is that it was successfully doing just that, until the referendum result. It is not an argument that ministers will make.

At the heart of Trussonomics is the willingness to cut taxes to achieve growth. Conservatives MPs may will this to work, but the markets will be more sceptical, regardless of whether assessments of the public finances by the Office for Budget Responsibility are made public. An expensive energy package is one thing but large discretionary tax cuts may be viewed as unsustainable. Markets may lose confidence in a way that is not supposed to happen under a Tory government. The cost of re-establishing credibility – in much higher interest rates and a reversal of fiscal policy – would be economically and politically excruciating.

The Truss approach could succeed triumphantly but probably won’t. More worryingly, if she and her Chancellor misjudge the financial markets, it could result in a spectacular failure. Friday’s statement may give us a better idea of the likely outcome.

[See also: What to expect from Kwasi Kwarteng’s mini-Budget on Friday]

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