What’s really new about Trussonomics? From her first big interventions – though the fiscal details are incomplete – we can grasp the basics.
First: though Liz Truss is philosophically inclined towards a small state, she and the Chancellor, Kwasi Kwarteng, look inclined to respond to big challenges with big spending. “Action first, work out the fiscal implications later,” is something you probably only get away with once, but a universal freeze on energy bills was the right thing to do even though – as we will come to – it was not enough.
Second: having spent big, Truss and Kwarteng have a preference for borrowing rather than taxation, and for deficit reduction in the long term rather than the short.
Third: by sacking Tom Scholar as Treasury permanent secretary and failing to commission an updated economic forecast from the Office for Budget Responsibility, the new government has shown it is happy to blur the fiscal implications.
These are big changes with big implications. They represent the decisive defeat of Sunakism – which was simply the latest and most stubborn iteration of the “Treasury view” that is focused on short-term deficit reduction.
Fourth: if, as is likely, Truss goes ahead with tens of billions of tax cuts for middle-class households, in addition to borrowing £130bn for the energy price guarantee, it will be safe to conclude that Truss and Kwarteng have no interest in redistribution unless it is upwards.
Tax cuts for the better off, subsidies for oil and gas corporations, sky’s-the-limit bonuses for City bankers: the signals are crude and clear. The dramatic borrowing and wartime-like urgency are not designed to benefit the poor; nor will the focus be on “levelling up” Britain’s former industrial communities. It’s all for the benefit of the rich, the traditional Tory voting base and south-east England.
Will it work? Kwarteng is right to order the Treasury to “focus solely on growth”. But he will struggle to meet the 2.5 per cent annual growth target he has set for the same reason that all governments have struggled since the 2008 financial crisis: the UK’s economy is structurally wasted, not just by Brexit but by decades of under-investment in skills, infrastructure and productive capacity.
Business investment, the holy grail that was supposed to rescue the UK from its post-crash stagnation, flatlined from the moment of the Brexit vote, collapsed during the Covid-19 pandemic, and is even now – despite the vast tax relief offered under Sunak – far below its post-crash peak in 2016.
As for trade, it is carnage. Our goods export volumes collapsed like everyone else’s during the pandemic. But uniquely among advanced economies, they have failed to bounce back. The trade intensity of our economy – the proportion of growth driven by buying and selling abroad – is going in the opposite direction to the rest of the G7: downwards. Real wages, meanwhile, are falling faster than at any time since modern records began. Many working people are trapped in a world of low skills, long hours, high rents, insecure jobs and failing health.
In the Truss universe, in which right-wing economists such as Patrick Minford and Gerard Lyons call the shots, the path to higher growth is supposed to be lower taxes and deregulation. A third ally, Julian Jessop, said this week: “No one seriously thinks that trend growth can be raised by tax cuts alone. But over the coming months we can expect to hear much more about supply-side reforms, plans to raise investment and productivity, and a new fiscal framework.”
One of the only virtues of being born in the 1960s is to have witnessed, over and over again, right-wing politicians promising exactly the same things without success. The Tories under Boris Johnson had a severe execution problem. They dreamed of a high-wage, high-skill, high-productivity economy but had no concept of the kind of industrial, skills and planning strategies needed to make it happen. People who assume this was down to Johnson’s fecklessness underestimate the problem.
Every sector of the British economy faces a skills and manpower shortage. Even for basic jobs there are no people. At the top end we lack the capacity to produce engineers, software developers and product designers. Even in industries where the government controls the flow of work years into the future – such as naval shipbuilding – workforces are built up and then squandered.
Walk through any Red Wall town centre and you’ll see how capital has retreated rapidly from towns in which skills are low, in which well-being is a distant aspiration, in which school standards are poor, and in which no university graduate would want to live. To set right decades of under-investment and social insecurity, the state – newly empowered with its capacity to borrow and invest – has to command the direction of the economy.
The government needs to end its “Sergeant Wilson approach” to industrial strategy, under which every order turns out to just be a polite suggestion. It needs to adopt a strategy of smart reindustrialisation – because no amount of coffee bars, buy-to-let homes and consultancy firms can replicate the economic dynamism a modern manufacturing cluster brings to a region or city.
And it needs to raise real wages and reduce the profit share of the economy. Our towns are as dowdy as they are, our manufacturing so shrunken, and our levels of poverty and inequality so disgraceful because a multi-decade offensive reduced the wage share in favour of the profit share. There’s no way back without reversing that.
I think Labour’s front bench is beginning to realise the political opportunity Truss has presented it. She has abandoned deficit reduction as a short-term strategy and admitted the need for borrowing to invest; yet she has no agenda for redistribution, only for market-led growth.
I hope we see Keir Starmer and his team grasp that opportunity with enthusiasm at Labour’s conference next week: taking the gag off shadow ministers when it comes to concrete spending, tax and investment policies. The shape of the political fight is now clear.