In his speech announcing the government’s “Growth Plan”, Kwasi Kwarteng declared: “We are at the beginning of a new era.” The Chancellor was soon proved right – but not in the way that he intended.
In the days that followed Mr Kwarteng’s statement, the pound fell to a record low against the dollar, and the cost of government borrowing is now expected to rise by the largest monthly amount since 1957. Such was the loss of market confidence that the UK was soon paying higher interest on its bonds than heavily indebted eurozone members such as Greece and Italy. Nearly 300 UK mortgage deals were withdrawn in a day as the market anticipated a surge in the Bank of England’s base rate to nearly 6 per cent.
This, most assuredly, was not the plan. Indeed, the chief secretary to the Treasury, Chris Philp, prematurely tweeted on the morning of his boss’s statement: “Great to see sterling strengthening on the back of the new UK Growth Plan.” But the government should not have been surprised by the market revolt. In his statement, Mr Kwarteng swaggeringly announced £45bn of tax cuts – the largest of any single fiscal event since 1972 – without pausing to explain how he would fund such largesse. The Chancellor may have vowed to build a high-growth economy but this is a hope, not a promise – and the markets recognised it as such.
As David Gauke, the former chief secretary to the Treasury, writes in his column on page 25, in the post-Brexit era, the UK cannot afford to take its lenders for granted. The loss of confidence reflects “the cumulative effect of our government for some time becoming less serious, less risk-averse, less willing to face up to hard realities, less ready to support our institutions”.
[See also: The UK is heading for an economic calamity]
Mr Kwarteng’s ambition of a high-growth economy, as we have previously argued, is the right one. Since the 2008 financial crisis, the UK economy has grown at an average annual rate of just 1.5 per cent (compared to 2.7 per cent before the crash). Of the G7 countries, only Italy has fared worse. This parlous performance has contributed to wage stagnation and helped deprive public services of much-needed resources.
But the measures Mr Kwarteng announced, such as the abolition of the 45p tax rate on earnings over £150,000, will do little to boost growth. A rise in Universal Credit, for instance, would be a far more effective stimulus since low-earners are forced to spend rather than save any gains they receive. Instead, the top 1.5 per cent of earners will receive a windfall that they do not need – or, in some cases, even want.
Such policies, as Jeremy Cliffe writes in this week’s cover story on page 18, are not an accident but the product of a “deep-rooted network of ideas, institutions and thinkers” that has championed free-market economics for more than 75 years.
Yet the UK is a strange candidate for this experiment: by Western standards it is already a relatively low-tax, deregulated economy. Unlike in the Thatcherite 1980s, there is little left to privatise and militant trade unions are no longer a formidable force. Liz Truss’s government, in short, is prescribing policy for a country that does not exist.
A more plausible vision was elucidated by Keir Starmer in his Labour Party conference speech. By promising to create “Great British Energy”, a new publicly owned clean generation company, he recognised the need for an active, entrepreneurial state of the kind we have long argued for. At present, as the think tank Common Wealth revealed, almost 45 per cent of the UK’s vast offshore wind capacity is owned by foreign state-owned entities (a mere 0.03 per cent is owned by the British government).
The UK’s biggest problems – overwhelmed public services, low investment, regional imbalances – are ones to which Ms Truss has no answers. Indeed, her purported solutions will only deepen the malaise: a surge in interest rates will further deter public and private investment.
In a new era of permanent crisis, voters crave stability and security, not free-market utopianism. The hubristic Ms Truss and Mr Kwarteng may yet condemn their party to defeat at the next general election. But as has been proved with remarkable speed, there is much damage they can do before that point.
This article appears in the 28 Sep 2022 issue of the New Statesman, The Truss Delusion