When Andrew Gimson and I interviewed Liz Truss last week, there were a variety of interesting topics on which we could have focused. We could have asked about her Damascene conversion to Toryism in the dying days of the Major government, or her zeal for challenging the Northern Ireland protocol. We could have quizzed her on her favourite Taylor Swift album, or inquired as to who she thought was going to win Love Island.
Instead, we spent most of the interview talking to her about ‘Trussonomics’: the heady mixture of tax cuts, changes to the Bank of England’s mandate, and supply-side reforms that she thinks Britain requires to get moving again. It was not as immediately exciting as discovering whether she preferred Red, Folklore, or Reputation.
But I’m glad that our conversation went down that route, since yesterday saw two significant interventions that make Truss’s plans seem both increasingly unrealistic and unwelcome in our darkening economic climate. One intervention was monetary, the other intellectual.
The first was the Bank of England’s monumental decision to raise interest rates by 0.5 percent – the biggest rise in 27 years. Alongside this, the Bank announced it expects inflation to reach 13 percent, based on energy bills hitting £3,500 in October. This would lead to a recession lasting through the last three months of this year and the whole of next year – the longest downturn since the 2008 financial crisis.
All thoroughly depressing. That is especially as new analysis from the National Institute of Economic and Social Research predicts such a recession could leave over 5 million households without savings next year, shrink average incomes by 2.5 percent, and leave the lowest paid on the verge of poverty.
That is why that other aforementioned intervention deserves listening to. This was an article by Nigel Lawson, Margaret Thatcher’s longest serving Chancellor, in yesterday’s Telegraph. In it, Lawson backed Rishi Sunak, and explained why he believes his fellow ex-Chancellor has learnt the economic lessons of the last few decades much better than his rival.
The man who gave us the biggest bang in 13 billion years, a 40 percent top rate of income tax, and, erm, Simply Nigella highlighted the contrasting approaches of two Tory Chancellors he observed first-hand: Anthony Barber and Geoffrey Howe. For Lawson, Barber’s approach best resembles Trussonomics, whilst Howe’s best reflects its Sunakian counterpart.
In his 1972 budget, Barber notoriously launched a ‘dash for growth’. He set growth targets of 10 percent for the following two years and shaved £1 billion off income tax. This came alongside his major liberalization of the banking system the previous year under the title of ‘Competition and Credit Control’ which had seen bank lending rise from £71 million to £1.33 billion. The money supply grew by 25 percent from 1971 to 1972 alone – the equivalent of the total growth in the three years leading up to 1970.
With all that stimulus, it was no shock that the economy grew by 4.32 percent in 1972 and 6.52 percent in 1973. But, just as unsurprisingly, inflation roared out of control – 7.07 percent in 1972, 9.2 percent in 1973, and 16.04 percent by 1974. All of this was exacerbated by the departure from fixed exchange rates in 1972 and the quadrupling of oil prices following the 1973 Yom Kippur War.
Within 15 months, Barber was introducing deflationary measures and Edward Heath’s government was forced into an incomes policy it had been elected to oppose. As Lawson notes, it was Barber’s failure that did more than anything else to convince many Conservatives that Keynesianism was dead and that monetarism was the necessary tonic for Britain’s economic woes.
So with Margaret Thatcher, Geoffrey Howe, and Lawson in office, so followed the notorious 1981 budget that raised taxes during a recession, designed to cut public sector borrowing, help curb inflation, and reduce interest rates. Only once that was done could Howe and Lawson be sure of the economic stability required for growth and tax cuts.
Lawson was right to draw parallels between then and today. For ‘Competition and Credit Control’, substitute the £360 billion by which the Bank increased the money supply in 2020 – more money than in the previous eleven post-crash years put together.
For Barber’s income tax cuts, read the £30-40 billion Truss wants to slash. For his ‘dash for growth’, swap in Truss’s identification of “a lack of economic growth” as the “number one problem in this country” in her interview.
Like Barber, Truss wants to go for growth. And like Barber, she wants this expansion to occur in an economy already suffering from an unprecedented monetary surge and a looming energy crisis. With rates expected to continue rising towards 3 percent as a recession looms, that outlook is only getting gloomier.
The apostles of Trussonomics would argue that her approach would bring enough growth to enable us to nip this stagflation in the bud. I am skeptical. Reversing tax rises designed primarily to raise revenue would mean the budget deficit and thus the national debt would increase more quickly.
Hoping to pay this off through greater headroom following higher tax receipts due to inflation bringing more taxpayers into higher tax bands through fiscal drag is misguided. The cost of servicing government debt goes up with interest rates. Already, as Sunak pointed out in the spring, that spending has quadrupled to hit £83 billion this year – exceeding the costs of schools, the Home Office, and the Ministry of Justice.
Truss’s proposals would only add to that burden, whilst boosting inflation and failing to boost growth. Sajid Javid has backed them; they reflect his own thinking. In a variety of Cabinet roles, he has backed increased borrowing and tax cuts to stimulate the economy. It was a potentially viable approach in an era of record-low interest rates and small, but real, economic growth. But that era is over.
Lawson is therefore right to argue that it is Sunak who has understand the demands of the moment better than his competitor. Getting inflation down is crucial. It is a cancer that disrupts the entire economy unless it is excised. Doing so will involve stringency on the part of the Bank of England, and tax rises on the part of the Treasury, as painful and as unwelcome as that is to any free-market Tory.
And whilst Trussonomics amounts to an attempt to stimulate growth in the short-term, Sunak at least has a plan to do so over the long-term, by encouraging business investment through policies such as his record super-deduction. As he laid out in his Mais lecture earlier this year, boosting business investment, increasing research and development, and tackling our anaemic productivity will do more for our growth and competitiveness than any crowd-pleasing tax cut now.
There are many good reasons to vote for Truss. She is a forthright on the culture wars, firm on the Northern Ireland Protocol, and a principled opponent of Russia and China. But her economic proposals are should not count in her favour. They sound good, but they do not recognise the needs of the moment. Party members have a duty to critique her on them over the next few weeks.
Sunak is flawed. His pandering to the Green Belt lobby would have made me a committed Truss-ite had she not been just as vague on how she was going to build more homes. There is a reason why ConservativeHome has not yet backed a candidate, if we choose to do so at all. Nevertheless, on this present crisis, he has the fundamentals right – and it is how the Government handles this mess that will decide whether it has even the remotest chance of being re-elected.