If you have voted for Liz Truss expecting to see a smaller state and lower taxes, then I have got some bad news. The next few months are going to see economic misery, characterised by large-scale government intervention and a lively debate over how to pay for it. They will see the heady dreams of Trussonomics – assuming she is our next Prime Minister – smash against the rocks of economic reality.
Having recently written about the flaws in her prospectus, and the dire winter we face, today is an opportunity to marry both topics together. With the new energy price cap to be announced on Friday, I must ask: is Truss ready for the challenge this poses? If, as expected, bills for the ‘average’ household rise from £1,971 to £3,600, we face millions struggling to keep the heating on this winter. That means mass defaults or boycotts. Since we will be unable to import enough energy from Europe, we will face blackouts. Massive state intervention will be required to prevent panic.
Even then, Putin may use gas supplies as a bargaining chip, bills may hit £6,000 next April, and inflation may reach the worst predictions of 18 percent or more. All this adds up to the most depressing economic climate for a new Prime Minister since Margaret Thatcher entered office. One wonders why anyone would want the job.
Nevertheless, we currently have three people keen on being our next Prime Minister – Keir Starmer, Rishi Sunak, and Truss – and, whatever their respective chances of getting to Number 10, each has a different strategy for dealing with this crisis.
Firstly, Starmer has announced a plan to freeze energy bills. Costing £15 billion, in addition to the Government’s previous support, it would be funded by backdating the windfall tax on oil and gas companies to January. It would also, according to Labour, reduce annual debt interest payments by £7 billion. That is palpable nonsense: holding down bills well into next year will be hugely costly, especially if it requires bailing out various energy companies, as has been the case in France. Paul Johnson, from the Institute for Fiscal Studies, has suggested it would be more costly than the furlough scheme if extended beyond Starmer’s initial six-month period. That is a certainty if bills are breaking into £4,000 and above next year.
That means inflationary funny-money creation from the Treasury, a whole heap of new debt, or higher taxes. Nevertheless, the policy is both universal – simple, if not progressive – and easy to communicate. One of the flaws of the support already announced by the Government – all £37 billion of it – is that it has not registered with the public. It is almost as if Johnson’s Downing Street isn’t overtly keen on promoting something thought up by Sunak. Asides from the cost, Starmer’s approach does nothing to encourage families to use less energy. It is therefore excellent politics, but economically incontinent.
Then to Sunak. His approach has the benefit of already being in practice. In May, the former Chancellor announced a range of support working up from a £400 rebate per household to £1200 for the most vulnerable. It was designed to shield the worst off from the increase in prices. Since then, prices have risen much faster and further than predicted, and Sunak plans to increase this support by an unspecified amount. He also failed to stump up for the sorts of wider-ranging measures – like a push for insulating homes, or an increase in Universal Credit – which could have begun to pay dividends if enacted earlier. Still, his approach at least has the virtue of being targeted.
But if the polls are to be believed, Sunak will not be around to extend his previous measures. So we turn to Truss. On Sunday, we saw Kwasi Kwarteng, her likely Chancellor, pledge that help would be on its way under a Truss premiership. This suggests the Foreign Secretary has lost her distaste for ‘handouts’. Yet we are yet to have any specific proposals, asides from pledges to reverse the National Insurance and Corporation Tax rises introduced by her rival, and to cut green levies. She also shares with her rival a lack of clarity over the scale of help required to help businesses, who will not be helped by the energy price cap. Many face the prospect of going to the wall; a recession is almost inevitable without huge assistance.
The case for Trussonomics is that these measures will both put more money in consumers’ pockets and encourage growth. The problem with this argument is twofold. Firstly, for millions of those affected by the NI rise, Sunak reversed the rise himself back in April. Only those earning above £25,000 have to pay it at all, and hundreds of thousands of the worst-off were taken out of paying altogether. Those saved by reversing the rest of the rise are more likely to be those less in need of help this winter – and an extra £100 in your pocket is of little use if your bills are going up by £500.
Secondly, cutting taxes costs money. Maintaining public expenditure and the payment of interest on the national debt means a larger budget deficit, more borrowing, and thus more debt and debt interest. That is even before Truss’s pledges for spending more on defence, or retaining the extra money pledged by this government for health and social care in the absence of the NI rise.
The Truss camp had reportedly hoped to use the so-called ‘fiscal headroom’ created by higher tax receipts to fund these cuts. But we now see reports that that headroom is smaller than expected, due to the worsening economic outlook and a dalliance with a nuclear power plant or two, and that whatever extra cash there is will have to be spent on helping voters pay their bills.
If Truss does not want to indulge in more inflationary money-printing from the Bank of England, more borrowing is necessary. Here in lies the problem. As Sunak has repeatedly pointed out, the cost of servicing our debt is rapidly increasing. The gap between forecast and reality for debt-servicing payments between April and July was over £4 billion.
The IFS is now predicting that debt-servicing payments will hit £100 billion in 2023-2024. As Kate Andrews has highlighted, that is £50 billion more than the OBR were predicting in March. That will only spike further if investors are spooked by a Truss government tinkering with the Bank of England’s mandate. To get these rates down, the Government therefore has to win back the support of investors.
Thatcher and Howe did that by raising taxes to reduce borrowing and control public expenditure. Truss and Kwarteng will have to increase expenditure whilst retaining the confidence of the markets. To do so, they have two options: raising taxes or cut spending elsewhere. Neither of these are things Truss has shown much interest in whilst campaigning. She will be forced to do one, or both.
But to govern is to choose. That is especially as, according to calculations by The New Statesman, public services require around £20 billion more just to keep spending in line with inflation. If that isn’t provided, public services like the NHS or schools will face real-term cuts in a way they did not even in the ‘austerity’ years. But Truss and Kwarteng will have little choice but to allow spending to fall and to push for further cuts, as a sign they are willing to get government finances under control.
Otherwise, despite being instinctively against it, they will have to raise taxes. From the backbenches, Sunak will mutter that he told us so. And a lot of Tory members will feel they have been had.
Johnsonian ‘boosterism’ floundered on the Prime Minister’s inability to realise that ever-higher spending entails ever-higher taxes. The looming crisis means his replacement cannot stick their head in the sand. Of course, this problem would be lessened if the Government pursued some actual supply-side reform designed to boost growth. But as our Editor pointed out yesterday, Truss will inherit a uniquely unfriendly parliamentary party. If Johnson could not get any meaningful reform – house-building, for example, or fracking – through with an 80-seat majority and a mandate, what hope does she have?
Either way, a Truss premiership seemingly heralds higher spending, more borrowing, and increased government intervention. This may be forced on her by adverse circumstances. But we don’t choose the hand we are dealt, and she wants the job. It is a sign of the air of unreality around this leadership contest that more have not cottoned onto this already.