Clint Eastwood is not the first person who springs to mind when one thinks of Paul Johnson, the Director of the Institute for Fiscal Studies. But I felt there was an element of Dirty Harry in his response to Kwasi Kwarteng’s mini-budget today. Do you feel lucky, Mr Chancellor?
“This is a huge economic experiment which carries with it lots of risks,” he told viewers, moments after Kwarteng had spoken. It was “like an entirely new government coming into office” who were “putting upwards of £40 billion into the economy when the Bank of England is really worried about inflation”. It was, in short, a “complete reversal of policy”.
It is hard not to agree with Johnson. On the one hand, we got a bonanza of measures that centre-right wonks and commentators have been calling for for years. A growth target of 2.5 per cent. Unpicking regulation. Disposal of government land to build more homes. Minimum service levels on striking industries. One has never seen Mark Littlewood so happy post-budget.
But wait – there’s more. The cancellation of the rises in National Insurance and Corporation Tax. Investment zones with lower taxes and regulations. A raise in the stamp duty threshold from £125,000 to £250,000. An end to the cap on bankers’ bonuses. The basic rate of income tax cut to 19 per cent from April.
And, unexpectedly, the Holy Grail – the abolition of the 45 per cent rate of income tax, and a return to a top rate of 40 per cent. One could hardly say that Truss and Kwarteng do not have the courage of their convictions – or accuse them of committing the cardinal Tory sin of claiming to be tax-cutters, whilst never delivering any.
As such, the most ideologically sound budget in living memory. Finally, a Prime Minister and Chancellor unashamedly defending a low tax, pro-growth, deregulatory agenda. Kwarteng said what we know to be true: high taxes discourage hard work, penalise success, and prevent entrepreneurship. One cannot help but cheer as the Labour frontbench looked clueless in response.
Then again, one has to be fair on Kwarteng’s recent predecessors. Rishi Sunak, Philip Hammond, and George Osborne were not men who entered Conservative politics because of their love of a larger state and higher taxes. The question must asked – why has no Tory Chancellor done all this before, if we in SW1 have been demanding it for so long?
There are two possible explanations. The first is the one favoured by Trussonomics’s disciples. That is that, for the last twelve years, we have been held back by the forces of orthodoxy. A Treasury in hoc to cheese-pairing, and an economic establishment too hampered by groupthink to embark on any bold departures. Ignore them, brandish your copy of Free to Choose, and get cracking.
It is a comforting thought, especially for those of us fond of lamenting how little distinctively Conservative policy our party has achieved in office. It is the approach, broadly, that Truss outlined to me when I interviewed her two months ago – and it is what she is now doing in government. No wonder many are saying today this was the most Conservative budget we have seen in decades.
But there is another explanation for why a statement like this hasn’t been delivered before now. It is being played out before our eyes, and that is that the markets won’t take it. The pound has fallen to its lowest level in almost 40 years, dropping below $1.10 and heading towards parity. The FTSE has fallen more than 2 per cent. Analysts now expect interest rates to more than double to 5.2 per cent next year.
Most importantly for the public finances, the yield on UK 10-year bonds, which mirror the Government’s borrowing costs, surged towards 3.8 per cent. They were under 1 per cent a year ago. It is hardly a surprise, with the amount of borrowing that the Government announced it would be pursuing today.
The central departure of Trussonomics is that one is no longer forced to choose to consider cutting public spending when financing tax cuts. Financing the cuts announced today alone will cost close to £150 billion over the next five years, but to enable them, government borrowing will reach its third-highest peak since the war, and remain over £100 billion, even once the energy support package ends.
Despite one being floated by Truss during her leadership campaign, there was no mention of a Spending Review in a today’s speech. In some ways, that’s a good thing. Having one so soon after the last would have further gummed up Whitehall. But that also means that we should not expect any cuts in government spending any time soon. With borrowing costs soaring, that matters enormously.
Not only because a smaller and more efficient state is more desirable, or because the spending plans the Government is operating on were drawn up at a time when inflation was less than a third of its current levels. No, it matters because it means Truss and Kwarteng really are going for broke. If their sums do not add up, the risks for the public finances are considerable.
As the Chancellor outlined today, he is convinced he can get our post-2008 average of 1 per cent growth up to 2.5 per cent in the medium term – and hope, in doing so, to win a historic fifth successive election victory. One also imagines that he is optimistic that the current downward trend in energy prices means the amount he will have to borrow might be considerably less.
But if his plan doesn’t work, we will be borrowing ever-more money at an increasingly expensive rate, with government debt surging upwards. As Johnson has highlighted, borrowing is now forecast to be £80 billion higher by 2026-27 than predicted in March, with over half based on today’s tax cuts.
This threatens further interest rate rises, alongside increases in taxes and spending cuts. Most likely, if Truss and Kwarteng’s gamble fails, these will be implemented by the next Labour Prime Minister and Chancellor. But governments come and go. What is more important is that by going all-in on this agenda today, our new Truss and Kwarteng risk discrediting free market thinking for a generation.
I have no doubt that their approach could deliver in spades in normal times, when inflation is under control, energy prices are not volatile, the markets aren’t spooked, and the Governor of the Bank of England is across his brief. I also have no doubt that the Prime Minister and Chancellor are wise enough to know that they are taking a big risk, and they deserve respect for doing so.
Still: they are throwing the kitchen sink at going for growth, and then some. If it works, it will be the most formidable vindication of economic liberalism since – yes, I will say it – Thatcher at her pomp. If it doesn’t, get ready to have Rachel Reeves jamming up your taxes, and a long, slow slog over the next twenty or thirty years to get us back into government, and make the case for markets.
Nevertheless, they say fortune favours the brave. After today’s speech, one cannot doubt that Kwarteng is that. So go on, Mr Chancellor. Make my day.