Emily Carver is Head of Media at the Institute of Economic Affairs.
As the dust settles on Liz Truss’ short-lived premiership, many have quite understandably welcomed a return to business as usual in the form of Rishi Sunak.
The former chancellor has promised “economic stability and confidence” will be at the heart of his government’s agenda. The media hysteria has softened somewhat. Jeremy Hunt will remain Chancellor. Some commentators have celebrated that we now have the “grown-ups” back in the building as if the only issue was a temporary bout of childishness.
Yet the idea that the UK’s problems began – or will end – with Truss is absurd. The enormous challenges Sunak will face as premier have not changed since she took on the job last month. The failures go back years, even decades.
In his first speech as prime minister, Sunak said he’d “fix” the mistakes made by his predecessor. But what mistakes are he intending to fix?
We know that Truss made major errors in terms of communication, politics and strategy. At the same time, she showed little understanding of the links between supply-side reform, monetary policy and fiscal policy.
The fact there was no co-ordination with the Bank of England in the week of the mini-budget was to prove disastrous, whatever you think of Andrew Bailey. The markets looked at a smaller rise in rates than the US Fed one day, and a major rise in the UK’s deficit the day after, and saw there was no underlying strategy at play, which fed a narrative of chaos and turmoil.
But these are not the only issues.
Sunak gained popularity when he turned on the spending taps, borrowing £375 billion over the course of the pandemic. But he will now rightly be forced to reject the ‘cakeism’ of his predecessors.
With tax rises and spending cuts likely to come next, we will learn once again the lesson that borrowing and spending comes at a price – and that balancing the books requires difficult decisions. The risk is that in an attempt and focus to lower interest rates at all costs, he may reduce growth still further. Growth must remain at the heart of policy.
Despite the challenging circumstances, and the desire to steady the ship, it would be wrong for the new Prime Minister to reject his predecessor’s growth strategy wholesale.
The core argument that Truss made, that economic growth has been neglected and needs to be prioritised, is the right one. The argument that Britain has to break out of its failures with supply-side reform to boost growth is also correct.
It is also wrong to lay the blame for our current economic woes at the feet of the mini-budget as if this started our problems. As is the case across the Western world, the UK is battling against inflation, brought on in part by pandemic spending, the eye-watering amounts of quantitative easing that accompanied it, and Russia’s invasion of Ukraine. Even without Truss and Kwasi Kwarteng’s haphazard, gung-ho budget, the writing was on the wall that the era of cheap money would be coming to an end.
Yet not raising rates for nearly a decade and a half looks increasingly mistaken.
Since the financial crisis of 2008/9, the British economy – as in other countries – has never got back to a reasonable rate of growth. We’ve failed to grow at a per capita rate of more than roughly one per cent, home ownership is stagnant, and savings rates have steadily declined. Average wages are roughly where they were in 2007, over fifteen years ago.
While our output and productivity has stagnated, ministers have continued to spend and central bankers have printed record amounts of money as interest rates have remained at historic lows. This has led to an economy drunk on cheap money, with no tangible growth to show for it.
Our politicians have been managing a period of economic decline. A return to the status quo should not be celebrated as a win.
Unfunded tax cuts without clear macroeconomic, growth, and public spending strategies, as tried by Truss and Kwarteng, were rightly deemed irresponsible, but continuing on our current trajectory with low growth and a historically high tax and regulatory burden isn’t particularly responsible either. Obsessing about gilt yields (and forgetting savers benefit as much as mortgage holders lose) cannot be the main pillar of an economic strategy.
Many Conservatives will be bitterly disappointed that tax cuts are now off the agenda. Indeed, it is likely that the burden will continue to increase, as they have done since Margaret Thatcher left office.
Sunak claims to be a free marketeer, and he could still make sound decisions when it comes to getting Britain moving. There are so many areas – from planning to energy – where regulatory burdens are holding back our economy, suppressing productivity and labour mobility as well as research and development, in addition to compromising our energy security.
The Prime Minister may have been elevated to steady the ship. Greater political and economic stability is welcome.
But in acknowledging the scale of the economic challenges we face, he must be bold. The Conservatives are already polling at rock bottom, but the end of the Truss administration must not mean the resumption of the politics and economics of decline. It will neither help the country or his party.