Mark Littlewood is Director of Popular Conservatism.
For those of a free market inclination, the late great Eric Morecambe has become a very useful ally.
In one of his many great comedy skits – in which he is displaying his complete lack of skill as a pianist – he gleefully insists to Ernie Wise that he is “playing all the right notes, but not necessarily in the right order.”
Those of us who still think that Liz Truss and Kwasi Kwarteng were “onto something” when they unveiled their ill-fated 2022 mini-budget now tend to fall back on Eric Morecambe’s line. The sheet music was pretty much perfect but the tinkling of the ivories was so badly executed that people are reluctant to ever hear that tune again.
Let’s put aside for now the external forces which contributed to Truss’s swift demise – such as the Bank of England’s disastrous handling of Liability-Driven Investments, which even their own internal report conceded caused about two thirds of the market turmoil of 2022. Let’s just accept that in the often unfair and brutal world of politics, we can never hope to play that tune that way again.
We should however return to the sheet music. In fact, the parlous performance of our economy and the appalling state of our public finances means we will have to do so. Economic growth needs to be the clarion call – it is the only way out of the fiscal hole we have dug for ourselves.
If growth is your number one priority, you need to be completely honest that other matters must take a back seat. A budget aimed at growth may well benefit the richer 50% of households rather more than the bottom 50%. That’s a “no go area” for those whose real priority is an ever more equal distribution of assets but not for those who want the country to become meaningfully more prosperous in aggregate.
If we are serious about growth as a political choice, we already know broadly how to get it. Taxes need to be on a downwards trajectory and high marginal rates need to be eliminated. Regulation needs to be on a similar pathway. If you want a nation of compliers, keep passing and enforcing rules at the current rate. If you want a nation of producers, do the opposite. Overall government expenditure will have to fall and also change in composition with relatively more spent on investment and considerably less on consumption.
Truss and Kwarteng attempted much of this but perhaps should have done things in a different order and in a different fashion.
The hard, unpopular part of the package – fiscal consolidation – was never compellingly presented as a key plank of the plan. In fact, an enormous energy bailout package was the first major action of the Truss administration. You could argue it was necessary, but it made it extraordinarily difficult to claim spending was going to fall. It is true that had Truss got her way then welfare benefits would have only been uprated only with wage growth (rather than the much higher inflation rate), but it soon became apparent that a large enough tranche of her Conservative colleagues in Parliament were wholly unwilling to countenance such an idea. You can blame Liz Truss’s hubris or the cowardice of a swathe of Tory MPs or a mixture of the two. Whatever your take on it, it was very difficult to see how the then government was going to get expenditure down.
The musical notes that need to be played first are those relating to spending cuts. By 2029, the scale of state spending reductions needed to get the year-on-year finances on an even keel will be truly enormous. Savings of around £200bn per annum will be needed to get towards a balanced budget (something no Chancellor of any stripe has been able to deliver for a quarter of a century). The current position of the Conservatives is that any pound found in cuts will be allocated equally between tax cuts and deficit reduction. This means – all things equal – identifying £400bn in spending reductions to achieve a balanced budget. That entails total public spending falling by about a quarter. No one has come anywhere close to detailing what such savings would look like – they are keener to list the areas they won’t touch (for example, the triple lock) than those that they will.
The next part of the Truss thesis that needs to be re-embraced is placing economic growth (specifically measured as increases GDP per capita) as the overriding policy priority. Although Liz Truss’s words have been copied by Rachel Reeves, mouthing a desire for growth is akin to engaging in a rain dance. It’s not enough to be sympathetic towards growth, you need to make political sacrifices to boost it.
At the very least, a “growth test” needs to be applied to all and any proposed new regulations. No new rules will be brought forward unless it’s clear that the impact on growth will be positive. An exception could be made for imminent threats to national security, but not to other worthy considerations (combatting obesity, “promoting diversity”, getting to carbon net zero etc – if growth really is the top priority it outtrumps these things).
A separate but detailed plan needs to be developed around tackling the stock of red tape, not merely the flow of it. Much, much more law needs to be repealed than passed. Currently, we have the absurdity of a government purporting to want economic growth while rolling out (just in the last few days) plans to ban certain types of tumble dryer and prohibit advertisements for fruit yoghurt on television before 9pm. Every regulation, no matter how insignificant, has a cost.
Finally, we need to revisit Laffer curve arguments.
To some, the mini-budget’s plan to cut the top rate of income tax from 45p to 40p was the last straw that broke the camel’s back. This is despite the fact that it is a rounding error in revenue terms and a good case can be made that revenues could well have increased if this tax reduction had gone ahead. The argument put forward by Truss and her ministers at the time was that this still would have left the UK with a higher top rate than Italy. That’s true, but also unpersuasive. A better approach would to be entirely practical – even predatory – about increasing tax receipts. The case should go something like this, “We want to increase revenues paid into the Exchequer from the rich. It now seems that this could be best achieved by reducing the rate of tax we charge them. This will encourage millionaires to come to – or return to – these shores and potentially strive still harder to increase their incomes. The test of this policy is simple – will revenues increase as a result of this tax reduction? If yes, we will continue on this path. If no, we will reverse the tax cut. We will be monitoring the issue constantly and will report back in 12 months.” A similar case needs to be put for tackling the ludicrous 62% marginal rate that kicks in at £100,000 of income.
The next government will need to revisit the Truss musical notes even if it plays them in a different order. First, detail the major spending reductions and get buy-in from the outset. Second, prove that going for growth is a plan not merely a wish. Finally, target tax rate reductions that reasonably can be expected to reduce revenues.
Rolling the pitch for such a strategy over the next two or three years could generate headroom for a smaller state, lower tax, higher growth tune to be replayed. If we get the right notes in the right order, it could be quite a symphony.
Mark Littlewood is Director of Popular Conservatism.
For those of a free market inclination, the late great Eric Morecambe has become a very useful ally.
In one of his many great comedy skits – in which he is displaying his complete lack of skill as a pianist – he gleefully insists to Ernie Wise that he is “playing all the right notes, but not necessarily in the right order.”
Those of us who still think that Liz Truss and Kwasi Kwarteng were “onto something” when they unveiled their ill-fated 2022 mini-budget now tend to fall back on Eric Morecambe’s line. The sheet music was pretty much perfect but the tinkling of the ivories was so badly executed that people are reluctant to ever hear that tune again.
Let’s put aside for now the external forces which contributed to Truss’s swift demise – such as the Bank of England’s disastrous handling of Liability-Driven Investments, which even their own internal report conceded caused about two thirds of the market turmoil of 2022. Let’s just accept that in the often unfair and brutal world of politics, we can never hope to play that tune that way again.
We should however return to the sheet music. In fact, the parlous performance of our economy and the appalling state of our public finances means we will have to do so. Economic growth needs to be the clarion call – it is the only way out of the fiscal hole we have dug for ourselves.
If growth is your number one priority, you need to be completely honest that other matters must take a back seat. A budget aimed at growth may well benefit the richer 50% of households rather more than the bottom 50%. That’s a “no go area” for those whose real priority is an ever more equal distribution of assets but not for those who want the country to become meaningfully more prosperous in aggregate.
If we are serious about growth as a political choice, we already know broadly how to get it. Taxes need to be on a downwards trajectory and high marginal rates need to be eliminated. Regulation needs to be on a similar pathway. If you want a nation of compliers, keep passing and enforcing rules at the current rate. If you want a nation of producers, do the opposite. Overall government expenditure will have to fall and also change in composition with relatively more spent on investment and considerably less on consumption.
Truss and Kwarteng attempted much of this but perhaps should have done things in a different order and in a different fashion.
The hard, unpopular part of the package – fiscal consolidation – was never compellingly presented as a key plank of the plan. In fact, an enormous energy bailout package was the first major action of the Truss administration. You could argue it was necessary, but it made it extraordinarily difficult to claim spending was going to fall. It is true that had Truss got her way then welfare benefits would have only been uprated only with wage growth (rather than the much higher inflation rate), but it soon became apparent that a large enough tranche of her Conservative colleagues in Parliament were wholly unwilling to countenance such an idea. You can blame Liz Truss’s hubris or the cowardice of a swathe of Tory MPs or a mixture of the two. Whatever your take on it, it was very difficult to see how the then government was going to get expenditure down.
The musical notes that need to be played first are those relating to spending cuts. By 2029, the scale of state spending reductions needed to get the year-on-year finances on an even keel will be truly enormous. Savings of around £200bn per annum will be needed to get towards a balanced budget (something no Chancellor of any stripe has been able to deliver for a quarter of a century). The current position of the Conservatives is that any pound found in cuts will be allocated equally between tax cuts and deficit reduction. This means – all things equal – identifying £400bn in spending reductions to achieve a balanced budget. That entails total public spending falling by about a quarter. No one has come anywhere close to detailing what such savings would look like – they are keener to list the areas they won’t touch (for example, the triple lock) than those that they will.
The next part of the Truss thesis that needs to be re-embraced is placing economic growth (specifically measured as increases GDP per capita) as the overriding policy priority. Although Liz Truss’s words have been copied by Rachel Reeves, mouthing a desire for growth is akin to engaging in a rain dance. It’s not enough to be sympathetic towards growth, you need to make political sacrifices to boost it.
At the very least, a “growth test” needs to be applied to all and any proposed new regulations. No new rules will be brought forward unless it’s clear that the impact on growth will be positive. An exception could be made for imminent threats to national security, but not to other worthy considerations (combatting obesity, “promoting diversity”, getting to carbon net zero etc – if growth really is the top priority it outtrumps these things).
A separate but detailed plan needs to be developed around tackling the stock of red tape, not merely the flow of it. Much, much more law needs to be repealed than passed. Currently, we have the absurdity of a government purporting to want economic growth while rolling out (just in the last few days) plans to ban certain types of tumble dryer and prohibit advertisements for fruit yoghurt on television before 9pm. Every regulation, no matter how insignificant, has a cost.
Finally, we need to revisit Laffer curve arguments.
To some, the mini-budget’s plan to cut the top rate of income tax from 45p to 40p was the last straw that broke the camel’s back. This is despite the fact that it is a rounding error in revenue terms and a good case can be made that revenues could well have increased if this tax reduction had gone ahead. The argument put forward by Truss and her ministers at the time was that this still would have left the UK with a higher top rate than Italy. That’s true, but also unpersuasive. A better approach would to be entirely practical – even predatory – about increasing tax receipts. The case should go something like this, “We want to increase revenues paid into the Exchequer from the rich. It now seems that this could be best achieved by reducing the rate of tax we charge them. This will encourage millionaires to come to – or return to – these shores and potentially strive still harder to increase their incomes. The test of this policy is simple – will revenues increase as a result of this tax reduction? If yes, we will continue on this path. If no, we will reverse the tax cut. We will be monitoring the issue constantly and will report back in 12 months.” A similar case needs to be put for tackling the ludicrous 62% marginal rate that kicks in at £100,000 of income.
The next government will need to revisit the Truss musical notes even if it plays them in a different order. First, detail the major spending reductions and get buy-in from the outset. Second, prove that going for growth is a plan not merely a wish. Finally, target tax rate reductions that reasonably can be expected to reduce revenues.
Rolling the pitch for such a strategy over the next two or three years could generate headroom for a smaller state, lower tax, higher growth tune to be replayed. If we get the right notes in the right order, it could be quite a symphony.