Captain Obvious strikes: they just should not have been in such a rush

Imagine you are a principled, small-state Conservative, and suddenly in September 2022 you are given your chance. What would have been the RIGHT way to go about it?

Let’s list some of the flinty but respectable views you hold.

  1. Growth: you think growth has been disappointing, and that forecasts for growth might legitimately be raised, with the right policies
  2. Tax: You always telegraph* how much you hate tax! Hate it! It is a moral thing. But you also have very firm views on how marginal tax rates are THE key variable in determining incentives to work, to work hard, and to invest
  3. Public spending. You don’t like it. See 2. But you also understand that public services are important, to voters above all. You are fairly tired of people telling you that these services will invariably become more expensive over time (cost disease, growing demand, a pampered sense that we deserve more and more every year) and think that actual, determined reform can address that.
  4. Regulation. It is often pointless, impedes economic activity and impinges on freedom.  Plus you have read your Mancur Olson and similar, and know that cancerous special interests can deploy concentrated political power to fix regulation into the system, for their own interests. In particular …
  5. Planning rules. Are the absolute worst.  Land is and forever will be one of the major inputs to the economic process, as well as a vital “good” for a decent life.  The way its supply is captured by insider interests is the economic-rent-seeking story of our age.  Fix that and good things follow.

Nothing wrong with that lot! Reasonable minds can differ on the matter of degree. I really don’t like 3, and by implication 2, for example.

Anyway, now you are sitting in Downing Street, day one, and a briefing from the Orthodox Civil Service team awaits you, to give you some sense of your options, and a historical recap.  Key points

  1. Public services. When Covid started finally to ebb, in 2021, the previous Chancellor raised future taxes and then carried out what felt like a generous spending review, funded by those taxes. Covid had generated backlogs and deficits throughout the system, hopefully addressed by this generosity. Later on, extra billions were raised through a 1.25ppts surcharge on NICs to relieve health and social care pressures.
  2. Cost of living. Even in the Spring, cost of living pressures were forecast to be extreme over the next 12-24 months.  Soaring energy bills caused by the spike in gas prices (the fault of Putin) meant a huge amount of further pain, if more action is not taken
  3. Economic confidence. Is wobbly.  Rates are rising everywhere in the world as central banks try to grapple with an unfamiliar conjunction of fast-rising nominal wages and prices, very weak consumer confidence, significant business uncertainty about future costs, and different economic blocs moving to different rhythms.  Rates are rising and mortgages already becoming much more expensive.
  4. Inflation kicker: the extra money announced for public services has been totally eroded by inflation, to the tune of £18bn.  Although revenues can benefit somewhat from inflation (through higher incomes), a lot of UK debt is index-linked, bringing an automatic spike in debt-interest costs. Whatever fiscal room we thought we had in March is now probably less.

You read all this conscious that everyone else thinks you hold a sixth view:

6. You believe in “sound money”. This is not well-defined, but has to mean a combination of: fiscal plans that do not spiral out of control; an independent monetary policy that does not have to be distorted by Treasury borrowing; a sedulous attention to the sentiment of the markets to your ideas.

And so what do you do?

Polly Toynbee has a neat phrase for the approach Truss and Kwarteng actually took: “Impossibilism …– to demand the impossible to break the system”.  An idea of Trotsky’s, apparently.  In this case, open a future deficit so large that the current spending commitments, implicit or not, just cannot be afforded.  It sounds similar to the Republicans’ perma-tactic, “Starve the Beast”. Alan Greenspan said the quiet bit out loud, according to Wikipedia. “”Let us remember that the basic purpose of any tax cut program in today’s environment is to reduce the momentum of expenditure growth by restraining the amount of revenue available and trust that there is a political limit to deficit spending.”

We know how it has ended.  The limit is not directly political, but market-financial.

Could they have delivered it? In my view, it was possible, but not through the starve-the-beast approach. Trying to start with the tax cuts and hope that this generates the growth to cover the rest is like a drowning man trying to save himself by pulling upwards on his boot-strings. The British won’t put up with you actually drowning the economy.  

The correct order would have been: first fix the immediate crises in public spending and living standards; then take your time delivering properly the smart public spending reforms and growth-boosting deregulations, and only then, when these can be credibly shown to be working, cut the taxes. If the reforms work, you have earned that space to cut the taxes. If they haven’t, then you don’t have the foundation upon which your tax-cutting aim was meant to be built.

I doubt it would have worked – I have explained elsewhere why I think planning reforms and tweaks to corporate taxes do not deliver that much growth, that fast. The irony is that I can imagine some of these reforms eventually happening – ideas like easier planning rules, and full expensing of capital investment – under a future government willing to take it slow. It will probably be a Labour one.

*see what I did

Published by freethinkingeconomist

I'm former special adviser (Downing Street 2017-19, BIS from 2010-14), former FT leader writer and Lex Columnist, former financial dealer (?) at IG, student of economic history, PPE like the rest of them, etc, and formerly in my mid-40s. This blog has large gaps for obvious reasons. The name is dumb - the CentreForum think tank blog was called Freethink, I adapted that, we are stuck now.

One thought on “Captain Obvious strikes: they just should not have been in such a rush

  1. Do we want growth or a planet to live on? The growth is raping the planet of resources. Never ending growth will lead to less and less raw materials for that growth. I am not against growth but the human race needs to slow down with its destruction of the Earths resources.Other ways need to be found to develop growth or we will end up in a new stone age.

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