Since launching her bid to be prime minister in July, Liz Truss has talked non-stop about the need to challenge Treasury orthodoxy and run the economy differently. Friday marks the day when the talking ends and Britain gets a taste of what Trussonomics actually means.
Let’s be clear: Kwasi Kwarteng’s statement to MPs on Friday is much more than a run-of-the-mill fiscal event. Mini budget doesn’t really do it justice either. Most full-blown budgets matter little and are quickly forgotten. This one is a very big deal indeed.
For decades economic policy in Britain has been dominated by the idea that the government’s books need to add up. Margaret Thatcher likened her approach to the public finances to that of a housewife seeking to manage a household budget. George Osborne accused Gordon Brown’s government of “maxing out” on the nation’s credit card. Labour faced relentless questioning during the 2019 election campaign about how – in the absence of a magic money tree – it would finance its spending plans.
Trussonomics turns all this on its head. The government will borrow big, not just to finance energy support schemes for households and businesses but also for tax cuts. Far from dampening expectations since becoming prime minister, Truss has doubled down. In addition to the cuts in national insurance contributions and the scrapping of next April’s rise in corporation tax, there has been talk of lowering stamp duty and bringing forward plans to reduce income tax.
Truss and Kwarteng’s message to those querying where the money is coming from to pay for the extra spending and tax cuts is that everything will work out well in the end because the boost provided to the economy by Trussonomics will lead to faster growth and higher revenues for the exchequer.
It is all rather reminiscent of the moment – 91 years ago this week – when the new coalition National government abandoned attempts to keep Britain on the gold standard: a massive U-turn after years of high unemployment and austerity deemed necessary to defend the pound at all costs. One minister in the previous Labour government said: “Nobody told us we could do that.” The same could well be said of Friday’s budget.
Some of the arguments deployed by Truss and Kwarteng echo those made by mostly left-leaning economists during Osborne’s attempts to balance the budget after the global financial crisis of the late 2000s. Then too it was said the Treasury was obsessing too much over the deficit and needed to pay more attention to growth. Osborne was warned by his Keynesian critics that spending cuts and tax increases would make deficit reduction slower, as indeed proved to be the case. No question: attacks on the orthodoxy are fully justified because sticking to the orthodoxy hasn’t worked.
In reality, only a government of the right could contemplate what Truss is doing. No Labour administration would dare say its economic plan was to boost growth by borrowing hundreds of billions of pounds, for fear that the financial markets would throw a hissy fit. Just as only a rightwing Republican president, Richard Nixon, could risk making overtures to Beijing in the early 1970s, so the attack on Treasury orthodoxy is easier for a self-styled Thatcherite.
Yet, the intellectual and political climate has changed since Thatcher came to power during a previous energy crisis in the late 1970s. Back then, a strong pound and high inflation were making life hellishly difficult for Britain’s manufacturers but Thatcher showed scant interest in bailing them out. Firms were left to sink or swim, with the strong surviving and the weak going out of business. Thatcher’s intention was to wean the country off the idea that the state should be expected to solve every problem.
That philosophy has not survived the double-pronged crisis of the past two and a half years: first a pandemic and now rocketing energy bills. The government responded to the first with the furlough and a raft of business support, and has now come up with the biggest package of state support for the economy in peacetime to deal with the second. Leaving households and businesses to cope as best they could was never an option for Truss. The argument at Westminster is not about whether there should be government intervention in the economy, but how big the intervention should be and how it should be funded.
All of which is good news for Labour and for the progressive left more generally. For a start, Trussonomics shields Keir Starmer from claims that his spending plans are reckless or unaffordable. In contrast to what Kwarteng will announce on Friday, Labour’s tax and spending plans are modest and conservative.
What’s more, by challenging the orthodoxy Truss has carved out the space for other hitherto taboo ideas. If it is possible to borrow to fund tax cuts, then why not borrow to increase welfare payment or for a green new deal?
There is one final – and obvious – way in which Trussonomics might be helpful to Labour. Growth has stalled, inflation is close to 10%, the pound is at a 37-year low, the chancellor has sacked the Treasury’s top mandarin and has decided not to subject his “fiscal event” to the scrutiny of the independent Office for Budget Responsibility. The Conservatives are behind in the polls, time is short before the next election, and there is plenty of scope for things to go horribly wrong.
Larry Elliott is the Guardian’s economics editor