• Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Voices: Trussonomics is an extension of Boris Johnson’s cakeism and will end in tears

·6-min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

I must admit that part of me, the journalistic part, can’t wait for Liz Truss to become prime minister. As we hacks always say, she makes for good copy. As we also say nowadays, she’s good for traffic. It’s a rather childish, shameful thing, because millions of lives will be made worse through her disastrous policies, so the better, more honourable part of me hopes she won’t get anywhere near power. But I may as well be honest and declare the vested interest.

To put things at their simplest: Liz Truss’s ideas will crash the economy. Trussonomics, as we might soon learn to call it, will impoverish the country. She will cut taxes, recklessly, just as inflation is rising. It will have dire consequences, the precise extent and nature of which are difficult to predict. In a worst-case scenario, with rising borrowing, debts and a sterling crisis, we might have to go begging to the IMF, because that’s what an outsized national debt in a world of high interest rates can mean.

And if she’s really as Eurosceptic as she makes out, and she’s serious about the Northern Ireland Protocol Bill and unilaterally breaking the EU-UK free-trade agreement, we’ll also have a trade war with our largest export market and source of supply for trade and industry. “Disaster” doesn’t come close.

Everyone seems to want to invoke Margaret Thatcher these days – Liz Truss even dresses up like her. But Thatcher would have thought Ms Truss’s policies bizarre, if not immoral. Ms Truss’s close friend, campaign manager and probable future chancellor, Kwasi Kwarteng, wrote a good book about the early period of Mrs Thatcher’s premiership, called Thatcher’s Trial. In it he recounts how Mrs Thatcher put beating inflation ahead of tax cuts.

Mr Kwarteng quotes Mrs Thatcher at the time: “One of the most immoral things you can do is pose as the moral politician demanding more for health, for education, for industry, more housing, more everything, and then say: ‘No, I didn’t mean you pay tax to pay for it; I meant you have to borrow more…’.”

It’s true, for example, that Mrs Thatcher immediately cut income tax rates on coming to power in 1979, but she also nearly doubled the standard rate of VAT, from 8 per cent to 15 per cent. Soon after that she broke the link between pensions and earnings, and her chancellor, Geoffrey Howe, ramped up interest rates and set unemployment off on a rising trend until it hit three million. It wasn’t popular, but it did get inflation down.

Thatcher was a balanced-budget, sound money right-winger, as Rishi Sunak is now; Ms Truss is more like a Ronald Reagan, placing great faith in the “Laffer curve”, praying that lower tax rates will yield higher revenues to make tax cuts self-financing. It wasn’t all that convincing even at the time, and Mr Reagan ran huge federal and trade deficits – but with the status of the dollar to underwrite them.

But let’s give her the benefit of the doubt for a moment.

Trussonomics, then, goes like this: Britain’s immediate inflation problem is a lack of supply (this is true). Therefore we need to make the economy more productive and efficient (this is also true). One way to do this is supply side reform, including tax cuts to improve incentives and encourage enterprise, and corporation tax cuts to prompt investment (this can be correct, at least in principle).

But here are the multiple problems with that argument. Any increase in investment, entrepreneurship and productivity would take months if not years to feed through, but in the meantime the British economy’s accelerating inflation rate will also inflate the cost base, render firms uncompetitive and, once embedded in the labour market, would take much harsher measures to squeeze out. Tax cuts would be cancelled out for many by even more rapid increases in prices and the cost of living, exacerbated by the depreciating pound. If Ms Truss allows the Bank of England to continue to be operationally independent, it will have to ramp up rates to take the excess spending power unleashed by the Truss tax cuts.

The boost to demand from tax cuts will have to be extracted by an equivalent hike in mortgage and credit card bills and business borrowing costs and, more than likely, will produce a mini-housing crash. Consumer and business confidence will be shredded. It would take money out of the pockets of workers with larger mortgages and modest incomes, and into the hands of older, richer people with small mortgages and larger savings.

Ms Truss argues that, although the British national debt is high, it isn’t as high in relation to national income as some other countries – the US, Japan, Canada. But there are important reasons why. America enjoys the “exorbitant privilege” of having the world’s reserve currency – the American dollar – and can spend far more money without ever being cashed in. Japan has tried to get itself out of deflation for decades by borrowing, and to little effect – its high public debt is a sign of failure. Canada enjoys a resource-rich economy and it accounts for public sector pension liabilities in a different way.

To keep up to speed with all the latest opinions and comment, sign up to our free weekly Voices Dispatches newsletter by clicking here

In any case, the extent to which any nation can live beyond its means depends on foreigners lending it the money to cover its trade and/or budget deficits. In the UK, both of them are growing. Their willingness to lend is dependent on the interest they get, to cover the risk they won’t get their money back. If an economy is dynamic and fast-growing – an emerging market in east Asia, say – it will be forthcoming. In a steadily growing and mature economy with modest outgoings and low inflation, such as Switzerland, occasional funding needs can be met. Britain, post-Brexit and on the brink of an EU trade war and uncontrollable national debt? Not so much.

So right now it is just plain wrong to tell people that they can pocket big tax cuts with no consequences because we can just borrow it and spend as much, or even more, on public services because the Truss-Kwarteng dash for growth will soon pay for itself. I doubt they even believe in it themselves – they just want to dress up Tory prejudice in respectable-sounding economic jargon.

The truth about the long span of the Thatcher-Major years, indeed stretching into the New Labour era, is that Britain’s economic revival was based on certain factors, all now missing. The first was the establishment of a low-inflation expectations economy, which took two sharp recessions (1980-81 and 1990-91) to finally achieve. We’re now going backwards on that. The second was deregulation, liberalisation of markets, trade union reform and privatisation. There was huge scope for that in 1979, and private finance initiatives were greatly extended in the 1990s and 2000s.

Now, though, there’s far less scope, and some of those ideas (such as rail privatisation) are out of fashion. Third was the EU single market project. No further comment about that. And the fourth was the immigration of labour from the EU, which boosted growth. Again, that’s now over and has given us labour shortages.

It is hard, in other words, to see what Trussonomics actually amounts to, or where it fits into the Tory tradition. It’s really cakeism, the extension of Boris Johnson’s economic fantasy island by others. It’s deception. It’s immoral. It will end in tears.

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting