When Trussonomics arrives, the big winner may well turn out to be Labour | Larry Elliott
smallLiz Truss has been talking nonstop about the need for prime minister since launching his campaign in July Challenging Treasury orthodoxy And run the economy differently. Friday marked the day the conversation ended, and Britain began to get a taste of what Trussonomics really means.
Let’s be clear: Kwasi Kwarteng’s statement to MPs on Friday was not just an ordinary fiscal exercise. Mini budgets don’t really do it justice either. Most full budgets are irrelevant and quickly forgotten. This is really a big deal.
For decades, UK economic policy has been dominated by the need to aggregate government accounts. Margaret Thatcher likened her approach to public finances to that of a housewife seeking to manage her family’s budget. George Osborne has accused Gordon Brown’s government of “maximizing” the nation’s credit cards. Labour has faced relentless questions during its 2019 campaign about how it will fund its spending plans without a magic money tree.
Trussonomics turns it all upside down. The government will borrow heavily to fund not only energy support programs for households and businesses, but also tax cuts. Instead of lowering expectations, Truss has doubled since becoming prime minister. As well as cutting National Insurance premiums and scrapping the corporate tax hike next April, there has been talk of reducing stamp duty and coming up with plans to lower income tax.
Truss and Kwarteng’s message to those asking where the money comes from to pay for the extra spending and tax cuts is that in the end everything will be fine, as the Trussonomics boost to the economy will lead to faster growth and higher revenue coffers.
It’s all reminiscent of the week 91 years ago, when the New Coalition governments abandoned their attempt to keep Britain on the gold standard: after years of high unemployment and austerity it was deemed necessary to defend the pound at all costs. “Nobody told us we could do this,” said a minister in a former Labour government. The same could be said for Friday’s budget.
Some of the arguments made by Truss and Kwarten echo those made by most left-leaning economists during Osborne’s attempt to balance the budget after the global financial crisis in the late 2000s. Then it was also said that the Treasury was too focused on the deficit and needed to focus more on growth. Osborne was warned by his Keynesian critics that spending cuts and tax increases would slow the pace of deficit reduction, which turned out to be true. Make no mistake: the attack on orthodoxy is perfectly justified because insisting on orthodoxy doesn’t work.
In fact, only a right-wing government can think about what Truss is doing. No Labour government has dared to say its economic plan is to boost growth by borrowing hundreds of billions of pounds for fear that financial markets will go into a tailspin. Just as only right-wing Republican President Richard Nixon might have risked advising Beijing in the early 1970s, so an attack on Treasury orthodoxy is easier for self-styled Thatcherists.
However, the intellectual and political climate has changed since Margaret Thatcher came to power amid the energy crisis of the late 1970s. At the time, a strong pound and high inflation made life extremely difficult for British manufacturers, but Mrs Thatcher had no interest in bailout them. Businesses either sink or swim, the strong survive and the weak fail. Thatcher’s intent was to free the nation from the idea that it should be expected to solve all problems.
The idea has not survived the twin crises of the past two and a half years: first the pandemic, now skyrocketing energy bills. The government responded to the first with furloughs and substantial business support, and has now proposed the largest peacetime national economic support package to tackle the second. It was never an option for Truss to let families and businesses do the best they could. The debate in Westminster is not whether the government should intervene in the economy, but how much intervention should be and how it should be funded.
All of this is good news for Labour and the progressive left more generally. First, Trussonomics protected Keir Starmer from claims that his spending plans were reckless or unaffordable. Labour’s tax and spending plans are modest and conservative compared to what Kwarteng will announce on Friday.
What’s more, by challenging the orthodox truss has opened up space for other hitherto taboo ideas. If you can borrow money to fund tax cuts, why not borrow money to increase welfare payments or the Green New Deal?
Trussonomics may help Labour in one final and obvious way. With growth stagnating, inflation near 10%, sterling at a 37-year low, the chancellor has sacked top Treasury officials and decided not to have his “fiscal affair” open to scrutiny by the Independent Budget Responsibility Office. Conservatives in polls China is lagging behind, the time until the next election is very short, and there is a lot of room for things to develop.