sSince Liz Truss launched her bid to become prime minister in July, she has spoken non-stop about the need to challenge the orthodoxy of the treasury and run the economy differently. Friday marks the day when the talk ends and Britain gets a taste of what Trussonnomics actually means.
Let’s be clear: Kwasi Kwarteng’s statement to parliamentarians on Friday is much more than a run-of-the-mill fiscal event. Mini budget doesn’t do it justice either. Most full budgets matter little and are easily forgotten. This one is indeed a very big problem.
For decades, economic policy in Britain has been dominated by the idea that government books must be right. Margaret Thatcher compared her approach to public finances to that of a housewife trying to manage a household budget. George Osborne accused Gordon Brown’s government of “maximizing use” of the country’s credit card. Labor was relentlessly questioned during the 2019 election campaign about how – in the absence of a magic money tree – it would fund its spending plans.
Trussonomics turns all of this on its head. The government is going to borrow a lot, not only to finance energy support schemes for households and companies, but also for tax cuts. Rather than dampen expectations since he became prime minister, Truss has doubled down. In addition to the reduction in national insurance contributions and the cancellation of the corporate tax increase in April, there has been a reduction in stamp duty and the promotion of plans to lower income tax.
Truss and Kwarteng’s message to those wondering where the money is coming from to pay for the extra spending and tax cuts is that everything will work out in the end, because the boost Trussonomics gives the economy will lead to faster growth and higher revenues for the economy. the treasury.
It’s all quite reminiscent of the moment – 91 years ago this week – when the new coalition National Government gave up on trying to keep Britain on the gold standard: a massive turnaround after years of high unemployment and austerity measures deemed necessary. to defend the pound at all costs. A minister in the previous Labor government said: “No one told us we could do that.” The same could be said of Friday’s budget.
Some of Truss and Kwarteng’s arguments are consistent with those of mainly left-wing economists during Osborne’s efforts to balance the budget after the global financial crisis of the late 2000s. Even then, the Treasury was said to be over-obsessed. due to the shortage and had to pay more attention to growth. Osborne was warned by his Keynesian critics that austerity and tax increases would delay the reduction of the deficit, which indeed turned out to be the case. No doubt about it: attacks on orthodoxy are fully justified because sticking to orthodoxy has not worked.
In reality, only a right-wing government could think about what Truss is doing. No Labor government would dare say its economic plan was to boost growth by borrowing hundreds of billions of pounds for fear that the financial markets would suffer a hissing attack. Just as only a right-wing Republican president, Richard Nixon, could risk rapprochement with Beijing in the early 1970s, so the assault on treasury orthodoxy is easier for a self-proclaimed Thatcherite.
Yet the intellectual and political climate has changed since Thatcher came to power during an earlier energy crisis in the late 1970s. At the time, a strong pound and high inflation made life terribly difficult for British manufacturers, but Thatcher showed little interest in saving them. Companies were left to sink or swim, with the strong survivors and the weak going bankrupt. Thatcher’s intent was to distract the country from the idea that the state should be expected to solve every problem.
That philosophy has not survived the two-pronged crisis of the past two and a half years: first a pandemic and now skyrocketing energy bills. The government responded to the first with leave and a series of business aids, and has now devised the largest peacetime state aid package to the economy to tackle the second. Coping with households and businesses to the best of their ability was never an option for Truss. The argument in Westminster is not about whether there should be government intervention in the economy, but about how large the intervention should be and how it should be financed.
This is all good news for Labor and for the liberal left in general. For starters, Trussonnomics protects Keir Starmer from claims that his spending plans are reckless or unaffordable. Contrary to what Kwarteng will announce Friday, Labor’s tax and spending plans are modest and conservative.
Moreover, by challenging orthodoxy, Truss has freed up space for other hitherto taboo ideas. If it’s possible to borrow to fund tax cuts, why not borrow to increase distribution or for a green new deal?
There is one final – and obvious – way Trussonnomics can help Labour. Growth has stalled, inflation is close to 10%, the pound is at its 37-year low, the chancellor has fired 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 trailing in the polls, the time is short for the next election and there is plenty of room for things to go horribly wrong.