4 minutes read
There is no doubt about it. Just three weeks after Liz Truss’ new prime ministership, she and her chancellor are sure to make headlines.
The so-called fiscal event on September 23 was the opening policy of the new government and, to be fair, something that had been much talked about during the summer’s leadership challenge. This was not thrown at any of us: following the leadership debate meant being fully aware of the direction of Liz Truss’s economic policies, while being aware of Rishi Sunak’s well-constructed arguments against it. So, to a certain extent, this shouldn’t surprise anyone.
The reaction of the currency and bond markets was quite predictable
Liz Truss and Kwasi Kwarteng have rightly identified a long-term problem in the UK economy – that of sluggish economic growth and pathetic productivity growth. They also identified a central conservative principle – that of allowing people to keep more of their hard-earned money. With Treasury tax receipts at record highs for generations, tax rates have been much talked about among conservative commentators.
But as the old saying goes, you can be in the right place but at the wrong time.
Kwasi Kwarteng’s mini-budget and broader politics are broadly two different things. On the one hand, there are structural reforms. He is visionary when it comes to ensuring that every single government department deals with the issue of growth. For example, education rightly prepares every child for the opportunities in life. But it’s fair to ask the question: is the economy as a whole getting the skilled labor it needs? The answer may already be yes – but embedding this broader economic value into the department’s work brings the strategy together.
Equally important is making the City of London competitive on a global scale. People may hate bankers, but we benefit from what they do and their taxes fund a lot of public services. But the choice of intervention was strange. Bonus cap removal is more about the balance between base pay and variable pay than total pay. The change enables banks to reduce fixed costs and thus regulatory capital reserves. But, curiously, the bank levy – the 8 percent surcharge banks pay on their corporate income tax – has been reintroduced.
The second common thread of the announcement was of course the increase in liquidity. Taxes have been reduced to some extent for most people. Corporate tax will remain at 19 percent and the promised increase in Social Security will not happen.
The idea behind this is to generate more investment in productive companies. The hope is that companies and successful business people will invest in projects that boost the economy and increase productivity. It’s a worthy idea, but it depends on people and companies doing just that without incentive. There’s no reason why someone who finds they have more cash available shouldn’t invest it in things to buy, for example. True, real estate investments are passive and do not contribute to increasing productivity while creating demand for the real estate market.
Regardless of these questions and observations, the policy is good. And it would almost certainly have been welcome in a period of favorable economic growth and inflation.
So, given that the directive is in the right place, could there be a worse time to introduce it? Probably, but it would always be difficult to pursue a policy of fiscal easing in a period of anti-inflationary monetary tightening. Tensions between the Treasury and the Bank of England can only lead to aggressive rate hikes.
The reaction of the currency and bond markets was quite predictable. Perhaps less predictable was the intervention of the International Monetary Fund. Far better considering where we are in the economic cycle (high inflation, energy crisis and a likely recession by the time we get out of Covid). An explanation of the structural changes – including helping households deal with the energy price crisis – and a token tax gesture (1p on the base price) would have been enough. Importantly, it would have presented a great opportunity to roll the field for future growth momentum in a future period of steady but lackluster economic performance.
Many people across the country are afraid of the future. You are in this position because of a well-intentioned but ill-timed fiscal intervention. We all want this to work as planned.
Mark Garnier is the Conservative MP for Wyre Forest.
Get a glimpse of what MEPs and colleagues are talking about. Sign up for the House’s morning email for the latest insights and reactions from parliamentarians, policymakers and organizations.