Boosting economic growth is a worthy idea – but the Chancellor’s plan was always ill-fated
There’s no doubt about it. Just three weeks into Liz Truss’s new premiership, she and her Chancellor are certainly hogging the headlines.
The so-called fiscal event on the 23 September was the opening policy of the new administration and, to be fair, something that had been much talked about during the leadership challenge of the summer. This was not something that was bounced on any of us: to have followed the leadership debate was to be fully aware of the direction of travel of Liz Truss’s economic policy, whilst being fully aware of Rishi Sunak’s well-constructed arguments against it. So, to a certain extent, none of this should be a surprise to anyone.
The reaction of the currency and bond markets was entirely predictable
Liz Truss and Kwasi Kwarteng have rightly identified a long-term problem within the United Kingdom economy – that of sluggish economic growth, and pitiful productivity growth. They have also identified a key Conservative principle – that of allowing people to keep more of their hard-earned cash. With Treasury tax revenues at record generational highs, tax rates have been much talked about amongst Conservative commentators.
But as the old saying goes, you can be at the right place, but at the wrong time.
Kwasi Kwarteng’s mini-Budget and wider policy, broadly speaking, is twofold. On the one hand, it looks at structural reform. He is visionary in seeking that each and every government department addresses the issue of growth. For example, education rightly prepares every child for life’s opportunities. But it is fair to ask the question: is the wider economy getting the qualified workers it needs? The answer may already be yes – but embedding that wider economic value in the work of the department brings together the strategy.
Similarly, seeking to make the City of London competitive on the global stage is important. People may hate bankers, but we benefit from what they do, and their taxes pay for an awful lot of public services. But the choice of intervention was odd. Removing the bonus cap is more about the ratio between base and variable remuneration than it is about overall pay. The change will allow banks to reduce fixed costs and therefore regulatory capital reserves. But, curiously, the bank levy – the 8 per cent surcharge banks pay on their corporation tax – has been reintroduced.
The second thread of the announcement was, of course, the increase in liquidity. Taxes have been cut for most people, to one degree or another. Corporation tax will stay at 19 per cent and the promised hike in National Insurance will not happen.
The thinking behind this is to generate more investment into productive enterprise. The hope is that businesses and successful business people will invest into projects that increase the economy and boost productivity. It is a worthy idea, but it does rely on people and businesses to do just that without incentive. There is no reason why someone finding they have more available money won’t invest it in, for example, buy-to-let properties. Whilst it provides demand for the property market, property investment is passive and does nothing to grow productivity.
Notwithstanding these questions and observations, the policy is good. And it would have almost certainly be welcomed at a time of benign economic growth and inflation.
So, given the policy is in the right place, could there be a worse time to introduce it? Probably, but it was always going to be tough adopting a policy of fiscal loosening at a time of counter inflationary monetary tightening. The tension between the Treasury and the Bank of England can only result in aggressive hiking of interest rates.
The reaction of the currency and bond markets was entirely predictable. Perhaps less predictable was the intervention from the International Monetary Fund. Far better, given where we are in the economic cycle (high inflation, the energy crisis and a probable recession as we come out of Covid). A statement delivering the structural changes – including support for households to cope with the energy price crisis – and a token tax gesture (1p off the basic rate) would have been enough. Importantly, it would have given a terrific opportunity to roll the pitch for future growth stimuli at a future time of steady, but lacklustre economic performance.
A lot of people across the country are frightened of the future. They 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.
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