One year on, three big calls that Liz Truss got right
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The all too brief premiership of Liz Truss began a year ago this week. The first anniversary is another good chance to reflect not just on what went wrong, but also on what she got right. As a supporter of “Trussonomics”, I feel responsible as well.
There were two big mistakes. One was to underestimate both the jumpiness in global financial markets and the naked hostility of much of the economics and political establishment to what Truss was trying to do. These fed into each other. It is no surprise that the pound fell, and borrowing costs rose, when leading commentators were suggesting that the UK was behaving like an emerging market.
It did not help either that a significant minority of Conservative MPs were being so publicly critical of Truss’s agenda, undermining her ability to claim an effective majority for her plans in Parliament.
The second mistake was that sensible policies were badly communicated and, in some cases, rushed through. For example, the abolition of the 45p rate of income tax was a sound supply-side reform. It would have encouraged investment and enterprise at little if any cost to the Treasury. Nonetheless, its unexpected inclusion in the September mini-Budget rattled the markets further and the political optics were poor.
But many other criticisms of the mini-Budget were overdone. By far the largest part of the package was simply delivering on commitments that had already been made – notably the essential support with energy bills and the cancellation of the damaging increases in National Insurance and corporation taxes.
There was nothing here that should have triggered a market crisis. Indeed, the initial response from business groups and many economic forecasters, notably The National Institute of Economic and Social Research (NIESR), was favourable.
Much has also been made of the fact that the mini-Budget was not accompanied by a full set of economic and fiscal forecasts from the Office for Budget Responsibility (OBR). But the announcement of the £70bn Covid furlough scheme was not accompanied by a full set of forecasts either.
Crucially, the OBR’s role is to assess whether the Government is on course to hit its fiscal targets. It therefore made sense to wait a little longer to incorporate the spending decisions in the Medium-Term Fiscal Plan. In the meantime, the individual policy announcements in the mini-Budget were costed as usual (although, also as usual, the figures were too pessimistic).
More positively, there were at least three big calls that Liz Truss got right.
First, she put growing the economy at the heart of policymaking, including by setting an ambitious target of 2.5pc for annual growth. Even the Labour Party has now adopted something similar with its pledge to “secure the highest sustained growth in the G7”.
Of course, Truss’s vision of how to achieve this was (and is) rather different from Labour’s. Her intention was to reverse the drift towards a higher-tax, higher-spend economy, hamstrung by increasing regulation and state intervention.
Central to this was a set of bold supply-side reforms - The Growth Plan - of which the cancellation of the harmful tax increases was just one part. Priority areas for reform included financial services, business deregulation, housing and planning, immigration, mobile and broadband infrastructure, food and farming, childcare, and energy security.
Many of these ideas have been carried forward, albeit in rather diluted form, but others have fallen by the wayside.
Regrettably, the Government has pressed ahead with the hike in corporation tax at a time when our competitors (notably Germany and France) are looking to reduce the burden on their businesses.
There is also mounting evidence of the harm that the windfall tax is doing to investment in the energy sector. The IR35 rules continue to hamper small businesses, while the VAT regime is an extra burden on the tourist industry.
Second, Truss was right to criticise the existing fiscal framework, where decisions are made on the basis of flawed OBR analysis and forecasts. These fail to take enough account of the wider impacts of changes in taxes and in spending, reducing policy to the level of bean counting.
Truss warned of a doom loop of higher taxes, weak growth, higher welfare spending, deteriorating forecasts for the public finances, and ever higher taxes. She was surely right in this too.
This is part of the thinking behind the establishment of The Growth Commission – an international group of economists, initially brought together by Truss, of which I am a member. We intend to take a broader view of the problems holding back productivity and growth across the Western world.
A key part of this work will be the development of dynamic models that give a more complete picture of the economic effects of policy changes. The Commission will also draw lessons from what works (and what doesn’t) in other countries.
Third, Truss recognised early on that monetary policy had been too loose for too long and, in particular, that interest rates would have to return to more sustainable levels to bring inflation back down. During the leadership campaign she called for the Government to lengthen the maturity of its borrowing to lock in low rates, and made some criticisms of the Bank of England which now seem relatively mild.
It is therefore ironic that the markets’ own reassessment of the outlook for interest rates played such a key role in sinking her premiership.
Truss was unfairly blamed both for what was in fact a global reset of monetary policy and for the fallout from the UK’s liability-driven investment (LDI) crisis, which exposed a fundamental problem at the heart of our pensions industry. The Bank of England, Treasury and other regulators should have been on top of this. But “Trussonomics” was a convenient scapegoat.
Indeed, borrowing costs are now even higher than they were in the wake of the mini-Budget, despite the so-called grown-ups being back in charge. This is not just in the UK either. US mortgage rates are at their highest since 2001.
Unfortunately, the UK has not yet embraced the pro-growth, free-market policies that are even more urgently needed as the era of cheap money finally ends.
Rishi Sunak and Jeremy Hunt may still prove to be the tortoises that win this race. Liz Truss and Kwasi Kwarteng were perhaps the hares who tried to do too much, too quickly.
But in the meantime, we need more people who are willing to challenge Treasury orthodoxy and the groupthink that grips the economics establishment. No one can now doubt how difficult that is.
Julian Jessop (@julianhjessop) is an independent economist. Roger Bootle is away.
