BOLD, FOR SURE – BUT JUST WASN’T MADE FOR THESE TIMES?
Today's emergency financial statement may have lacked the formal designation of a Budget, but in some ways it represents a more significant fiscal and economic event.
Meanwhile the political implications are clear - after twelve years of Conservative dominated government, the new Administration has repudiated much of the UK's economic record since 2010.
The Truss/Kwarteng world-view is clear and uncompromising: an overly large State has been taking far too much in taxes, holding back free enterprise and stunting economic growth. After the triple trauma of the global financial crisis (2008), Brexit (since 2016) and the Covid pandemic (2020/1) a radically new approach to economic management is necessary as a matter of urgency......or at least once businesses and individuals have received one final serving of taxpayer funded largesse courtesy of the energy support package.
This is a long-standing, heartfelt strategic position jointly-held by the now two leading figures in UK politics, who have also been increasingly frustrated from within government, at the failure, as they would see it, to grasp fully the opportunities presented by leaving the regulatory constraints of the European Union.
The headline initiatives set out by the new Chancellor of the Exchequer and designed to turbocharge growth and productivity in the UK economy include accelerated reductions in income tax and stamp duty; a reversal of the National Insurance hikes imposed earlier in the year; a scrapping of planned corporation tax rises as well as radical deregulation in planning, investment zones and free-ports and much else besides. What the measures in this package have in common is a clear break with the fiscal rules under which the Treasury has operated in recent times.
A former constituent of mine before he entered parliament, Kwasi Kwarteng shared many of my economic frustrations during the coalition years. Its much vaunted austerity programme failed after five years of reductions in public expenditure to eliminate the budget deficit; the departmental cuts, however, led to diminished service levels in healthcare, criminal justice and welfare provision whose long shadow looms over us today. Ultra-low interest rates have distorted asset values, heightened inter-generational economic conflict and impeded business investment. As Kwarteng put it to me some years ago, "We've now got the worst of both worlds - we've given austerity a bad name, but not actually achieved it in the public finances."
That simmering discontent lies at the heart of the fixation with achieving rapid economic growth that the government now proposes and in its profound distrust in 'Treasury Orthodoxy'. Simply put, if underlying growth levels can be raised by a percentage point or two, the compound impact on living standards and the public finances will be immense (our national debt is now over three times what it was when the financial crisis hit, a fact disguised by the near zero interest rate regime since then, which has only in recent months begun to unwind).
Needless to say to bear fruit this aggressively pro-growth agenda will take time, the sands of which are running out as the next General Election approaches. Expect to hear more in the months ahead
of the 'long-term growth plan' and - a Thatcher-era throwback - 'taking the necessary medicine' with the implicit recognition that tangible results may be sparsely apparent within the next two years.
Nevertheless for the first time since the Brexit vote, political strategy and tactics between Numbers 10 and 11 Downing Street will be closely aligned. The Truss/Kwarteng partnership is strong, not least as there is a clear understanding that any continuation of the acute Johnson/Sunak or May/Hammond tensions would result in mutually assured destruction of the government. The calculation is also that the clear sense of renewed purpose and direction on the part of the government will buy it the provisional support of the international capital markets after a torrid time for sterling. This may prove optimistic.
The firm emphasis in this statement on growing financial and professional services recognises the importance to the UK economy of this wealth and tax generating sector; it also points to some of the political barriers that lie ahead. Truss and Kwarteng instinctively support the 'Singapore-on-Thames' model of Brexit, yet this has always been at odds with the way leaving the EU was sold to the British public in 2016 and beyond. Assurances of controlled immigration and higher levels of public spending were designed to appeal to the Red Wall voters over the past six years. The deregulatory, supply side revolution that underpins the growth at-all-costs policy now being advanced runs counter to what has happened since we left the EU. Trade barriers have been erected with Britain's nearest, and largest, trading partners with huge new bureaucratic and compliance burdens and costs being imposed upon companies trading with the EU. Labour shortages abound in seasonal work and hospitality where relatively unskilled EU nationals were formerly employed in large numbers and cannot now qualify for visas. Investor confidence and infrastructure development remains subdued as a consequence of continued regulatory uncertainty.
Even those supportive of this buccaneering new economic strategy are concerned that it represents a bold gamble, especially as it will require nerves of steel from a Conservative parliamentary party that remains deeply divided and traumatised by the events of recent months. Whilst this package will delight those Tory MPs who still fervently believe in the free market, small state, low taxation tradition, many of those from the fabled Red Wall take a more protectionist, interventionist, high-spending and levelling-up approach to economic life - in tune with many of their electors who brought them unexpectedly to parliament in recent years.
But in her Ministerial appointments to the Treasury, the Prime Minister has made it clear there is no going back to the way things have traditionally been done.
She and her Chancellor are in essence theoretical free-marketeers. Truss had spells as a management accountant with Shell and economist/policy specialist with Cable & Wireless but by her thirtieth birthday had moved into lobbying and then the think tank world. Kwarteng continued his studies at Cambridge to take a Doctorate in Economic History before a brief spell working in the hedge-fund world and time writing well received history books.
However, the more junior members of the Treasury team are all over the age of 50, having had substantial financial careers, suggesting they will be strong, independent-minded Ministers, willing to stand up to any sign of Treasury 'group-think'.
Andrew Griffith, the Financial Secretary, was Finance Director at Sky for almost 15 years; Richard Fuller (Economic Secretary) spent over two decades as a management consultant and tech investor in Australia and the US before returning to the UK to pursue a political career. Meanwhile the Exchequer Secretary, Felicity (Flicker) Buchan, was a senior banker with JP Morgan and then the Bank of America before becoming an MP in 2019.
No-one will fault the Chancellor in his audacity today and many market professionals support the clear sense of direction and vision in the strategy of the new Administration. However, the acute economic uncertainties, many of which are global in nature, already suggest a bumpy ride for individuals and companies alike in the months ahead without further policy upheaval.
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