Ssince launching her bid for prime minister in July, Liz Truss has spoken non-stop about the need to a challenge to the authenticity of the Treasury and manage the economy differently. Friday marks the day the conversation ends and Britain gets a taste of what Trussonomics really means.
To be clear: Kwasi Kwarteng’s statement to MPs on Friday is much more than just a fiscal event. Even a small budget is not suitable. Most of the full budget matters little and is quickly forgotten. This is a really big deal.
For decades, economic policy in Britain was dominated by the idea that the government’s books had to be added up. Margaret Thatcher compared her approach to public finances to that of a housewife who wants to manage her household budget. George Osborne has accused Gordon Brown’s government of “maxing out” the National Credit Card. Labor faced relentless scrutiny during the 2019 election campaign about how – in the absence of a magic money tree – it would fund its spending plans.
Trusonomics turns all this on its head. The government will lend large loans, not only to finance energy support schemes for households and businesses, but also to reduce taxes. Far from toning down expectations since becoming Prime Minister, Truss has doubled down. In addition to the reduction in national insurance contributions and the scrapping of the increase in corporation tax in April, there was talk of a reduction in customs duty and the presentation of plans to reduce income tax.
The message from Truss and Kwarteng to those wondering where the money is coming from to pay for the extra spending and tax cuts is that it will all work out in the end because the boost Trusonomics provides to the economy will lead to faster growth and more revenue for the coffers.
It’s all rather reminiscent of the moment – 91 years ago this week – when the new coalition Nationals government gave up trying to keep Britain on the gold standard: a massive U-turn after years of high unemployment and austerity seen as necessary to defend the pound at all costs . One minister in the previous Labor government said: “No one told us we could do this.” The same could be said for Friday’s budget.
Some of the arguments put forward by Truss and Kwarteng echo those made by mainly left-leaning economists during Osborne’s attempts to balance the budget after the global financial crisis of the late 2000s. At the time, it was also said that the Treasury was too obsessed with the deficit and needed to pay more attention to growth. Osborne was warned by his Keynesian critics that spending cuts and tax increases would slow down deficit reduction, and it proved to be the case. There is no doubt: the attacks on Orthodoxy are completely justified because the adherence to Orthodoxy has failed.
In reality, only a right-wing government can think about what Truss is doing. No Labor administration would dare say its economic plan was to boost growth by borrowing hundreds of billions of pounds, for fear of sending the financial markets into a frenzy. Just as only a right-wing Republican president, Richard Nixon, could risk venturing into Beijing in the early 1970s, so attacking the Treasury’s orthodoxy is easier for the self-styled Thatcherite.
However, the intellectual and political climate has changed since Thatcher came to power during the previous energy crisis of the late 1970s. Back then, the strong pound and high inflation made life hellishly difficult for British manufacturers, but Thatcher showed little interest in saving them. Firms were left to sink or swim, with the strong surviving and the weak going out of business. Thatcher’s intention was to wean the country off the idea that the state was expected to solve every problem.
That philosophy has not survived the twin crises of the past two and a half years: first the pandemic, and now rising energy bills. The government responded to the first with an absence and a bunch of business support, and now it has come up with the largest package of state support for the economy in peacetime to deal with the second. Leaving households and businesses to fend for themselves as best they could was never an option for Truss. The argument in Westminster is not about whether there should be government intervention in the economy, but how big the intervention should be and how it should be financed.
This is all good news for Labor and the progressive left in general. For starters, Trusonomics protects Keir Starmer from claims that his spending plans are reckless or unaffordable. In contrast to what Kwarteng will announce on Friday, Labour’s tax and spending plans are modest and conservative.
Moreover, by challenging orthodoxy, Truss opened up space for other hitherto taboo ideas. If it is possible to borrow to finance tax cuts, then why not borrow to increase welfare or the Green New Deal?
There is one final – and obvious – way in which Trusonomics could be of help to Labour. Growth has stalled, inflation is close to 10%, the pound is at its lowest level in 37 years, the chancellor fired the Treasury’s top mandarin and decided not to subject her “fiscal event” to the scrutiny of the independent Office for Budget Responsibility. The Conservatives are trailing in the polls, there is little time until the next election, and there is plenty of room for things to go horribly wrong.