Truss channels Thatcher, gets timing wrong

Kwasi Kwarteng is an Eton scholar, went to Harvard and has a Phd in economic history from Cambridge. Surely, he is one of the most economically educated Chancellors we have ever had.

Liz Truss too is no slouch, having worked her way to Oxford from humble beginnings.

So here they are, as Mr Drew points out below, trying to do something about the UK economies performance in a big hurry. For a very long time now, the UK has been sinking back to its post-war status, with socialist policies driving down growth and leading to higher taxes in a cycle of despair. Not since the late 1990’s have pro-market policies been popular or implemented. Blair, Cameron and Boris all worshipped at the NHS cult and in massive state redistribution.

With the large tax cuts seen today, the current leaders are trying to change course. To redress the large tax burden to encourage investment. It is the right approach but the timing is so bad, that they have taken the biggest gamble since Cameron agreed to a Brexit referendum.

With the tax cuts, come no spending cuts. Indeed the energy support offered is enormous and comparable to the Covid state spending madness. Still the socialist grasp on the media and body politic insists that gross spending and help for all is the purpose of Government. This year, with interest rates rising, the pound falling and inflation out of control, we will borrow more than during covid and getting on for 2009/10 levels of borrowing.

The markets are shocked, not believing that the UK won’t  continue to follow the EU orthodoxy of managed decline. However, with massive spending there are no guarantees of success and possible horrendous downside risks. 

Next year super energy bills will finish many businesses. No one is paying £35 for a cod and chips.  The war in Ukraine is likely to escalate not end. Interest rate rises will cause huge problems in the housing market and start to damage bank balance sheets.

This will likely lead to a Schumpterian crisis, one where massive destruction is wrought on our zombie economy with the hope that out of the ashes a leaner, better focused and more profitable one arises. 

The fact that the rest of the West will get this too more or less is not much of a consolation for us. Perhaps the real gamble is that with everything buggered anyway we need to set things up for a recovery on a more pro-growth economic base?

A better approach would have been to sign-post these changes. Agree some cuts to budgets no longer affordable to go with them and so limit the real fiscal easing until next year when inflation should drop (it will when high energy prices are baked in, big drops will occur, even if only back down to 5-6%).

Thatcher had to endure first and my take is that this is the Truss plan. It is her 1981. Risk it now, go for growth and hope something turns up. It is a big gamble, we are left to hope it works. 

Failure will be a hard burden. Massive debt, a pound heavily devalued trying to buy expensive energy valued in strong dollars. Double digit interest rates that will induce a recession worse that 2008 in the real economy with huge unemployment and negative equity a common experience for many of us. Plus a Labour government keen to say it is all the fault of Tory tax cuts, trying to tax our way back to growth.