The economic consequences of Liz Truss

The country is returning to a more normal life. But it will not be that normal. Liz Truss will see to that.

On Friday, Kwasi Kwarteng, chancellor of the exchequer, will follow up his emergency energy package with a mini-Budget. The latter is expected to reverse the rise in national insurance contributions and stop a planned increase in corporation tax. It will also set a target of annual growth at 2.5 per cent. Should we take that seriously? No and yes. No, because the idea that the government of a market economy can meet a growth target is ridiculous. Yes, because it will guide policy. The question is whether it will guide it for good or bad. My bet is on the latter.

Neither Hayek nor Friedman would have thought a growth target at all sensible. That is planning. Hayek would rightly insist we have neither the knowledge nor tools to deliver one. In Britannia Unchained, published in 2012 (two of whose authors were Kwarteng and Truss), Brazil was proposed as a model. Ten years later, that looks silly.

A growth target is not just unworkable, but a danger. Suppose Kwarteng tells the Treasury and Office for Budget Responsibility they must assume this target in their forecasts (if they are allowed to make any.) If he is wrong, deteriorating public finances could generate a crisis of confidence, as happened in the 1970s. He seems to dismiss such worries as mere “managerialism”.

So, let us put the target to one side and consider policy. Truss says “the economic debate for the past 20 years has been dominated by discussions about distribution.” Yet, says the OECD, the UK has, after the US, the highest inequality in the distribution of household disposable incomes of all high-income countries. Nor were George Osborne’s post-crisis austerity policies at all concerned with “distribution”. Her view of the UK’s past debate is a red herring.

We need to recognise instead that 40 years on, Thatcherism is a zombie idea, for two opposing reasons — both what was achieved and what was not.

Thatcher did liberalise labour markets, curb trade unions, privatise nationalised industries and slash top tax rates. Her policies (which included promotion of the EU’s single market), as well as those of later governments, also strengthened competition in product markets. Overall, today’s UK is a low-tax country, by the standards of other high-income economies. It has a deregulated economy, in which the successful are well rewarded, but those who do less well are penalised. Such Thatcherite aims then are now a reality.

What then did Thatcher and those who followed her fail to achieve? They did not liberalise the biggest distortion in the economy, which is land use. They did not transform the skills of the population, which has been made harder by the conditions in which many children grow up. They failed to address defects in corporate governance, which bias spending against investment. They allowed the search for safety in corporate pensions to shift portfolios away from the supply of risk capital to business to ownership of government bonds. This in effect turned the plans into state-backed pay-as-you-go schemes.

In all, economic performance has not been durably transformed for the better. In 2019, output per hour worked in the UK was much the same, relative to France and Germany, as it had been in 1979. Above all, productivity has stagnated since the financial crisis. Investment is the lowest as a share of GDP of all big high-income countries. Business investment has remained below its peak in real terms since the Brexit referendum. The previous implosion of the financial sector under “light touch regulation” did not help. Nor did post-crisis austerity or the folly of Brexit itself. The uncertainty alone is bad for confidence and so for investment

The idea that further tax cuts and deregulation (such as lifting the cap on bankers’ bonuses) will transform this performance is a fantasy. What is simple has already been done. What is left is hard to do. To take one example: higher investment requires higher savings. From where are these to come? There are also the linked complexities of climate change and energy. Moreover, the evidence is that both better economic performance and political stability may depend on lower inequality, not still more than the country has today.

The Truss government is not just devoted to tax cuts and deregulation. It also continues to suggest the possibility of breaking with the EU over the Northern Ireland protocol, which would also be a breach with the US. This would undermine confidence in the UK’s probity, add to uncertainty, prove that Brexit has not been done and suggest that the government cannot live with the choices it made on its own flagship policy. To add to all this, Truss seems set on breaking with China, too. Her UK seems determined to be friendless.

Furthermore, the Tories won their majority under Boris Johnson on getting Brexit done, strengthening the NHS and “levelling up” poorer areas. In so doing, they created a new coalition of traditional supporters with former Labour voters. Today, Brexit is not done, the NHS is in crisis and levelling up seems on the way to oblivion. Just 81,000 Tory party members have chosen as prime minister someone who was not even the first choice of their elected members of parliament. She has no mandate for the policies she wishes to pursue. One can imagine little better designed to exacerbate today’s pervasive cynicism about politics and politicians.

Trust is easy to destroy, but hard to recover. This is why keeping one’s word matters. Britannia is not “unchained”. It is instead sailing in perilous waters. Can the new captain and first mate even see the rocks that lie ahead?

martin.wolf@ft.com

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Source: Economy - ft.com