Truss’ growth plan is nothing but a magic potion

Liz Truss was weighed on the scales and found defective. So does Kwasi Kwarteng. A week of unnecessary and damaging turbulence proved this. But behind it lies an even greater danger. The only kind of leader more dangerous than the scoundrel Britain used to have is the zealot it now has. The predominant characteristic of zealots is their belief that reality must conform to their desires and not the other way around. If this way of life is adopted by an individual, it can cause great harm to the people who are close to him. With political leaders, the result can be catastrophic for the country.

The irony is that for these people “the market” is God and economics is their religion. But actual markets turned them down as investors fled sterling and gilts, causing such chaos that the Bank of England did Fiscal Policy Committee compelled to step in to save the government and an ill-regulated pension industry from their follies.

The reality is that Truss doesn’t have a growth plan. She has a “growth plan” — a magic potion into which she sprinkles reversal of recent tax hikes, freedom for banker bonuses, and lower taxes for the wealthy, says “abracadabra” and suddenly Trend Productivity growth quadruples, evoking annual growth of 2.5 percent.

Such dreams could be amusing if they were not so dangerous for the country.

Line chart of UK 10 year government bond yield (%) showing a 40 year trend has reversed

First, they are at the forefront of a long line of lies – lies that justified excessive austerity in the wake of the financial crisis, lies that Brexit would bring prosperity, lies that the Northern Ireland Protocol solved the Brexit puzzle, and the lies that the government would do something serious about leveling backward regions of the country. Now those responsible are promising a huge leap in productivity. In his analysis for the Tony Blair Institute, Oxford Economics concludes that overall production could be 0.4 percent higher five years from now. The mountain works and produces a mouse.

Second, while this isn’t a growth plan, it is is a blueprint for inequality and insecurity. The recent chaos will certainly increase the government’s desire to cut welfare and public services. They would then shift income from the bottom to the top of the distribution in the midst of a livelihood crisis in a country with the highest disposable income inequality among high-income democracies to the United States. You will justify this with the old duck that countries are like company and therefore cannot afford high public expenditure. Abolishing foreign aid would add to the unnecessary casualties some of the poorest people on the planet.

This Parliament was not elected on such a program. The Party has been captured by zealots who are indifferent to reality or simple decency. As John Burn-Murdoch states: “The Tories have broken away from the British people”.

Line chart showing 10-year yield (%) UK government bond yields have skyrocketed

Finally, the government has shaken the credibility of public institutions and British policy: they have attacked the Treasury, denied tax transparency, wreaked havoc on the gilt and foreign exchange markets and forced the bank into an ill-timed return to quantitative easing. Populist movements always despise restrictive institutions run by “elites”. But institutions are the bulwark of a civilization. The Conservative Party used to understand just that. No longer. Investors know that now. It goes without saying.

Indeed, the UK’s longer-term economic performance needs to improve if its people’s aspirations for a better life are to be realised. If the government wants to do something useful about it, it could dust off the federal report 2017 London School of Economics Growth Commission. Better incentives are indeed part of the answer, but only part. Systematic tax reform would therefore be desirable. There must also be difficult deregulation, particularly in land use. The state must provide quality public goods, understanding that they are a social benefit and not a cost. There must be fiscal and monetary stability. Much more needs to be invested in physical and human capital, both public and private. More needs to be saved. There must be a growth-oriented regional policy. There must be an internationally open economy. Last but not least, there must be stable and credible policies, not the constant risk of another trade war with our closest neighbors.

Truss and Kwarteng will not deliver this. Unfunded tax cuts investment zones will certainly not deliver this. Another large increase in inequality will not do this. These people are crazy, evil and dangerous. You must go.

martin.wolf@ft.com

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https://www.ft.com/content/510948e9-3c33-42c5-929e-b97c953dc767 Truss’ growth plan is nothing but a magic potion

Adam Bradshaw

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