This article has also appeared in Reaction
Let us be clear. The rhetoric from Liz Truss and Rishi Sunak, the two final contenders for the leadership of the Conservative Party and the keys to Number 10 is designed to achieve one thing and one thing only – to throw as much red meat as possible to the small selectorate of party members who have a vote.
The main dividing line between the two has boiled down to economic policy. Which soundbite will appeal most to the selectorate: “We are the party of sound money and fiscal responsibility” or “We are the low tax party that delivers widespread prosperity and economic growth”?
It’s probably not much of a stretch to believe that the latter has greater appeal.
Truss is right that, after the last couple of years, austerity and fiscal consolidation lack allure. Especially so with the memory of the Osborne years still lingering in people’s minds and the widespread mea culpas from the IMF and others that the contractionary policies they pushed following the financial crash were a big mistake. Not much consolation to the millions who suffered in the process. But there you are.
To simplify, Truss wishes to stimulate economic growth through stimulating citizen spending by leaving more money in their pockets. She also wants to leave more money in corporations’ pockets by abandoning planned increases in corporate tax and reversing the increase in National Insurance contributions. This is all to be welcomed in principle. But it is incomplete.
Will any of that result in increased industrial investment and improved productivity? The UK experience over the last several decades suggests it most likely will not. Productivity and industrial investment in the UK are persistently low. We live in a financialised economy and have seen time and time again the preference to use extra money for dividend payouts and share buybacks – the latter being what the Economist once called corporate cocaine. Even sustained ultra-low interest rates were substantially used by some to borrow to buy back shares rather than invest.
Few will argue against trying to drive prosperity and economic growth. But putting money in corporate pockets has time and again proven insufficient in the UK context. The Truss team needs to supplement that approach with some clear policies that makes industrial investment and productivity improvement more attractive, and more achievable, for large British businesses than financial engineering. If they can crack that one, they surely deserve a stint in Number 10.
The second issue is, of course, inflation. Every traditional economist is warning of sky-high inflation if such a course is pursued. Truss points out that inflation is currently driven by supply-side problems that her policies will overcome. Maybe. Maybe not. Even if this proves successful, the issue of achieving a smooth transition (if such is achievable by anyone) does not go away.
Truss states that forecasts suggest that inflation is temporary and will soon fade. Yet forecasts are based on assumed policy interventions. When those change, so will the forecasts.
This is a dilemma with no easy solution. The traditional choice has been to bring down inflation by, effectively, inducing a recession and follow up with stimulus to push for growth. Truss hopes to shortcut that process and challenge conventional wisdom. It may work. It may not. We shall have to see what Trussonomics will eventually do to the buying power of the pound in your pocket.
Finally, Truss seems determined to challenge conventional wisdom on central bank independence. A re-think on the nature and scope of central bank independence is something we have argued for for years. Of course, threading the narrow path between democratic accountability and market confidence in the pound is no mean feat. But the religion of technocracy unhindered by political accountability must be slain. The debate must be opened for broad public discussion while avoiding difficult major decisions being taken in a rush.
If Truss prevails, we might all be in for a big experiment in economic management. Please fasten your seatbelts and let us hope we enjoy the ride – and the destination.