You never know, Truss and Kwarteng might just pull this off

Eye-watering volumes of money have been injected into the economy, first during the financial crisis, then during the Covid pandemic, and now during the fuel cost crisis, but it has not been the result of economic growth, and it has not fallen from the magic money tree; it has to be repaid. Addressing this issue was never going to be popular, but it was always going to be necessary.

Taxes are pervasively high. An average earner gives the government a pound in every three of his or her income, between income tax and "the other income tax", National Insurance. Higher earners, a large category which includes professions such as a police sergeant, hand over not much under half their salaries. And that’s before council tax, VAT, fuel tax, and the myriad other taxes which drain a person’s disposable income.

The accepted compensation for higher taxes in a democracy is high-quality public services but, all over the UK, this is not a luxury we enjoy. We are not, in this country, exposed to much international comparison of, say, our health or education systems. This is simultaneously good for politicians and bad for people, for if our eyes were diverted to the performance of the services we pay for we would realise rather rapidly that they are comparatively poor, to put it charitably.

Failure has become normal. Accepted. Reform has been rejected in favour of the depressingly lazy presumption that pouring more tax money into these black holes will do anything other than perpetuating the failure while reducing the money in people’s pockets.

So, yes, I could see where the Prime Minister and the Chancellor were coming from when they announced a cut in basic-rate income tax and the scrapping of the National Insurance rise. These moves will increase people’s disposable income at precisely the time they need it.

Lazy politicking

And I could see where they were coming from when they scrapped the additional rate tax for very high earners. I’ve always seen tax as being for dough, rather than for show. If very high taxes generated very high tax receipts, democracies all over the world would take 90p in the pound from the richest. They don’t, because there is a mountain of evidence that it doesn’t work, and a molehill of evidence that it does. The "tax cuts for their rich pals" is just lazy politicking; this move in isolation may very well increase our tax receipts. That is a good thing.

As is the proposal to cancel the proposed substantial hike in Corporation Tax, planned for next year. Again, there is a reason why developed countries compete with each other on business tax; it’s because they understand that attracting industry means creating jobs, means increasing tax revenues, means more money for services. Increasing the taxes of so-called "big business" makes for a great Twitter meme for a vote-hunting politician, but it does not work.

Growth is good. It makes us all healthier and wealthier. So these growth proposals, in and of themselves, would most likely have been well received by the markets, and indeed by the people, were it not for the two large elephants in the room – borrowing and inflation.

Funding this through borrowing is clearly the characteristic which spooked the financial markets. The UK needs a ladder out of its debt hole, but Mr Kwarteng gave us a spade.

And there is clearly a risk that the two major announcements of this three-week-old Government – the energy price cap and the fiscal loosening – will exacerbate the runaway inflation from which we have all been suffering this year.

Knee-jerk reaction

The reaction, in the last seven days, has been seismic and – whatever they may say – - it has clearly taken Downing Street by surprise. We should not attempt to diminish the tangibility of the announcement’s impact. People may lose their homes this week. Families may fall apart this week. This is real.

However, we are obliged to look beyond the knee-jerk reaction and wonder what the longer-term impact will be. Dispiriting as this may be, last Friday’s announcement was more politics than economics. Ms Truss and Mr Kwarteng entered Downing Street as the presumed losers of the 2024 General Election. Playing it safe will not reverse their fortunes; they needed to both gamble big, and win big. They have taken care of the first part.

The mood music, today, is of chaos and collapse. It is now effectively received wisdom that the only solution is to reverse rather than to continue to accelerate. This may be correct. Those who say that Ms Truss and Mr Kwarteng are reckless ideologues may have it right. Those who say they are in over their heads may be on to something. Those who are talking up the prospects of a vote of no confidence in Ms Truss’s leadership, of a new Prime Minister, of a General Election, may in time be seen as the saviours of a nation.

However, on the other hand, they may not. We have lived, in the last decade, in the most turbulent political times in living memory. This would hardly be the first time that the briefers, the opposition, the commentators, the media, have declared an outcome with righteous certainty, only to have to reverse-engineer a set of reasons why they were, in fact, wrong.

In two years' time, we are likely to be in the midst of an election campaign. Might the interest rate have settled at a new normal by then? Might inflation be right down, with energy prices more manageable? Might sterling have recovered to the point where imports and a foreign break seem attractive again?

You’re shaking your head, most likely. And you’re probably right. But are you certain? Really?

Andy Maciver is Founding Director of Message Matters and Zero Matters

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