Kwasi Kwarteng’s anything-but-mini budget was one of the most dramatic shifts in UK economic policy that we have ever seen – a bigger change, perhaps, than if Boris Johnson had been succeeded by Keir Starmer rather than Liz Truss.
The new government is focused on the right objective – to increase the underlying rate of growth in the UK economy, which has been too low since the global financial crisis. If we don’t find a way to address this, successive governments are going to be faced with a choice between not adequately funding public services or doing so at the price of a growing and politically unpopular tax burden. Increasing the growth rate will make politics easier whether you are on the centre-right or centre-left.
The government’s solution – reforming the supply side of the economy by for example speeding up the planning system and making changes to the immigration system to address labour shortages – is right too. I would add to its list of reforms undoing some of the damage done to our trading relationship with our nearest neighbours by Johson’s Brexit deal and tackling the increase in long-term sickness that has reduced the supply of labour. And as a Conservative I share the view that lower rates of tax boost growth. So what’s not to like?
Well, first, there is a question of fairness. The chancellor is right to say we need to focus on how we grow the cake, but that doesn’t mean questions about how it is cut up can be ignored. According to the Institute for Fiscal Studies, if you look not just at the measures the chancellor announced the other day but at other changes to the tax system taking effect over the next few years (principally the freezing of allowances), the only people who will pay less tax are those earning over £155,000 a year. At a time when millions of people are struggling, that is morally indefensible.
Then there is a question of timing. It makes no sense to cut taxes, stimulating demand in the economy, when we have high inflation. The Bank of England will have no choice but to increase interest rates by more than it was already planning to do. This isn’t a growth plan, it’s a plan to plunge millions of homeowners into mortgage misery.
And third, there is a question of fiscal credibility. The government sacked the most senior official in the Treasury. It announced a huge package of tax cuts funded by higher borrowing when we are already increasing borrowing to pay for freezing energy prices. And it refused to publish an independent forecast of the effect of its policies. There is nothing conservative about any of this, and it is no wonder the markets were spooked.
Imagine the field day that Conservative MPs would be having if a Labour government had introduced the second biggest increase in spending since the second world war funded solely by higher borrowing, and if that announcement had been followed by turmoil in the markets, criticism from the IMF and an emergency market intervention from the Bank of England. What has happened over the last few weeks has damaged the reputation of the country, and that has real-world consequences in terms of our long-term borrowing costs – this now costs us more than Portugal and Spain and nearly twice as much as Germany. That damage won’t be completely undone even if parliament blocks some of the tax cuts or Conservative MPs persuade the prime minister to U-turn or she is replaced either by Conservative MPs before the next election or by the public at that election. Opposition parties and those in the Conservative party who oppose what the government is doing need to start thinking about how we repair this damage.
Credibility comes from strong institutions. The Johnson and Truss governments have weakened some of those institutions. The starting point should be how we can strengthen the independence of the Bank of England, with parliament having to approve appointments to the monetary policy committee.
We need to legislate to ensure that no future government can cut taxes or increase spending on this scale without publishing an independent forecast from the Office for Budget Responsibility (OBR). And we should give parliament a say in the appointment of key civil servants such as the permanent secretary to the Treasury and the head of the OBR, so that markets have confidence that in future ministers can’t just sack respected officials and replace them with people who are less able to resist ill thought-out policies.
The events of the last few weeks have done profound damage to the reputation of the Conservative party too, though I suspect Observer readers will be less concerned about that. Johnson’s government showed a shocking disregard for standards in public life and the rule of law. It prioritised a hard Brexit over the integrity of our United Kingdom. The Truss government has thrown away the Conservative party’s reputation for sound management of public finances.
Rule of law, Unionism, sound money: these are some of the pillars on which the Conservative party is built. It is shocking to see the party’s leaders so casually undermine them. The polls show where this is headed. As with our country’s reputation, it will take years to undo all the damage – but the sooner we start, the better.
Gavin Barwell was chief of staff to former prime minister Theresa May