The author was a Liberal Democrat minister in the coalition government 2010-2015.
Those who expected Liz Truss’s government to be “continuity Boris” will now have recognized their mistake. The populist, pragmatic, non-ideological Johnson-Sunak era has been replaced with the tax-cutting, deregulatory, small-state ideology of the new Prime Minister and her Chancellor.
Radical, bold and ambitious are words that Truss and Kwasi Kwarteng want associated with their financial plans. But others come to mind: irresponsible, eccentric and regressive. Let’s start with irresponsible.
When the Conservatives came to power, in coalition, in 2010, the Treasury predicted a budget deficit of just over £160bn for 2009/10. As Chief Secretary-to-be, I received a now infamous letter from my Labor predecessor admitting “there is no money [left]”.
The coalition established a new body, the Office for Budget Responsibility, to ensure transparency and to prevent chancellors from messing up the forecasts. The OBR figures informed every fiscal policy event, often influencing the Chancellor’s decisions. They are free from political interference and from the optimism that politicians are prone to – not least with regard to setting growth targets such as the current 2.5 percent target.
We began a deficit reduction program. This was not an ideological obsession. It was intended to achieve three outcomes: to keep interest rates low, to avoid a build-up of debt to saddle future generations, and to ensure that sound public finances would allow bold responses to national emergencies (think pandemics and wars). Prudent fiscal management has allowed the UK to fund expensive interventions such as the Leave Scheme and now the Energy Price Guarantee.
For conservative colleagues, this process of “fixing the roof” was their central mission. It has all now been junked by Truss. OBR has been sidelined; instead of previous chancellors’ muddled forecasts, on Friday we were offered no forecasts at all. The central government’s borrowing is massively increased not to deal with one-off crises, but to deliver large, unfunded tax cuts. It is an extraordinary change of course — just as UK public finances need to be strengthened to meet the health and pension costs of an aging population.
Next comes eccentric. How else to describe a government policy that seeks to increase growth through tax cuts, while the Bank of England has to raise interest rates to reduce inflation? The politicians have their feet on both the economic brake and the accelerator simultaneously. The result can be seen in an increase in gilt yields, which will increase the cost of debt servicing in the UK.
If unfunded tax cuts could lift long-term growth rates to Kwarteng’s target of 2.5 percent, they may be worth this incoherence. But there is little evidence for that. If Truss really wants to boost productivity and growth, she will have to tackle more complex policy challenges: improving education and skills, planning reforms and repairing our battered trading relationships.
Finally to regressive. The cuts in income tax and National Insurance contributions hugely favor high earners. Stamp duty cuts will benefit the elderly, wealthier and those in the South East. It’s not leveling up. Truss might say she prioritizes options. But there is an iron relationship between poverty and crippled life chances: We will never create a country with real social mobility on a rising wave of inequality.
This is a huge economic experiment. The result will be more debt, higher interest rates, starved public services and greater inequality. With a budget deficit, according to the latest IFS forecasts, which could average around £160 billion a year (or more) over the next two years.
Current finance ministers may have to leave a letter to their successors: “There’s still no money left. We’re back to where we started in 2010.” It would not be a happy legacy.