Opinion – Martin Wolf: The economic consequences of Liz Truss

The country is returning to a more normal life. But it won’t be so normal. Liz Truss will take care of that.

On Friday (23), Kwasi Kwarteng, Chancellor of the Exchequer, will follow up on his emergency energy package with a mini-budget. This is expected to reverse the increase in national insurance contributions and prevent an anticipated corporate tax increase. It will also set an annual growth target of 2.5%. Should we take this seriously? No and yes. No, because the idea that the government of a market economy can achieve a growth target is ridiculous. Yes, because it will guide policy. The question is whether it will guide them for good or for evil. My bet is on the latter.

Neither Hayek nor Friedman would consider it wise to have a growth goal. That’s planning. Hayek would rightly insist that we don’t have the knowledge or tools to produce one. In Britannia Unchained [Britânia liberta], published in 2012 (two of its authors were Kwarteng and Truss), Brazil was proposed as a model. Ten years later, this seems silly.

A growth target is not only impractical, but dangerous. Suppose Kwarteng tells the Treasury and the Office of Budget Accountability that they should assume this target in their forecasts (if they are allowed to make any). If he is wrong, deteriorating public finances can generate a crisis of confidence, as happened in the 1970s. He seems to dismiss such concerns as mere “managerialism.”

So let’s leave the target aside and consider politics. Truss says that “the economic debate of the last 20 years has been dominated by discussions about distribution.” However, according to the OECD, the United Kingdom has, after the United States, the greatest inequality in the distribution of disposable household income among all high-income countries. George Osborne’s post-crisis austerity policies weren’t concerned with “distribution” either. Truss’ view of the old debate in the UK is a red herring.

We need to recognize, instead, that 40 years later Thatcherism is a zombie idea, for two opposing reasons – both what has been achieved and what has not.

Thatcher liberalized labor markets, restricted unions, privatized nationalized industries, and slashed key tax rates. Her policies (which included promoting the EU’s single market), as well as those of later governments, also strengthened competition in product markets. Overall, the UK is now a low-tax country by the standards of other high-income economies. It has a deregulated economy where the successful are rewarded but the less successful are penalized. Such Thatcherite goals are a reality today.

What, then, that Thatcher and those who followed her failed to achieve? They have not liberalized the biggest distortion of the economy, which is land use. They did not transform the talents of the population, which was made difficult by the conditions in which many children grow up. They have not been able to address the shortcomings in corporate governance, which tends towards spending rather than investing. They allowed the quest for security in corporate pensions to shift portfolios from offering venture capital to corporations to ownership of government bonds. This, in effect, turned the plans into pay-as-you-go, state-backed schemes.

Overall, economic performance has not been lastingly transformed for the better. In 2019, output per hour worked in the UK, relative to France and Germany, was about the same as it was in 1979. Above all, productivity has stagnated since the financial crisis. Investment is the lowest as a proportion of GDP among all high-income countries. Business investment has remained below its peak in real terms since the Brexit referendum. The financial sector’s earlier implosion under “light regulation” did not help. Not the post-crisis austerity or the madness of Brexit itself. Uncertainty alone is bad for confidence and therefore for investment.

The idea that more tax cuts and deregulation (such as raising the cap on bankers’ bonuses) will transform that performance is a fantasy. What is simple has already been done. What remains to be done is difficult. To give an example: greater investment requires greater savings. Where will this come from? There are also complexities linked to climate change and energy. Furthermore, the evidence is that both better economic performance and political stability may depend on lower inequality, not greater inequality than the country already has.

The Truss administration isn’t just dedicated to tax cuts and deregulation. It also goes on to suggest the possibility of breaking with the European Union over the Northern Ireland protocol, which would also be a violation with the US. This would undermine confidence in the UK’s probity, increase uncertainty, prove that Brexit was not made and suggest that the government cannot live with the choices it has made in its own core policy. To add to it all, Truss seems determined to break with China as well. Your UK seems determined to be friendless.

Furthermore, the Conservatives gained a majority under Boris Johnson to complete Brexit, strengthen the NHS (National Health System) and “level out” the poorest areas. In doing so, they created a new coalition of traditional supporters with former Labor voters. Today, Brexit is not done, the NHS is in crisis and the leveling off seems to be on its way to oblivion. Only 81,000 members of the Conservative Party chose as prime minister someone who was not even the first choice of their elected members of Parliament. It has no mandate for the policies it wants to pursue. It’s hard to imagine anything better to exacerbate today’s pervasive cynicism about politics and politicians.

Trust is easy to destroy, but difficult to regain. That’s why keeping your word is important. Britannia is not “free”. Instead, it’s navigating dangerous waters. Can the new captain and first mate see the rocks ahead?

Translated by Luiz Roberto M. Gonçalves