Kwasi Kwarteng is set to deliver a mini-Budget next week that will define the economic policies of Liz Truss’s Conservative government.
We know the new chancellor will reverse this year’s rise in national insurance contributions and stop a planned increase in corporation tax rates next April. Kwarteng will outline the costs of holding down gas and electricity prices this winter, although this forecast will come from the Treasury without the independent scrutiny of the Office for Budget Responsibility. And finally, he is set to establish a new government target of 2.5 per cent economic growth every year, supplementing the Bank of England’s 2 per cent inflation target.
It is easy to imagine how Kwarteng will sell the new policy of tax cuts to boost growth and longer-term economic performance to the House of Commons. “The central objective of the government’s economic strategy is to maintain a faster rate of growth of national output,” Kwarteng might say. Lower taxes are vital because it is “crucially important to look beyond the next year and to lay firm foundations on which we can build a fast rate of economic growth in the future.”
“We have made massive reductions in taxation so as to increase employment,” the chancellor will conclude. “We have held down [energy] industry prices,” thereby demonstrating that “expansion and the attack on inflation” go hand-in-hand.
Kwarteng, who holds a PhD in economic history, will instantly recognise that I used no imagination in devising these words, just the cut and paste function on my computer and a copy of Anthony Barber’s 1973 Budget speech. It came a year after the same Conservative chancellor said in his 1972 statement, “I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation.”
These two Budgets are widely regarded as the worst pieces of short-term economic management in Britain since the second world war. Inflation soon rose above 24 per cent and comparisons with the “Barber boom” are never complimentary. The Budgets did not even help Edward Heath win the general election in February 1974.
While Truss had few options but to hold down energy prices this winter, there is no need to stoke inflationary pressures and weaken the longer-term sustainability of the public finances with additional permanent tax cuts. Moreover, assuming new policies improve the long-term average rate of growth of the economy simply repeats Gordon Brown’s mistake in late 2006 when he announced a faster trend growth rate of the economy before demonstrating success.
The coming fiscal statement is therefore taking great risks both with inflation and the public finances. The gaping trade deficit will rely on the kindness of strangers to finance the UK living persistently beyond its means and the chancellor will have to hope that financial markets this winter are gentle.
In these circumstances, the best defence against loose policies is for the UK’s independent economic institutions to stand firm. The Bank of England needs to demonstrate that it is determined to offset the additional inflationary pressure created by the government’s borrow and spend attitude.
The OBR should insist on publishing an official forecast before the end of 2022, so that it can meaningfully meet its legislative requirement to produce two assessments of the public finances a year. It should reject Kwarteng’s wishful thinking over a 2.5 per cent trend growth rate until the chancellor can demonstrate he has achieved his ambition.
There is little doubt that these institutions must be irritating for a chancellor who is “unashamedly pro-growth”. But they were created precisely to guard against repeating the mistakes of the 1970s. That moment has come.
chris.giles@ft.com
Credit: Source link