It was probably the shortest tax cut in history. A little more than a week after announcing the end of the 45% top rate of tax, chancellor Kwasi Kwarteng was forced into a humiliating U-turn. In reality, he had no choice. His mini-budget had been savaged by the markets, had put Labour 30 points ahead in the polls, and was likely to be defeated by Conservative backbenchers in the House of Commons.
With this rapid U-turn, the government’s “growth plan” – using supply-side reforms to improve incentives, and to make the UK more competitive, enterprising and efficient – has taken a huge blow. Perhaps something can be salvaged from the project. Perhaps. But Kwarteng and prime minister Liz Truss will have to change their strategy.
Here are three places they could start.
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1. Assume the City isn’t on your side
First, don’t assume the City or Wall Street will be on your side. The financial sector has no special attachment to free market liberalism. Banking is one of the most heavily regulated, uncompetitive and state-dependent sectors of the economy, and most of the people working within the industry are hostile to any form of deregulation.
Nor are they very interested in the results. The currency traders and hedge-fund managers are not looking at overall growth a few years out. They are only looking at sentiment around the next bond issue. If they see a space to attack they will.
A reforming government looking to improve the supply side of the economy will have to assume the City will oppose it all the way. That means it will have to lock down its forecasts before it launches any new plans, as well as making sure the Bank of England is on board to deal with any fallout.
2. Stay away from the news
Next, avoid the headlines. It’s the big eye-catching measures – such as ending the bankers’ bonus cap or scrapping the 45% tax rate – that stir up real opposition. It is even worse when they suggest the government doesn’t care about equality or fairness.
In fact, the Truss government has already made some genuinely positive changes that will help boost growth significantly. Changing the ridiculous IR35 tax rules that allowed the Inland Revenue to hound many self-employed people out of work will make a big difference.
So will scrapping the data-protection rules that have dramatically reduced the number of tech start-ups. They are quite dull and technical changes, so no one really notices them very much, and hardly anyone gets upset aside from a few specialists. But they will make as much difference to growth as the top rate of tax.
3. Focus on the priorities
Finally, focus on key structural reforms. That means removing planning barriers that have stopped the UK from building enough homes; lifting the bizarre solvency rules that prevent pension funds from investing in infrastructure projects that would both make money and help the country run more smoothly; or removing the restrictions on fracking that have stopped the UK from supplying its own energy. The planned investment zones will be the most important component of that. If they are bold enough, and big enough, they could liberalise huge swathes of the country and generate lots of fresh investment.
In reality, there was lots of this good stuff last week – gritty, detailed measures that will make a real difference to growth. In the 1980s, the big wins of the Thatcher government were privatising the state-owned monopolies, taming trade unions, and selling off social housing to increase home ownership. Many of them, such as curbing union power, were done so gradually it was hard to oppose them.
Likewise, the big wins of the Truss government – if it survives for more than a few weeks – could be building new houses, restoring the incentives to work, re-booting the City and ending the EU’s crazily heavy-handed regulation of technology and science. If it focuses on those priorities, the growth plan can still work and supply-side reforms can still boost the economy. But the lessons of a bad week need to be learned or it is just going to end in defeat.
Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.
He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.
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