Assume a can opener. The Truss government’s answer to Britain’s economic crisis

Swingeing tax cuts for the rich will simply make them richer

There is an old story about a group of shipwreck survivors marooned on a desert island. Relief  beckons when cases of canned food wash up on shore. There is a snag. The absence of a can opener.

The priest among them looks to divine intervention, while the mathematician pipes up that algebra will identify the cans’ weakest point. The engineer sets to work on a contraption to wrench off the lids. The archeologist goes in search of a shard of flint. The economist simply shrugs. It’s easy. All they need to do is “assume a can opener”.

The tale is (a bit) unfair on economists. Liz Truss’s government, though, has taken wishful thinking to heart. Its new economic strategy conjures up an array of can openers. Kwasi Kwarteng, Truss’s ideological soulmate at the Treasury, has produced what he calls “a new approach for a new era”. He says he will raise the underlying growth rate of the economy from 1.5 to 2.5 per cent a year. How? Well, all will be well just as long as we assume that it will happen.

Unsurprisingly, Kwarteng’s package of debt-funded tax cuts for wealthy individuals and big corporations, along with unlimited bonuses for City of London bankers, has proved controversial.  Those earning, say, a million pounds a year will be gifted £55,000 by the tax cuts. Those with an annual income of £20,000 can expect a gain of £157. The £45bn cost overall - the biggest since Anthony’s Barber’s ill-fated giveaway Budget in 1972 - will be piled on to government debt. This in addition to £60bn in state subsidies to cap energy prices during the winter.

The economic facts speak for themselves. Britain has been falling behind its European neighbours for more than a decade. The public realm is decaying - take a look at its hospitals, the railways, airports, the streets of the big cities.  Now the economy is sliding into recession. Inflation is in double figures and public debt at historically high levels. The current account deficit stands at 8 percent of national income, trade and investment flows with the European Union are stymied by post-Brexit disputes, and sterling’s value has been sliding on foreign exchanges. 

No-one should have been surprised then that financial markets reacted to Kwarteng’s package by marking down still further the value of the pound and demanding that the Exchequer pay higher interest rates on public debt. The irony was not lost on Whitehall officials, who remain deeply sceptical about the chancellor’s approach. The markets, they noted, had given the thumbs down to a group of politicians who saw themselves as champions of the free market. The Bank of England, already pushing up short-term borrowing costs to rein in inflation, has little choice but to raise rates higher.  Put simply, by putting its foot on the accelerator the Treasury has obliged the Bank to slam down hard on the brakes. 

Kwarteng’s numbers, the markets have deduced, do not add up. Some fiscal loosening was necessary and inevitable to steer the economy through the energy price crisis. But a huge package of discretionary tax cuts risks fuelling inflation and putting unsustainable demands on borrowing. Sterling may stabilise for a time after the recent sell-off, but the direction has been set. Why would investors buy pounds? 

In the biting observation of former US Treasury Secretary Lawrence Summers, Britain is now behaving rather like an emerging market turning itself into submerging market. Others draw parallels with the eccentric policies, and consequent economic mayhem, of Turkey’s Recep Tayyip Erdogan.

At this point, Kwarteng reaches again for assume-a-can opener wishful thinking. If the long-term growth rate of the economy does increase to 2.5 per cent, he says, then all will be well. Faster growth will provide money for tax cuts, to pay down borrowing, and to finance public expenditure. The flaw, of course, is that there is next-to-nothing in the chancellor’s package to secure this ambition.

The assertion that lower tax rates will boost investment and productivity collides with the measurable reality that Britain’s nearest European neighbours - France, Germany and the Netherlands - have long had at once higher tax burdens and better economic performance. During the opening years of the century, average living standards in Britain lagged these competitors by about 8 percent. The figure now is 20 percent.

The same goes for the promised bonfire of regulations. If Britain were being held back by rules and regulations originally made in Brussels, why do French businesses produce on average 20 per cent more per worker than their British equivalents? How has German industry managed to thrive in a high tax, highly-regulated economy? 

The prosaic truth is that Kwarteng’s supply side measures to streamline planning for national infrastructure projects and local housing development are useful, but will have precious little impact on productivity. Were the government serious about raising the economy’s long-term potential it would be focusing on investing in education, skills training, science and research. It would be building infrastructure, notably to develop renewable energy, rather than fiddling with planning rules. It would be dropping its plan to repudiate unilaterally the treaty it signed with Brussels. That, though, would be hard work. And it would take a decade to bear fruit.

Beyond the ideological lurch, what puzzles me about all this is that the politics of the Truss/Kwarteng project seem almost as bad as the economics. True, some of the commentary around the package has suggested it might give a short-term boost to demand and restore the Tory party’s claim to be tax cutters. But tens of millions of Britons now face a ferocious squeeze on their living standards. The National Health Service is in crisis and the least affluent in society are queueing at food banks.

This is the moment the Conservative party has chosen to abandon all pretence of a commitment to fairness. The wealthiest 10 percent of the electorate scoop up nearly half of the tax cuts. London and the South East are be the biggest beneficiaries. The promise of “levelling up” opportunities for the less affluent in society has been shoved aside in favour of the chimera of “trickle down” from the richest. Truss seems unabashed. The economics is delusional and the politics self-destructive. How long before Tory MPs catch on?