Four chancellors in four months. And now three prime ministers. As I write, we do not know who will replace Liz Truss. But with her resignation her short-lived economic theory, Trussonomics, has gone.
The grownups have come home and brought with them what Truss used to deride as “abacus economics” — in other words, making sure every penny we spend is funded by a penny we earn.
Truss used to think that was so old-fashioned, when you could — as the last chancellor but two, Rishi Sunak, put it — “stick it on the country’s credit card”.
The problem with borrowing money is someone needs to lend it to you. And the credit cards issued by international investors and pension funds demanded much higher annual percentage rates to meet the ambitions of Trussonomics — £46bn of unfunded tax giveaways announced in just 26 minutes. Not handouts, which in Trussonomics were wrong, but just — quote —letting people and businesses keep more of their own money — unquote.
The party’s militant wing had marched in and laid waste to every balanced book in the library
In fact, the total was a lot more than £46bn. That was per year. And, just days before now ex-chancellor Kwasi Kwarteng’s ‘mini-Budget’ — which, like the Dodo in Alice’s Adventures in Wonderland, promised tax prizes for everybody — Trussonomics had pledged to subsidise every electricity and gas bill in the UK — household and business — at a cost of £60bn just in the first six months.
For households, the promise extended to October 2024, with the total cost potentially exceeding £100bn.
‘Smithereens’
Trussonomics had its fans. The Daily Mail headlined, “At last, a true Tory Budget,” while Sunday Telegraph editor Allister Heath wrote, “The best Budget I have ever heard a British chancellor deliver… the spreadsheet-wielding socialists blown to smithereens by Kwarteng’s stunning neo-Reaganite peroration.”
The militant wing of the party had marched in and laid waste to every balanced book in the library.
Fear spread in Tory ranks. Not so much about the unaffordability of the promises as about their own unelectability
It lasted three weeks. The pound plummeted. Pension funds cried for help as they lost their bets, placed with borrowed money, on which way gilt returns would go. The Bank of England obliged with £20bn magicked out of its quantitative easing tree. And the arcane world of international finance hit home when the interest rates charged on mortgages went through the roof that people could no longer afford.
Millions would face monthly repayments rising by hundreds of pounds. And every month that passed there would be tens of thousands more middle-class households plunged into hardship as rates below 2% ended.
Fear spread in Tory ranks. Not so much about the unaffordability of the promises as about their own unelectability. The party called up its political wing, who got out their socialist spreadsheets and, in a three-day rout, did more U-turns than a roomful of line dancers.
If you see tears in Jeremy Hunt’s eyes, it is decisions that are causing them, not distress
Apart from the house price boosting cut in stamp duty and the third change in a year to National Insurance Contributions (NICs), the only policy to survive this bonfire of inanities was scrapping the cap on bankers’ bonuses because, as latest chancellor Jeremy Hunt explained, “we will get more tax from rich bankers”.
‘Eye-watering difficulty’
Altogether, £32bn of tax giveaways were ditched. But paying for the £20bn left and the £60bn for the energy bill handouts — now reduced to six months for both businesses and households — will require what Hunt called “decisions of eye-watering difficulty”. So, if you see tears in his eyes, it is decisions that are causing them, not distress.
One sneaky tax reversal that will save £1bn a year concerned income tax on dividends. The three rates were all raised by 1.25 percentage points last April. It was a pacifier to people who asked why those who lived on dividends should be exempt from paying more tax towards the NHS and care services when people who worked were paying an extra 1.25% of earnings.
Every month there would be tens of thousands more middle-class households plunged into hardship as rates below 2% ended
The higher NICs will end on 6 November. But the Kwarteng promise of a corresponding cut in dividend income tax rates next April has been U-turned.
Meanwhile, advisers can only sit and wait while the FTSE100 is roughly where it was at the turn of the century, the pound hovers around $1.12, and the best safe return is a savings account paying, as I write, 4.6% over one year and 5.05% a year for the next five, with no risk to capital.
Paul Lewis is a financial journalist and host of Radio 4’s Money Box
This article featured in the November 2022 edition of MM. If you would like to subscribe to the monthly magazine, please click here.
The UK is so heavily in debt not because of ‘Trussonomics’ but due to the £s trillions spent re-capitalising the banks post ‘great financial crisis’ and due to the £Bns spent by Rishi Sunak supporting ‘businesses and households’ throughout the pandemic. The third reason is insufficient economic growth to satisfy public spending ambitions. ‘Trussonomics’ would not have added much to the national debt burden, which would have remained second lowest in the G7 as a percentage of GDP. Truss wanted growth – as the only mechanism to finance sustainable public spending AND to shrink the government’s budget deficit/ national debt as a percentage of GDP. Her tax changes were announced too quickly and personal tax cuts were unnecessary. Business tax cuts and strong investment incentives were needed – as was deregulation, an axing of non-essential quangos/inspectorates and many other reductions in wasteful public spending. Under Hunt/Sunak public spending seems likely to absorb an increasing portion of national wealth – which is an unlikely recipe for long-term economic success. It will be interesting to see whether they have a viable plan for long-term economic growth – I hope they do. Balancing the national books is essential – but the best way is to grow the economy, whilst curbing public expenditure growth – so that it absorbs less of national income. Liz Truss and Kwasi Kwarteng had admirable objectives – but timing and execution were poor. Pulling in the opposite direction to the Bank of England could never have worked either. Trashing their objectives- whilst admiring earlier profligacy and moribund public policy is unjust to Truss and to Kwarteng – who are now the ‘whipping boys’ for others’ serious policy failings – and for the global disruption caused by the pandemic and its aftermath.
brexit hasn’t helped either. This is what comes of allowing the Col. & Mrs Blimps in the shires the responsibility of selecting a leader. The Tory party is becoming more like the Republicans in the US. Let’s hope that Mr Sunak can infuse some moderation.
@harryKatz – spot on.