Somewhere on the roads into north London, the suburbs turn into streets lined with the townhouses of the anti-growth coalition. As Liz Truss told the Conservative party conference last week, here live the “enemies of enterprise” who would hold Britain back.
Forget that financial markets were thrown into a tailspin by her plans for the economy, pushing up mortgage costs to eye-watering levels. Forget that Britain under the Conservatives is on the brink of a prolonged recession with the highest rates of inflation for 40 years. Here was the real culprit: the pundits talking Britain down.
The ambition of Truss and her chancellor, Kwasi Kwarteng, to go for growth might well be a laudable one, given the intense pressure on households amid the cost of living crisis. But it should not be controversial to point out that the task is easier said than done.
Over the past decade Britain has fallen behind comparable rich nations, with stagnant wage growth and a failure to tackle deep economic divisions. In-work poverty is unacceptably high and bound to soar further this year, as wages fail to keep pace with inflation. After living costs are taken into account, average pay is no higher today than in 2007 before the financial crisis struck, in the worst period for wages since the Napoleonic wars.
Truss should know this better than most, as a minister in successive Conservative-led governments for the past decade. Back in 2011 her party warned: “We literally cannot afford to go on like this” – on the first page of the “plan for growth” published by George Osborne.
“If we do not wake up to the world around us, our standard of living will fall, not rise,” said the document, which attacked high taxes and regulatory barriers for holding back free enterprise.
Could it be that the same party remains asleep at the wheel? For the first time since the financial crisis, Labour has pulled ahead of the Conservatives in opinion polling on economic credibility.
That might not be too surprising after the meltdown in financial markets triggered by Kwarteng’s mini-budget. But it is the culmination of a decade of failure that should hurt the most.
Had Britain’s economic performance continued at the pace seen before the 2008 financial crisis, the economy would have been almost £300bn bigger, according to the New Economics Foundation. That’s GDP per head of £4,400 in today’s prices.
Why should the Truss plan for growth be any different? The prime minister might style herself as Britain’s disruptor in chief, ripping up the anti-growth rulebook to get the economy going, but the plans her government has announced so far are fairly similar to the tried, tested and failed tactics of the past decade.
Most mainstream economists reckon the prime minister’s revamped trickle-down agenda of tax cuts and deregulation is unlikely to work. But should Truss wish to discredit them, she would need to expand her criticism from the townhouses of north London to the towers of Canary Wharf and the Washington headquarters of the International Monetary Fund.
Analysts at Société Générale reckon the plan for tax cuts to pay for themselves will require “pinning everything on the baseless hope of boosting medium-term growth to 2.5%”, while Bank of America reckons there will be only a “small growth impact” at best.
The US bank reckons that GDP will only be raised by about 0.2% despite the plan costing more than £40bn. Deutsche Bank agrees, reckoning that any benefits will be far outweighed by higher borrowing costs caused by higher interest rates from the Bank of England triggered by Truss’s tax and spending plans.
At the heart of the problem is that most mainstream economists think Truss has placed too much hope on tax cuts for the rich boosting the supply capacity of the economy. Meanwhile, any deregulatory agenda will immediately run into the anti-growth coalition in her own party: of backbenchers worried about growth-enhancing ideas such as higher levels of immigration or building on the green belt.
Truss has spoken at length about the need for supply-side reforms – changes to increase the productivity of the economy – yet there are few signs her plan will unlock such progress. Income tax cuts targeted at the rich are more likely to spur consumer spending than private enterprise. While lower rates of corporation tax might help, the past decade shows repeated cuts had little impact.
Such changes weren’t among the demands of even big business lobby groups such as the Confederation of British Industry or the British Chambers of Commerce, which would privately tell you that tax reliefs on productivity-boosting investment or closer trade links with the EU were more important.
There are other ways to boost productivity than simply slashing taxes, standing back and hoping for an economic renaissance. Rather than suffering with barriers to industry that are too high, Britain looks more as though it has a problem with a growth platform that is too weak.
Labour recognises this, with an economic policy increasingly in tune with large business groups. Its plans for more investment in public services, childcare, health, infrastructure, and co-investment alongside private business could have a far more powerful impact. At the very least, it is a change in tack from the dogma of the past decade that has been shown to have woefully failed.
After a decade of austerity undermining the public sector, even analysts at Bank of America recognise this – warning in research notes to City clients that a creaking health service in Britain is now starting to weigh on the economy by holding back more people from being able to work.
“There is considerable evidence that deteriorating health service performance is having a first-order effect on potential growth: rising workforce sickness has cut labour supply,” the analysts warned. “Any return of austerity may make that sickness trend worse, while it may also damage other elements of potential supply, such as skills.”
For Truss there is little time before the next election to show her plans can boost Britain’s economy. On an early assessment, the outlook isn’t promising, with her measures more likely to be anti-growth than those of her critics.
