Are you against growth, Liz Truss asks in her speech to the Tory party conference. What about your credentials as a disruptor? Can you say, with a steady hand on your trusty sword, that you have cut through anything more than a pat of butter in the past few years, let alone weeks?
Growth in all its guises should be positive for the economy. Growth promotes new jobs and incomes, says Truss. Disruption likewise. But when a government says it wants to build, build, build and at the same time achieve net zero carbon emissions, there are obvious contradictions.
There are also related conflicts between those who would pave over large parts of the countryside for the benefit of overseas investors looking for cheap distribution sheds and weak environmental regulations, and those who want more countryside and the kinds of 21st-century protections that block those who own capital from turning others’ lives upside down.
More immediate for the fledgling government is the need to please institutions with proposals that push in opposite directions. Truss and Kwasi Kwarteng must show the Office for Budget Responsibility (OBR) proof that their policies can put rocket boosters under the economy and at the same time persuade the Bank of England that their ministers have no intention of doing any such thing.
Kwarteng’s first move will be to tell parliament he is bringing forward his autumn statement from 23 November to the end of this month. This gives him a chance to persuade the Bank’s monetary policy committee that it should restrict any interest rate rise to 0.5% when it meets on 3 November.
The chancellor and his officials will spend this week and next trying to devise a programme that tempers his mini-budget by offsetting much of the £43bn in tax cuts left on the table after the 45p rate cut (costing £2bn) was scrapped.
Signals from Kwarteng’s camp point to welfare budgets taking the biggest hit. A bonfire of the subsidies Boris Johnson promised to level up the country, improve biodiversity and renew ageing infrastructure could also be on the cards.
At the moment, with inflation at 9.9%, and a combination of Brexit and ill-health meaning there are no spare workers, extra spending only creates more inflation.
If an interest rate rise of 1 percentage point or more can be avoided, Kwarteng can expect two-year fixed mortgage rates to begin falling and the heat from homeowners and buyers to ease. Predictions of interest rates as high as 6% next year would be revised down, easing the pressure from financial markets on government borrowing costs.
The Treasury knows it would help if the Bank considered the £60bn Kwarteng expects to spend on his energy price cap over the winter non-inflationary – as most of it will be spent on electricity and gas rather than new cars and furniture. But the subsidy is partly inflationary because it is universal. Rich and poor will benefit alike, so some households will have spare cash.
Suppose, though, that the Bank is happy to restrict its interest rate rise – such is the tourniquet on spending to fund tax cuts – where does that leave Kwarteng’s growth plan?
He has promised an era of expansion in which the annual 1.8% GDP increases seen over the past 20 years rise to 2.5% over the coming 10.
Without government spending to turbocharge the economy, he will need to rely on deregulation – and the disruption this brings – to carry the fight. Free market thinktanks say this is enough to attract investment and promote growth, but the OBR is likely to be more sceptical. In its early years, the OBR said business investment was immune to austerity, then later had to apologise for this error. Officials will not want to make a similar mistake.
OBR chief economist David Miles will most probably downgrade his forecasts for consumer spending and private sector investment, much of which hangs on the coat tails of public spending. If he sticks with the current forecast of 1.75% over the medium term, he will have single-handedly ripped the heart out of the Truss project.
Kwarteng may be tempted to cast Miles and the OBR as members of the anti-growth coalition. It would certainly be disruptive. However, that would only spook international money markets that lurk in the woods like wolves waiting for a passing wounded deer.
Truss’s only option is to tell her supporters the time is not right for growth, growth, growth. There is an inflation crisis, an energy crisis that could lead to blackouts, and a looming sharp increase in poverty. Dealing with that is enough for any government.
