SSomewhere on the streets of north London, the suburbs are turning into streets lined with the townhouses of the anti-growth coalition. As Liz Truss told the Conservative Party conference last week, this is where the “enemies of entrepreneurship” live that would hold Britain back.
Forget that their economic plans have sent the financial markets into a tailspin, driving mortgage costs to staggering levels. Forget Conservative Britain is on the brink of a prolonged recession with inflation at its highest rate in 40 years. Here was the real culprit: the pundits badmouthing Britain.
The ambition of Truss and her chancellor, Kwasi Kwarteng, to bet on growth might well be commendable given the enormous pressure on households amid the livelihood crisis. But it shouldn’t be controversial to point out that the task is easier said than done.
Over the past decade, Britain has fallen behind comparable wealthy nations, with stagnant wage growth and a failure to address deep economic divisions. In-work poverty is unacceptably high and will continue to rise this year as wages fail to keep pace with inflation. After accounting for the cost of living, the average wage today is no higher than it was in 2007 before the financial crisis, the worst wage period since the Napoleonic Wars.
Truss should know this better than most, having served as a minister in successive Conservative-led governments over the past decade. As early as 2011, her party warned: “We literally cannot afford to continue like this” – on the front page of the “Growth Plan” published by George Osborne.
“If we don’t wake up to the world around us, our standard of living will fall, not rise,” says the document, which attacks high taxes and regulatory barriers to discourage free enterprise.
Could it be that the same party is sleeping at the wheel? For the first time since the financial crisis, Labor has overtaken the Conservatives in opinion polls on economic credibility.
That may not come as a surprise after the financial market meltdown triggered by Kwarteng’s mini-budget. But it’s the culmination of a decade of failure that should hurt the most.
Had the UK’s economic output continued at the pace seen before the 2008 financial crisis, the economy would have been nearly £300 billion larger, according to the New Economics Foundation. That’s a GDP per capita of £4,400 in today’s prices.
Why should Truss’ growth plan be any different? The Prime Minister could pose as Britain’s disruptor-in-chief and tear up the anti-growth rulebook to jumpstart the economy, but the plans her government has announced so far are befitting the tried, tried and failed tactics of the last decade similar.
Most mainstream economists agree that the Prime Minister’s revised trickle-down agenda for tax cuts and deregulation is unlikely to work. But were Truss to discredit her, she would have to extend her criticism from the townhouses of North London to the towers of Canary Wharf and the International Monetary Fund headquarters in Washington.
Analysts at Société Générale believe the plan for self-sustaining tax cuts “must bet all on the unfounded hope of boosting medium-term growth to 2.5%,” while Bank of America believes there’s only a “small one.” Growth effect” will give the best.
The US bank expects GDP to rise by only around 0.2% despite the plan costing more than £40bn. Deutsche Bank agrees and believes any benefits will be far outweighed by higher borrowing costs caused by higher Bank of England interest rates triggered by Truss’ tax and spending plans.
The crux of the problem is that most mainstream economists believe Truss placed too much hope in tax cuts for the rich to boost the economy’s supply capacity. Meanwhile, any deregulating agenda immediately bumps into the anti-growth coalition within your own party: backbenchers worried about pro-growth ideas like higher immigration or building on the green belt.
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Truss has spoken at length about the need for supply-side reforms — changes to make the economy more productive — but there is little evidence her plan will enable such advances. Income tax cuts aimed at the rich are more likely to boost consumer spending than private business. While lower corporate tax rates could help, the past decade has shown that repeated cuts have had little effect.
Such changes were not among the demands of even big business lobby groups like the Confederation of British Industry or the British Chambers of Commerce, which would privately tell you that tax breaks for productivity-enhancing investments or closer trade ties with the EU are more important.
There are other ways to increase productivity than simply cutting taxes, holding back, and hoping for an economic renaissance. Rather than suffering from barriers to industry that are too high, the UK seems to have more of a problem with a growth platform that is too weak.
Labor is acknowledging this with economic policies increasingly geared towards large corporate groups. His plans for more investment in public services, childcare, health, infrastructure and co-investments alongside the private sector could have a far greater impact. At the very least, it’s a change of course from the dogma of the last decade that has proven to have failed miserably.
After a decade of austerity that has eroded the public sector, even analysts at Bank of America are acknowledging this – warning City clients in Research Notes that a creaky healthcare system in Britain is now beginning to weigh on the economy by killing more people prevents from doing this work.
“There is significant evidence that deteriorating healthcare performance is primarily affecting potential growth: increasing sick leave in the workforce has reduced labor supply,” the analysts warn. “Any return of austerity may exacerbate this disease trend while also affecting other elements of potential care, such as B. skills.”
There is little time for Truss before the next election to show her plans can boost Britain’s economy. According to an initial assessment, the prospects are not promising as their actions are more anti-growth than those of their critics.
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