What can be learnt from Trussonomics
To misquote the late entertainer, Eric Morecambe, Liz Truss had all the right instincts, but not necessarily in the right order. To acknowledge this point is important now that her short tenure looks set to go down as the most chaotic of modern times. These instincts were for economic growth, rather than a steadily higher burden of taxation. She instinctively favoured reform of failing markets, rather than handouts and bailouts. As Truss leaves the highest stage of UK politics it will become important that this reformist zeal does not leave with her. The lesson of her time in office is not that financial markets will block economic change. Rather that such change requires political and institutional credibility. On both fronts she fell short, and investors sniffed it a mile off.
So, what are the options facing Rishi Sunak? The first is to re-establish the UK’s reputation for having robust, independent checks and balances to its political and economic decision-making. Be this the Judiciary, the Bank of England, Parliament, or the Office for Budget Responsibility – over the last six years international investors have looked on as these have been steadily diluted. The UK economy gave the impression of having economic stewards who knew the price of everything, and the value of nothing. At 2.5% of the world economy, the UK economic weather is often established in Washington, Beijing and Berlin. Strong, independent institutions enable the UK to punch above its economic weight and attract a disproportionately large amount of inward investment. The additional interest rates that issuers of Sterling-denominated debt – both the government and companies – have had to pay in recent weeks is the price of institutional dilution. This added to the lower prices that UK public companies have received to sell equity since the Brexit vote in 2016. A reversal in these trends is the easiest economic win for Sunak.
The second area to focus on is establishing a durable political coalition for controversial reforms that boost economic growth. In this respect the Truss narrative about the UK facing an anti-growth coalition rings true. However, she had twin problems with making such language credible. The selection of political opponents in the coalition appeared tin-eared to the growth barriers also presented by the restrictive planning lobby, and by proponents of a hostile Brexit. There was also little mandate from the 2019 Conservative Manifesto for supply side reforms to address market failures in childcare, financial services, planning law and in energy security. One of the reasons why tax cuts in the September Mini-Budget were so poorly received were that few people believed supply side reforms that would grow the economy, and deliver a smaller government debt, were achievable. Whilst the political challenges for the fifth Conservative Prime Minister since 2010 are formidable, the same challenges faces Keir Starmer and the Labour Party. The temptation is to leave controversial supply side reforms out of any manifesto for government. But to do so provides only a pyrrhic victory. The UK economy deserves better.
The final area for focus is on tax. There is a risk is that recent events lead to the conclusion that radical tax measures cannot be implemented. This is not the case. Tax simplification that lowers obscurely high marginal tax rates on both low and high incomes remains an important objective to avoid distorted behaviour. Pivoting the incidence of tax from income towards unearned capital gains and consumption can be part of a pro-growth agenda. However, this requires the intellectual confidence to take on vested interests and to welcome scrutiny from experts.
Together this represents a supply-side reform package that successive governments have paid lip service to for years – but have ducked as favourable external financing conditions have enabled government borrowing and low inflation to take the strain. Events across the world have made that a rather less appealing, and affordable option. The next few UK governments will have to stick the course on supply side reforms. If they don’t then the UK’s tax burden will inexorably rise.
Managing Director, Head of Research