Britain on the edge as memories of Truss’s fiscal incontinence persist
The Tories may be under new leadership, but voters know who put Sunak’s predecessor into No10
Like a bad penny, the Liz Truss road show keeps on coming back. Last week it was to promote a book, Ten Years to Save the West. Most unwelcome in Downing Street it was too, serving not to enliven debate on how to get growth going again, but only to remind everyone anew what a snakepit the Conservative Party has become and quite what a mad period of government her 49 days in office really were.
Rishi Sunak, the Prime Minister, is desperate to disassociate himself from this bizarre episode in British economic history, but try as he might, he’s been unable to escape its memory. It matters not that Sunak warned in terms during his first leadership bid what might happen if Truss was given free reign, or that he has succeeded in stabilising the ship since then. Doing some of the right things by way of benefits, tax and planning reform gets barely noticed; instead he’s inescapably tarred with the same “crashing the economy” brush.
You can change the leader and pretend that it is an entirely new Government all you like, but it is the party that presided over the debacle that is remembered. For Labour, the former prime minister’s refusal to go quietly into the night is the gift that keeps on giving. Rachel Reeves, the shadow chancellor, could not have been more delighted at the Trussmobile’s seemingly completely unhinged return.
Inflation is coming down, and a semblance of growth has returned, but the public finances continue to look grim as grim can be. The Government is drowning in debt.
If the Chancellor, Jeremy Hunt, were to follow the letter of last week’s advice from the International Monetary Fund (IMF), he would still be squeezing hard. More settled economic conditions provide a perfect opportunity to rebuild fiscal buffers, the IMF insists.
But across much of the world, this is an election year. To impose more fiscal pain when about to go to the polls is political suicide. IMF analysis finds that fiscal deficits are, on average, 0.4pc of GDP higher in election years than otherwise.
Hunt is no exception. After brutal action to steady the ship post Truss’s mini-Budget, he’s pretty much been easing back on the medicine ever since. By further loosening the Government’s fiscal rules, so that the requirement for debt to be falling as a proportion of national income is extended from three years’ time to five years, Hunt has managed to create at least some room for pre-election giveaways. Cuts in employee National Insurance contributions announced in the last Budget will be built upon in a second fiscal event later this year.
Yet the patient is not responding. If the IMF were sitting in judgment it would have found the Government to have already breached its own fiscal rules. IMF forecasts find UK public debt still to be rising as a proportion of national income in five years’ time, not falling as it should be. This is largely because the IMF refuses to accept that promised cuts in departmental spending after the election will in practice be delivered. This may be a trifle unfair. The chances of Hunt delivering on those cuts are much higher than those of his Labour opposite number, Reeves. By running things so close to the wire, Hunt has in any case conspired to deny Labour scope for deviation. Any fiscal headroom has already been spent.
It’s a pretty miserable inheritance, but then as Hunt put it at the IMF’s spring meeting in Washington last week, “I’m not going to give Rachel Reeves any inheritance at all, because I’ll still be in power after the election”. Brave words. It seems very unlikely he can defy the polls, but we had better hope he does. Painful decisions await whoever is returned; the incumbents are much more likely to face up to them than the other lot, with its addiction to welfare.
Britain’s position is scarcely unique. The IMF’s greatest strictures were reserved for the United States, which is on a fiscal course of almost Trussitelike abandon, with little prospect of a Trump presidency reversing it. At 7.1pc next year, the US’s projected fiscal deficit is more than three times higher than the average for advanced economies, with around 2pc of GDP projected to be added to the national debt in each and every year out into the indefinite future.
There is, however, a crucial difference: the US has growth, and lots of it. On a five, 10, 20-year view – take whatever time frame you like – the US has hugely outperformed Europe, progressively widening the income gap and rendering a Briton abroad a relative pauper. According to IMF analysis, the gap between the US on the one hand and Europe and the UK on the other in GDP per head has widened to a third in purchasing parity terms.
What’s the secret? It’s deep and liquid capital markets, which in turn makes technological innovation easy and cheap to scale up. It’s still relatively high levels of immigration, with the US able to hoover up much of the available international talent. It’s an “out with the old, in with the new” approach to business, allowing for the most efficient possible allocation of capital. More latterly, it’s also about energy self-sufficiency, which has shielded the US from high oil and gas prices. And it’s about that most un-American activity of all – massive state subsidies for key industries to help wean the country off perceived dependence on China.
None of this diminishes the scale of the challenge the US faces in addressing its debt overhang, but it does provide something of a following wind. As long as there is growth, then quite large quantities of debt become sustainable. Without it, debt dynamics quickly reach the point of no return.
Britain is not yet at that point, but it is on a slippery slope, as a hard-hitting House of Lords economic affairs committee report is expected to highlight shortly. Harsh criticism will be reserved for fiscal rules that allow the Government to continually put off the day of reckoning.
From defence to climate change and the pressures of an ageing population, the demands on public spending just keep growing. If nothing is done to correct the position, the size of the national debt – already close to 100pc of GDP – will triple over the next 50 years, according to Office for Budget Responsibility forecasts. Government plans for stick-and-carrot measures to get Britain’s 6m working-age adults neither in employment nor looking for it back into work need to be urgently accelerated.
This would be a start, but it is not enough. The warning lights are flashing red. Do we really have to tip catastrophically over the edge before any notice is taken of them?
‘To impose more fiscal pain when Britain is about to go to the polls is political suicide’