Truss aims to ease the pain
Liz Truss and her Chancellor Kwasi Kwarteng are engaged in a fiscal experiment unlike anything seen in a generation. The combination of generous help for households and businesses to cope with the energy price surge and the likely tax cuts in tomorrow’s Growth Plan is a departure from Treasury discipline.
Previous interventions by government in the financial crisis and during Covid-19 were rapidly followed by fiscal tightening.
The orthodoxy is legacy thinking, reaching back to the UK’s humiliating bailout by the international Monetary Fund in 1976.
Since then, successive chancellors, Tory and Labour, have obsessed about credible fiscal rules. The Office for Budget Responsibility was George Osborne’s effort to inject into fiscal policy the independence enjoyed by the Bank of England.
The public finance data for August show that the Truss government doesn’t start in a bad place. in the first five months of 202223, borrowing at £58.2bn was 26.9pc below a year earlier.
The badly judged decision to fund 25pc of the national debt with inflation-proof bonds is proving costly, with debt interest payments reaching £49bn so far this year. The costs could come down with a bump as energy price subsidies bite. in spite of a slowing economy, income tax and corporation tax receipts remained buoyant.
The energy price package for business is, at £40bn, a big intervention. if it saves enterprises, preserves jobs and ensures the local stays open, it should be pro-growth.
Along with the £100bn-plus subvention for households, it should shore up family budgets and consumer confidence and break the doom loop. As with pandemic measures, the borrowing to meet energy bills should be a one-off for the public finances.
Accusations that the Truss government is some kind of ‘Taliban’ or ‘cabal’ because the Government intends to pare back taxes are wildly exaggerated. Spiking the employers’ and employees’ hike on national insurance should ease the squeeze on incomes.
Cancelling the corporation tax rise is preempting something which hasn’t happened. So much the better if it were to be reinforced by ‘full expensing,’ an immediate 100pc allowance for all plant, machinery and tech investment.
Stamp duty breaks should ensure housing, a key element of the consumer economy, is not crushed by high interest rates.
These policies are light years away from the swingeing reductions in tax bands (that would be nice too) at the heart of Reaganomics. Accepting that deep recession and unemployment are inevitable should not be an option.
The Truss alternative deserves an outing.
Electric shock
BRiTAin’S dream of being a high-tech, high-value economy with an advanced engineering and software sector to match is in danger of suffering another blow.
Schneider Electric’s bid for Cambridge pioneer Aveva, valued at £13.5bn, will greatly weaken a vital stock market sector.
it is no accident that Schneider is seeking full control of Aveva’s proprietary software for the energy infrastructure and manufacturing sector.
it stands on the eve of an investment boom in the power industries, driven by the war on Ukraine and higher prices.
The deal is a critical test for Business Secretary Jacob Rees-Mogg. As glad as he may be about the UK attracting inward investment, albeit from France, he needs to consider its deleterious impact.
Schneider has substantial investments in China including a joint venture. So any deal risks proprietary technology escaping.
One of SoftBank’s actions after it bought Arm Holdings was promptly to sell down its interest in a Chinese joint venture.
Aveva, similarly to Arm, operates an open access model under which anyone can buy or license its software. Under full control of Schneider there can be no assurances that will still be the case. That ought to be a prima facie case for competition inquiries in London, Brussels and across the Atlantic.
Italian job
WHEn French-israeli billionaire Patrick Drahi grabbed 18pc of BT, the Government lost no time in launching a security review.
now another French billionaire, Xavier niel, has bought a 2.5pc holding in £30bn Vodafone, which is also important to the UK’s national interest. His possible goal is to force the sale of Voda’s italian offshoot.
Vodafone chief executive nick Read should tell niel to take a hike.