The Daily Telegraph
Truss’s plans to borrow big may save Britain. She is out of other options
The new PM has rejected austerity and higher taxes for more debt in her battle against inflation
‘Kwarteng, in a previous life, was a City analyst. He will know that narratives are as important as numbers’
In Liz Truss’s first two speeches as Prime Minister, she decided to praise Boris Johnson rather than bury him. But her debut outing at the dispatch box for PMQS marked a clear break from her predecessor and a new direction for her party.
Asked straight questions, she gave straight answers. During her leadership campaign, Truss had opposed a windfall tax on energy companies. Sir Keir Starmer wanted to know if that was still the case.
Truss’s answer (and I paraphrase only slightly): yep.
Didn’t that mean that she was effectively laying the bill for the energy crisis at the feet of hardworking people rather than big corporations, Starmer asked. Truss told him he was looking at things the wrong way round. Raise taxes and you’ll reduce investment; everyone will be worse off. Same old Tories, said Starmer. Well, there’s not much new about a Labour leader calling for higher taxes, Truss retorted.
Here we had two leaders laying out two competing economic visions for the country. You may disagree with one or the other, but, after watching Starmer trying to nail a bloviating jelly to the wall for the last two years, it was really rather refreshing.
Which vision will prevail? In the long run, the smart money would be on a majority of voters erring towards Truss’s plans for lower taxes and rewards for aspiration (there’s a reason why Labour election victories are the exception rather than the norm). Short term, the idea of energy companies holding on to all their profits is going to be hard for many people to stomach.
Let battle commence. With only about two years to go until the next general election, time may not be on Truss’s side. That said, it’s already clear that Starmer will struggle to paint Truss as “continuity Johnson”.
In the 12 years the Conservatives have been in power they have had to respond to three large and very expensive economic emergencies: the global financial crisis, the Covid pandemic and now the energy crunch.
If a government gets landed with a big bill – be it for bailing out the banks, putting the nation on furlough or capping energy bills – the Treasury can broadly try to make the numbers add up in one of three ways: by reducing spending, raising taxes or increasing borrowing.
George Osborne, in tune with the prevailing orthodoxy of the day, went for austerity. That strategy is now widely thought to have done more harm than good. This reduced Rishi Sunak’s options to two and he plumped for higher taxes – arguably a decision that cost him the leadership race.
Now Truss has asked her Chancellor, Kwasi Kwarteng, to have a look at what’s behind window number three. Will it work?
The last couple of days have amply demonstrated how fluid and dynamic the whole situation actually is, and why all forecasts should be taken with a pinch of salt.
Until recently most economists were issuing apocalyptic forecasts about UK inflation peaking at 14pc next year. But such estimates precluded the possibility of the Government doing anything about bills.
This was fair enough. How could anyone know the mind of a prime minister who hadn’t yet been appointed? What’s more, the favourite for the gig was very vocally favouring tax cuts rather than “handouts”.
But now that Truss has been installed in No10, she is quickly adopting pragmatism over ideology. And, boy, how. On top of the £130bn to freeze household energy bills, Truss is said to be mulling another £40bn for small business. This compares to the £137bn bank bailout package during the global financial crisis.
Elizabeth Martins, senior economist at HSBC, branded the mooted policy a “near-term game changer”. She added: “If [Truss] were to freeze the cap at current levels, it could even mean that inflation has already peaked.”
A key factor here will be investor sentiment. The UK has a big current account deficit and, therefore, already relies on the “kindness of strangers” to fund it. One suspects Kwarteng gets this. In a previous life he was a City analyst. He’ll know that narratives are just as important as numbers – if not more so.
That is almost certainly why he spent the first morning on the job meeting City leaders. He tweeted that he spelled out Truss’s “pro-growth economic approach, including immediate support for families and businesses to tackle the cost of living and a commitment to fiscal sustainability”. His next job is to explain how those last two elements are not mutually exclusive.
That will be tricky but not necessarily impossible. Yes, the Government looks set to borrow more – perhaps even a lot more. But capping bills could suppress inflation (though that’s not a certainty). And if fiscal policy lends its shoulder to the wheel to tame prices, monetary policy won’t have to work quite so hard.
That might mean interest rates don’t need to rise as high as the market is currently betting they will.
And if interest rates stay reasonably low, the Government’s debt repayments won’t get out of hand, allowing it to borrow a little bit more without scaring the horses.
Capital Economics has calculated that if inflation does now peak at 11pc – rather than 14.5pc as had previously been forecast – it will save the Treasury about £17.5bn in debt interest payments.
In other words, borrowing more might paradoxically mean foreign investors are prepared to lend more.
That is, of course, an oversimplification. But it certainly shows how you could start constructing a more optimistic case for the UK economy and why fears over a “sudden stop” as investors dump gilts are hopefully misplaced.
Given the creaking NHS and growing defence commitments, it’s hard to see where meaningful spending cuts will come from.
The UK’S tax burden is already at a post-war high. We must therefore hope that Truss’s government can get away with more borrowing. It’s fresh out of other options.