Trussonomics is in serious danger of damaging – not boosting – growth

It was reckless to attempt to replicate the feats of Thatcher without putting in the groundwork

In much the same way as evangelicals confront thorny issues by asking themselves: “What would Jesus do?” So Tories have long plotted their course by considering: “What would Maggie do?” Around about now, it must surely be dawning on them that Thatcher’s assessment of how Liz Truss is managing the economy would be: not like that.

Yes, the Conservative Party’s secular saint also inherited a moribund economy that was struggling with high inflation. And, yes, she cut the overall tax burden and slashed red tape in order to combat deep-set economic sclerosis and boost growth.

But the Iron Lady was tactical as well as strategic about how she achieved those aims. By focusing on an abridged version that only assesses the ultimate destination while ignoring the journey she took to get there, the self-anointed heirs to Thatcher have arrived at a conclusion that is both ahistorical and reckless.

The current Prime Minister and her Chancellor Kwasi Kwarteng have, in fairness to them, had to work on fast forward. The big advantage that Thatcher had over Truss was several years as leader of the opposition before she moved into No10. In his memoirs, Nigel Lawson details how that period was used to draw up the incoming government’s economic plans in minute detail.

The number one aim of Geoffrey Howe, Thatcher’s first chancellor, was to kick start the process of reducing the deficit. His first Budget in 1979 was entirely focused on cutting government spending. He had already worked through and agreed these plans with shadow ministers in the summer of 1978 when an election started to look likely.

Howe did reduce the eye-wateringly high rates of income tax by cutting the top “earned” rate of 83p and the top “unearned” rate of 98p to 75p. But he balanced the books with a big increase in VAT. Howe’s third Budget in 1981 actually increased the tax burden by 2pc of GDP, including a new 20pc levy on North Sea oil production and even, you’ll like this, a one-off windfall tax on banks.

These were the forgotten hard yards that went into restoring the nation’s finances before the big tax-cutting Budget that Lawson unveiled in 1988, which Kwarteng seemingly sought to emulate last Friday.

Tim Congdon, the noted economist who worked with Thatcher and sat on the Treasury panel of “wise men” that advised the Conservative government on economic policy between 1993 and 1997, believes the not-so-mini-budget was “the exact opposite” of the 1981 Budget “in both content and form”.

He argues that borrowing in order to cut taxes, as Kwarteng plans, actually risks expanding the size of the state because it will lead to higher interest payments on national debt and thereby increase public expenditure.

“The ideas behind [Kwarteng’s Budget] are the antithesis of those which informed so-called ‘Thatcherite monetarism’,” adds Congdon. “Trussonomics is a wild and reckless adventure. We cannot know what Thatcher would think about it and hername should not be involved to defend it.”

In attempting to pull off the same feats as Thatcher and Lawson without preparing the electorate, the markets or the nation’s finances, Truss and Kwarteng resemble a novice ice skating duo seeking to emulate Torvill and Dean after watching one Youtube clip and without bothering to even stretch, let alone put in the necessary years of training.

That the result has been a tangled mass of concussion, contusions and broken teeth was both predictable and predicted. Even those who believe in their bones that a centre Right government is usually the best bet for this country and are broadly sympathetic to what Truss is attempting are beginning to despair at her and Kwarteng’s triple salchow of stupidity on timing, sequencing and communications.

The Bank of England has been left with the unenviable task of cleaning up the rink. Yesterday, it warned of a “material risk” to financial stability and made a massive intervention to stabilise the government bond market. It suspended its programme to sell gilts and instead switched to buying long-dated bonds, effectively restarting quantitative easing.

There has been some talk in recent days of the Government stepping on the accelerator to boost growth while the Bank pumps the brakes to slow price rises.

Now the reluctant dodgem drivers at Threadneedle Street are being forced to work both pedals at once. One worries about the engine.

Yesterday morning, the markets were betting that the Bank would hike interest rates to 6pc. At that level, it is hard to see how households or businesses will be able to keep up their monthly mortgage and loan repayments. There have also been concerns that pension funds would struggle to meet their obligations.

For all the focus of the gyrations in sterling since Friday, the real damage is being wrought in rising yields. Overnight on Tuesday, Moody’s raised the spectre of a potential downgrade in the UK’S credit rating, which would clearly make a bad situation catastrophic.

That possibility alone is hugely increasing the cost of financing for businesses that will, if maintained, hugely curtail their ability to invest. According to data compiled by Bloomberg, UK companies are staring down the barrel of the highest refinancing costs on record. If this is what the reversal of the planned corporation tax hike is going to cost, it’s too expensive.

A chaotic end to the era of cheap money was bound to result in all sorts of dislocations and disruptions that no one could anticipate. But the job of the Government must surely be to ensure the national finances are in a sound enough state to weather the transition rather than make it worse.

For those Conservatives that have taken the wrong lessons from Thatcherism, the pain will be seen as evidence that the plan is working. But others will realise what the economy is currently experiencing is some way off the promise to unleash the private sector. There’s no way Thatcher would have tried to boost growth like this.

‘For all the focus of the gyrations in sterling since Friday, the real damage is being wrought in rising yields’