Triggering a market panic with your first budget, pushing pension funds to the brink of disaster, causing mortgage mayhem and the pound to plummet, inducing an emergency Bank of England intervention and a threat of a credit rating downgrade, then executing a rapid u-turn on a key tax policy – the abolition of the 45 per cent rate of tax – to defuse the risk of a humiliating defeat in parliament is one way to secure your own page in the history books. But will Kwasi Kwarteng’s dire start to his time in office also temper some of the other aspects of the new cabinet’s shock-and-awe style approach to economic strategy?
In some ways, it already has. First, in his address to Tory conference this week, the chancellor notably commented that his economic growth strategy would be underpinned by the UK’s strong institutional framework, including the “independent Bank of England” and the Office for Budget Responsibility (OBR), two institutions which the new chancellor and prime minister previously appeared to hold in disdain. That is an important olive branch given that the negative reaction to September's infamous 'mini' Budget stemmed as much from unease over the unorthodox method of delivery as it did from alarm over the lack of clarity on how £160bn of fiscal loosening would be funded. There will clearly be no more hints about clipping the wings of the Bank, if only to avoid a furore of even greater magnitude than the one we’ve just witnessed. It should now be crystal clear to the occupants of Number 10 and 11 Downing Street that such a move would further dent confidence in the UK and reinforce the view that it is an unsafe place to invest. The chancellor will presumably henceforth always show his work to the OBR.
Kwarteng assured conference attendees that he would have an “ironclad grip on fiscal discipline”, to quell the jibes that the Tories are no longer the party of fiscal prudence. If he and Liz Truss thought a series of tax cuts would be met with resounding applause, they were wrong. It’s difficult to buy Kwarteng's excuse that he was pushed by the energy crisis into announcing the giveaways in the manner he did. No. These tax cuts were intended as a big statement.
There has been confusion about whether Kwarteng will bring forward the date when he produces the missing half of the budget jigsaw. If he sticks with the original date of 23 November - that’s an unacceptably long way off and suggests that plans for reducing debt to GDP aren’t yet watertight. If the package of fiscal loosening is going to be funded through cuts to public spending – Austerity 2.0 – then it's worth remembering the Institute of Fiscal Studies' point that just to keep current planned spending at the same level will require an additional £18bn inflation-linked annual injection. Without this, cuts to services will be even deeper than intended. Falling energy prices might, however, alleviate some strain on the nation's finances as this would bring down the cost of the energy guarantee package.
The events of the past week suggest that other aspects of the Kwarteng-Truss economic strategy and supply-side reforms (such as smashing up and rebuilding planning laws) may need to be toned down or ditched, which increases the already-slim chance of the target 2.5 per cent rate of growth remaining out of reach. In any case, there is no sign yet that analysts are revising their own medium term growth numbers which remain resolutely around the 1.5 per cent.
The chancellor's surely-truncated speech was certainly thin on content. No references to “more tax cuts to come”. He repeated that retained EU laws "holding the country back” will be replaced or repealed, and that planning rules will be liberalised, land released and development accelerated. So not so much Getting Britain Moving, as the conference slogan stated, as Getting Britain Building, but can that produce the long-lasting truly innovative growth that keeps on giving?
Ultimately, low taxation is what makes this duo's approach stand out. Yet the chancellor's heavy reliance on tax cuts as a route to producing growth is not dissimilar to pensions funds' heavy but risky reliance on liability-driven investment strategies. What that tells us is that oversight and regulation – the input of outside parties – almost always bring valuable benefits.
