Putting your foot down and driving over a cliff

Over the past few months I have taken to reading the collected works of Kwasi Kwarteng as a cure for insomnia. If I find myself lying awake at 3am then a quick glance at the Chancellor’s historical and political musings is usually enough to send me off. I’ve most recently been wading slowly through his opus War and Gold: A Five-Hundred-Year History of Empires, Adventures and Debt. When I started reading it last night with a backdrop of the pound crashing on world financial markets this suddenly seemed incredibly timely.

This isn’t a review of the book (but it is better and more informative than you might imagine, although it could really do with another edit) but more a reflection on what it tells us about the new occupant of No11 and the wider Truss project. In the small hours of this morning I was reading the chapter on Reagan and Thatcher, with their focus on supply side reform, shrinking the state, deregulation, cutting taxes, and generally getting out of the way (in their telling) of people wanting to create wealth and jobs. In short, a whole lot of what we’re hearing from the new government.

Kwarteng is a good enough writer not to quite give away what he thinks, but it is clear that he had a lot of sympathy with this agenda back when War and Gold was published (2014). But perhaps what’s most striking is the relish with which he reports the sense of direction given by Thatcher in particular: “many questioned the pace and efficacy of the reforms that [the] government had introduced. Yet, as in so much else associated with her government, the direction and philosophy were clear. Policies flowed consistently from a set of ideological premises”. It is clear that this ideological purity, rupturing with the past, and seizing the initiative is something Kwarteng admires.

“Looking back at the Thatcher era in Britain and the Reagan era in the United States… what is commonly held is that both leaders were highly ideological in their approach to politics. They adopted clear policy positions which had been derived from a set of simple beliefs about the world, about society and about the economy”. The approval in Kwarteng’s voice is clear. Stake out a position. Be straightforward about it. Don’t worry about being unpopular; revel in it, in fact. Supply side reform is important in Kwarteng’s eyes, but there is a sense that he really feels that doing something, anything, is the most crucial thing of all.

The massive difficulty with this is that Britain now is not Britain then. From the point of view of a supply sider in those days there was a lot to do. In their eyes we had significant spare capacity in the economy with unemployment rates far higher in the late 1970s even before the Conservatives got in. Tax rates were also far higher. The state was much bigger. Markets, including that for labour, were hamstrung by more regulations. And so on, and so on.

Most relevantly for today it’s worth remembering too that Thatcher and her Chancellor, Nigel Lawson, cared about the value of the pound. They were aiming for a balanced budget and, whilst they didn’t often achieve it, thanks to privatisations and North Sea oil the chasm between spending and revenues was not catastrophic while they were in charge. Kwarteng and Truss simply do not have a plausible plan for any of this, beyond crossing their fingers and hoping that they will stimulate growth and that will inflate the tax take: “through growth, we will get more tax receipts, which will actually reduce the net debt to GDP ratio over the medium term”, the Chancellor said yesterday. That has clearly not convinced the markets, and the pound has weakened accordingly.

In this blog I haven’t had space to comment on the moral vacuum at the heart of the mini-budget. The grotesqueness of giving huge tax cuts to the very richest, only small reductions to the average worker, and a hint that benefits will be cut for the most vulnerable has rightly be called out by a huge range of commentators including senior Tory MPs. I also haven’t addressed the (frankly pretty nauseating) Westminster bubble view that if nothing else this is canny politics, painting the Labour leadership into a corner. I’ll do that in another post. But does the mini-budget stand up if we look at it solely through the lens of Kwarteng’s book? Does it live up to Thatcherite standards (as lauded in War and Gold)? Is it politically savvy? For me the answer to these questions is a resounding no.

The simple fact is that it is highly unlikely to stimulate growth. Consider this: because no one believes Kwarteng has a serious plan to cut the deficit the pound slid yesterday by 3 percent against the dollar, reaching $1.09. Since January it has fallen by around a fifth. That makes everything we import – energy, food, clothing – much more expensive. The falling pound, coupled with a need to get inflation under control, will give further impetus to the drive to increase interest rates, crimping investment and taking money out of the pockets of anyone with a mortgage.

The reality is that the Bank of England said this week we are already in a recession. It might now be shallower than it might have been thanks to the mini budget, but to tame inflation the Bank is “tapping on the brakes with increasing force while the UK Government is at the same time putting its foot hard on the accelerator”. In short, the likelihood of Kwasi Kwarteng achieving even the fairly narrow goals he set himself is tiny. Conversely, whilst he may congratulate himself on being bold and taking decisive action, it looks likely that he has made some poor choices – and putting his foot down could take us over a cliff.