Politician keeps promise – markets fall

They suspected that they might be electing a radical, but to their great surprise, Britain’s Conservative party members found out on Friday that they had also elected a party leader who meant what she said.

British politics may take a little while to recover.

New finance chief Kwasi Kwarteng delivered a package outside the parameters of fiscal orthodoxy, headlined with big personal and corporate tax cuts and some scary debt projections.  Certainly the Treasury advice could be summarised as ‘you’re on your own, mate’.  But then smart ministers know that anyway.

And the good news is surprisingly good.  First, a novel policy of giving productive people their money back, is likely to have better micro-economic effects than handing it to less productive folk with sensitive voting habits.  Secondly, the new mob seem willing to tackle regulatory barriers to growth, including even some of those brought in by their own Conservative party predecessors.  Planning to be simplified, fracking to go forward, property transacting to be less costly and a convince-us-or-it-goes-next-year rule for adopted EU regulations.  

The great symbolic gesture is the removal of a regulatory cap on banker bonuses, a post global financial-crisis measure which was knowingly designed to have more impact on the gullible public than on the level of financial sector remuneration.   

Moreover, Truss might even get lucky with the timing of the package, by signalling a change just as Europe slides towards a nasty recession.

But the bad news is not trivial either.

The tax cuts are not matched by fiscal restraint, so current fiscal settings are not sustainable. The government has yet to make brutally clear to the public that, since the financial crisis, the cake tin has been emptied.  Markets are betting that they can’t – or won’t.

And the to-do list may need to include such vote-winners as public service cuts (including to final salary pensions), seeing off an upsurge of trade union militancy, and encouraging imports to compete with shaky British businesses.  Again, conventional thinking sees no reason to trust the government’s appetite for biting these bullets – or the electorate’s for rewarding them.

However, it’s not entirely a reprise of Thatcherism. 

The composition of state spending is different this time round, with some opportunities for refocusing, perhaps cutting back on infrastructure or education spending to feed the health monster.  The latest dollop of cash to cap high energy prices gives them a breathing space to come up with a model that moves towards economic efficiency but is also more politically durable. The structure of regulation is markedly changed and it may prove impossible to achieve big productivity gains through surgical targeting or tweaking at the margins.

And fortunately ministers do understand that, at least initially, they are on their own.  A profound reveal during Brexit was the inability of the British civil service to challenge its own orthodoxy as the world changed.  Even now the established view seems to be that the energy transition is going to pay for itself. 

But success or failure is unlikely to be a matter of slick policy initiatives or a few percentage points of GDP or the debt burden.

The new government has broken with twenty years of right-of-centre political orthodoxy in declaring an end to drift.  It has drawn a line (perhaps arbitrary but you may feel there was little choice ) and is saying: tax stops here; spending needs to fit; desirable rules need to be compromised if there is not enough economic growth.

It looks like a signal to politicians of the right everywhere – your voters don’t seem prepared to live with the compromises of the likes of David Cameron (or John Key for that matter). Boris’s party enemies nobbled him – but they got the opposite result to the one they were hoping for.

There is the problem of popularity to be sure.

But should the opposition gain power, they will find no money in the kitty and themselves being forced down the path of higher taxes, slower growth and disappointed expectations.

At which point, the next Conservative PM will be able to hail Liz Truss’s and Kwasi Kwarteng’s premature – and unrewarded – courage.