Sunak vs Truss: a battle between two failed economic policies

 

While the dividing lines between the two candidates on economic policy appear fairly clear, the division is more fundamental than the timing of tax cuts. It is the politics of one big lie, that we saw under Cameron and Osborne, against the politics of perpetual lying, that we saw with Brexit and Johnson. Both candidates share the same aim, which is to minimise the quality of public services and maximise tax cuts while still winning elections. They differ only on what the best political means of achieving that goal is.

The big lie under Cameron and Osborne was that reducing the deficit was an important, in fact the most important, goal of the government's macroeconomic policy, and that reducing the deficit meant cutting public spending across the board. It was a big lie because even at the best of times reducing the deficit is not a primary objective of policy, and in a recession when interest rates were stuck at their lower bound reducing the deficit is the macroeconomic equivalent of serious criminality.

To give some credit to Sunak, he recognised the need in the middle of the pandemic to support the economy, just as Labour had done after the Global Financial Crisis (GFC), support which Osborne attacked from opposition. But while Labour's 2009 fiscal stimulus was an intelligent response to the GFC recession, Sunak seemed to make no attempt to understand the pandemic in formulating his macroeconomic response. Instead all his decisions subsequent to introducing furlough both made the pandemic worse (eat out to help out, encouraging a delay in effective action to deal with the second wave etc) and failed to grasp the importance of controlling infections for the health of the economy. It is therefore Sunak as well as Johnson that we have to thank for the severity of the UK death toll from the pandemic and also the depth of the consequent UK recession. As they both found out but continue to deny, before vaccines were made available lockdowns delayed meant more deaths and longer lockdowns later.

The UK recovery from the pandemic recession was swift and more complete than the recovery was from the GFC recession, as it was in most countries. This reflected a combination of rapid vaccine development, the very different nature of the two recessions and the absence of austerity during the initial recovery period. It had very little to do with Sunak's one stimulus measure, a big investment incentive for firms, which has turned into a costly flop. But with the UK currently experiencing the combination of a relatively weak recovery and high inflation, it is clear that Sunak and Johnson's failures during the pandemic, coupled with the costs of Brexit, are depressing UK incomes just as Osborne's austerity did.

Sunak, like Osborne, likes to frame his job as Chancellor (and perhaps Prime Minister) as being responsible with the deficit, rather than improving the welfare of UK citizens. Osborne began the decline in the NHS, and Sunak has allowed that decline to reach critical levels, such that poor health is now producing a poorer economy. Even within the self imposed deficit straightjacket, he had the opportunity to use the higher deficits of the pandemic period as an excuse the put major resources into both the NHS and public investment, but instead he was too quick to set deficit targets so increases in both were far too modest. He also accepted a fiscal rule that imposed an arbitrary limit on public investment.

Under Sunak, like Osborne, arbitrary deficit targets limit public spending, and any better than expected news on the deficit is normally earmarked for tax cuts. Sunak, like Osborne, fails to see the essential role that public services play in producing a healthy and efficient economy. Instead the public sector is seen as a burden, and the private sector as always more efficient, an ideology that evidence provided by outsourcing failures like test and trace fails to dent. [1]

In this context the willingness of Truss to relax the deficit constraint might seem welcome. But she wants to relax the constraint to produce not better public services, but tax cuts today that are greater than Sunak's future tax cut plans. That their ultimate goal, tax cuts, is the same shows that the difference between the candidates involves strategy rather than objectives. The strategy Truss is adopting is taken from the Republican party, and is called 'starve the beast'. (See George Eaton on Sunak’s Thatcherism compared to the Reaganism of Truss.) Like Reagan's tax cuts, her policy is to raise borrowing to sufficiently high levels such that at some point a deficit crisis will be declared, the answer to which is of course spending cuts. This may not even be the initial plan, but with the ideology of her party and the dominant media narrative it is an inevitable outcome. So while Sunak aims to keep to deficit targets and cut taxes in good times, Truss plans to cut taxes now so spending is cut in a future manufactured deficit crisis.

Starving the beast involves not just one big lie, but a whole series of untruths. Voters are being told that tax cuts will not raise demand and therefore inflationary pressure, and will also pay for themselves. When both fail to happen after the next election voters will be told that the high interest rates that tax cuts have made inevitable and a larger deficit has nothing to do with tax cuts, but is all the fault of a bloated public sector. The Conservatives' favourite economist, Patrick Minford, will do overtime in TV studios to give this nonsense economics some spurious credibility, just as he did with Brexit.

A steady stream of lies about economics is what Brexit, and Johnson’s period of government, was all about. In that sense Truss promotes the Johnson continuity strategy, just as Truss in many ways represents the Johnson continuity candidate: often radical changes in political beliefs to satisfy personal ambition, a self-discribed “disruptor-in-chief”, with an ability to claim personal triumphs that is inversely proportional to actual achievement. Cutting taxes and spending more in the short term is what Johnson wanted to do but was prevented from doing so by his Chancellor and the Treasury.

Tax cuts now is a strategy that works in winning over Conservative party members, because they represent the small minority of voters who want tax cuts and lower public spending. These members are also the ultimate Brexit faithful, believing the lies constantly fed to them by the Brexit press. But both the ideas advocated by Truss and the policies proposed by Sunak are the opposite of what the UK economy needs right now. The twelve years of Conservative rule have put theUK economy in as bad a state as it has been since WWII, and all they are doing is advocating more of the same.

The Cameron/Osborne period, the years of the one big lie, turned what had been a vibrant economy into a depressed economy. Large percentages of economic output and incomes were lost, as austerity first delayed a recovery from the GFC for three years and then ensured that recovery was tepid. Lack of investment caused by weak demand and uncertainty meant productivity growth, which had been in relatively good health in the decades before 2010, became one of the weakest in the OECD. Johnson’s answer to that was to promote the continuous lies of Brexit, which ensured yet more percentage points in output and incomes would be lost. Yet the damage he and his Chancellor did was not limited to that. Criminal mishandling of Covid and inadequate funding for the NHS and social care meant poor health started producing macroeconomic harm, and their brand of crony capitalism encouraged rent seeking rather than innovation.

The macroeconomic priority of any new Prime Minister has to be two-fold: to deal with the current crisis and to deal with the problem of slow growth in productivity, output and incomes. The current crisis is about the distribution of income: those most hit by higher energy and food prices are those that can least afford it. Part of the solution is to transfer more income from those who have gained from the crisis, the energy producing firms, to those that need it most. It’s the solution that Sunak was reluctantly forced to introduce, after insisting for months that a windfall tax was a bad idea. Sunak’s scheme was temporary, involving a 25% tax with far too generous exemptions for investment. To fund further help for the poorest this winter, it could be made permanent, at a rate above 25% and with no exemptions for investment in fossil fuel extraction.

The first priority in solving the underlying problem of slow UK growth should be to begin the process of restoring the NHS to the position it was when Labour left government. Part of that process is reversing the privatisation of health provision, which while it might have saved money initially either costs more in the longer term or reduces the quality of care, and sometimes both. This is going to cost a lot of money, which is why tax cuts either now or in the near future are such a stupid idea.

Another priority is public investment, including investment to help green the economy. Public investment can be a spur to productivity enhancing private investment, which will promote growth by expanding the supply side of the economy. We also need to reverse direction on Brexit, start cooperating with the EU and begin the lengthy process back into their Customs Union and Single market. Public investment and health come together with Covid, where the government should be embarking on a massive programme to have effective ventilation in every school, workplace and other areas outside the home where Covid can spread.

The problem for most people living in the UK is that both candidates for PM find it impossible to do these things, both because of their Thatcherite ideology and Brexit obsession, and because their own MPs believe the public sector is bloated, inefficient and needs to get out of the way. This is hardly surprising for a party that is increasingly controlled by very wealthy donors and press barons, and that is dependent on them to outspend and misrepresent their political rivals before elections.

Both candidates pledge policies that pander to prejudice or press misinformation, like pledging no more on-shore wind farms (Sunak) or ending the green fuel levy (Truss), when green energy offers the only secure way to avoid a future energy crisis (as well as saving the planet!). So expect no progress on reversing the damage the Conservatives have done to the UK economy over the last twelve years whichever of the two candidates becomes Prime Minister. Instead the only relevant question is how much more damage each can do until the next general election.

[1] The waste of money produced by inappropriate outsourcing and corruption under Johson’s leadership is immense, yet as Chancellor Sunak was in an excellent position to stop it happening, yet he didn’t. His solution to the current NHS crisis seems to be only the power of his leadership, the same leadership he failed to show when Chancellor.