THE TABLET THE INTERNATIONAL CATHOLIC WEEKLY FOUNDED IN 1840

ECONOMIC POLICY CONFUSION

A MUDDLED, DISTASTEFUL AND IMMORAL PLAN

T here is an egregious downside to the economic policy announcements made by the new Conservative government led by Liz Truss, namely that while they make the rich richer they make the poor poorer. That cannot be right. Their justification is that lowering the taxes on high earners will stimulate economic growth, from which everybody will eventually benefit. But there is a serious non sequitur at the heart of this proposition.

Why should lowering the taxes they pay on their earnings make people work harder? They might just as well calculate that they need to work less hard for the same net benefit. But Conservatives have long assumed that tax cutting is good in itself because it leaves people free to dispose of more of their own income as they think fit. But if that applies to the wealthy, why not also to the non-wealthy? And it is they who are in desperate need of a boost to net income just now, as inflation nears 10 per cent and energy bills, despite being capped by the government, are soaring upwards. Crumbs “trickling down from the rich man’s table” are hardly sufficient.

Economists are sometimes accused of suffering from “physics envy”. They wish their calculations had such accurate and predictable outcomes. But they need to look more closely at Heisenberg’s Uncertainty Principle, for unpredictability is certainly the name of the game in the financial markets as investors and currency speculators try, and fail, to make sense of the twists and turns of Britain’s economic policy.

Or policies. For there are two players in the British team, and they have opposing goals. The Treasury, instructed to deliver the new Prime Minister’s radical plan for large tax cuts while simultaneously borrowing vast sums of money to pay for it, is on a “dash for growth” strategy; while the Bank of England is committed to controlling inflation by raising the bank rate, which sets the rate at which millions of mortgage holders and small businesses can borrow. So while the new Chancellor of the Exchequer, Kwasi Kwarteng, is trying to inject money into the economy by tax reductions, the Bank is trying to suck money out of the economy by raising interest rates.

F iscal policy (tax rates) and monetary policy (interest rates) are at odds. The big financial institutions, large corporations and governments trading in the international money markets are not the only ones confused. They have no stake in Liz Truss’ political future. They just see reckless irresponsibility. And so they sell sterling, and double the interest rate on British borrowing. Confidence is all, and traders in any market panic once it is gone.

The Truss government is unashamedly right-wing, and seems to have adopted Facebook founder Mark Zuckerberg’s famous motto, “Move fast and break things”, as its methodology. That is not very conservative, and there is something distasteful about the zeal, indeed glee, with which the Truss camp has gone about its business. Commentators on the right are enthused; elsewhere there is bemusement and alarm. The average Tory MP, who may not have supported Liz Truss’ candidacy for the party leadership at the outset, may cling to half a hope that it will all work out for the best. But there is not much trust in the government even inside the Tory party in Westminster just now.

It is undeniable that the British economy is sluggish. The promised post-Brexit lift-off did not happen. But who can be blamed, with the European Union out of the way? Nobody seriously argues that the fault lay with the 45 per cent income tax rate on annual incomes over £150,000, the removal of which has become the most notorious of the changes Kwarteng has tabled. Indeed it is an open question whether he can persuade Parliament to agree to it, even though the government’s defeat on such a measure could precipitate a general election.

A substantial rise in Universal Credit would have directed scarce national resources in the right direction, towards those suffering most from the cost-of-living crisis. Britain is a very unequal society economically, and social justice alone demands some redistribution of wealth. But Truss and Kwarteng seem wedded to Friedrich von Hayek’s dismissal of social justice as an “absurd superstition” and Milton Friedman’s mantra that “the business of business is business” – id est social justice is no part of its concern. What they completely lack is any sense of the common good. There is no prioritising of environmental protection and no preferential option for the social services which do most to help the poorer members of society. This is an unashamedly “Two Nations” government – and it revels in it.

The goal which the government has set itself of a 2.5 per cent annual growth in Gross Domestic Product (GDP) per year is nothing like the panacea for a good society that it claims, even if it were achievable. GDP does not measure national well-being – not even approximately. It ignores the third or voluntary sector, a vital component of any healthy society, because it cannot measure it. For the same reason it ignores “unpaid” work, a lot of it done by women in the form of caring for elderly or infirm relatives, or child-bearing and rearing. And there is no recognition for unpaid overtime, on which our health and education and many other public services have come to depend.

Even more significantly it ignores what are called “externalities”, such as damage to the environment by industrial processes. So fracking, and oil and gas exploration in the North Sea, which the government hopes will trigger that 2.5 per cent annual growth, ought to appear on the negative side of the balance sheet; so ought increases in social and economic inequality, another externality.

The fetishisation of GDP growth implied in the government’s approach is not going to make Britain a better place to live – at least not for ordinary people. The Labour Party is in danger of making the same mistake. Increasing inequality is a much better measure than growth in the GDP of the health of any society, one on which Britain scores badly but which Truss and Kwarteng discount. Even Boris Johnson understood this.

Whatever happens to the pound – and the news is unlikely to be good – there will be a political reckoning to come at the next general election. But the longer-term judgement must be inter-generational. The former Chancellor Rishi Sunak said borrowing now to pay for tax cuts for the rich is a transfer of wealth to the present from the future, which is when these debts will have to be repaid. As he said repeatedly, that is immoral.