Cutting Waste and Red Tape to Control Public Finances, Says LEO McKINSTRY | Leo McKinstry | Columnists | Comment

Instead, the statement sparked an explosion at the heart of government, causing serious damage to the authority of the Chancellor and Prime Minister. But the harm may not be permanent, especially if the bold plan succeeds in its aim of reviving longer-term growth by encouraging wealth creation.

Nevertheless, just weeks after taking office, Truss and Kwarteng are now engulfed in crisis partly of their own making.

With his package of tax cuts worth £45billion, the biggest such cuts for 50 years, the boldness of the Chancellor’s program was meant to inspire shock and admiration.

But in reality, it has caused despair among Tory MPs and alarm in financial markets. Yesterday morning in early trading in Asia, the pound fell to an all-time low against the dollar, while plunging against most other currencies.

There was a rally in the afternoon, largely on the belief that the Bank of England will be forced to raise interest rates in an effort to protect the pound.

What makes this episode so depressing is that the intentions of the Chancellor and Prime Minister were laudable.

Their key diagnosis of Britain’s economic problems was correct: that the tax burden, now at a level not seen since the early 1950s, is far too high.

Its enormous weight undermines enterprise and productivity, causing, in Kwarteng’s striking expression, “a vicious cycle of stagnation”.

At the heart of their approach was the traditional Conservative belief that living standards would rise for everyone by allowing taxpayers to keep more of their own income, while state grabs act as a brake on growth.

As Winston Churchill, who served as Chancellor in the 1920s, said, “For a nation to try to impose itself in prosperity is like a man standing in a bucket and trying to lift himself by the handle. “

But where Truss and Kwarteng went wrong was in executing their plan. In their boldness, they make a number of mistakes.

By far the most important was their failure to plausibly explain how the government would pay for the tax cuts. The Treasury’s response – that the bill would be paid by more borrowing – smacks of recklessness, especially at a time of huge debt and runaway inflation.

It was as if the curators had found not just a magic money tree, but an entire orchard. If borrowing heavily was so easy, then all governments would be doing it.

But the reality is that such a method, like printing money, ultimately degrades currency, drives up prices, and imposes huge costs through higher interest payments.

There were other mistakes, such as the failure to prepare the markets and the unnecessary abolition of the 45% income tax bracket, which gave the impression that the government was favoring the wealthy. It would have been preferable to raise the income tax thresholds for all employees.

Nor was it credible for the Treasury ministers to claim that they had been inspired by Margaret Thatcher, as she believed deeply that the state should live within its means, as evidenced by her famously difficult budget in 1981 in the stronger from an economic crisis while she put taxes.

By their errors of judgment, Truss and Kwarteng have given the opposition a gift.

At its conference in Liverpool this week, the Labor Party reveled in portraying itself as both the guardian of fiscal discipline and the ally of working people, while portraying the Tories as irresponsible, incompetent and biased towards the wealthy . Just days before their own conference, many Tories are deeply concerned about the government’s eroding economic position credibility. “If the markets think we can’t replay our debt, we’re in banana republic territory,” said one MP.

But this feeling of doom may be exaggerated. Markets are notoriously prone to sudden, even irrational mood swings, and their volatility has been exacerbated recently by the war in Ukraine, the energy crisis and the aftermath of the Covid pandemic.

Fortunately, the chancellor, who has a deep knowledge of economic history and has written several books on the subject, shows no sign of panic.

“I am always calm. Markets move all the time,” he says. It’s not just wishful thinking.

Several factors could now work in favor of the government, including a significant drop in energy prices and the impact of supply measures announced last week, such as the creation of new investment zones. Moreover, if the Chancellor gets a firm grip on spending by cutting waste and bureaucracy, he could soon rebuild public finances and his own reputation as sound money.

Kwarteng can also take solace in the experience of George Osborne, one of his predecessors, who chaired the much-criticised ‘Omnishambles’ budget in 2012 and was loudly booed at the Olympics, for leading Britain’s return to growth, characterized by strong reductions. unemployment and budget deficit.

Victory in the 2015 general election was his reward.

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