Pro-growth Liz-enomics would deliver the post-Brexit shake-up Britain needs
Source - Daily Telegraph 22/07/22
Matthew Lynn
We can cut taxes. We can shelve planned increases in the amount of money the state takes from workers and companies. We can redefine the Bank of England's mandate and start bringing public spending under tighter control. With a radical pro-growth, pro-business platform that is now likely to take her into No 10 by the autumn, Liz Truss has already decisively shifted the economic debate.
Already, she has broken the consensus Gordon Brown established 25 years ago – that tax cuts never work, that higher state spending was always better, and that the Bank would control inflation.
But she should seize the opportunity to be even bolder by setting out a plan to reduce the size of the state. Tear up the tax code and start again, scrap tariffs and embrace deregulation to boost productivity and growth. The space is there to dramatically redefine the way the state works – and she should take it.
The contest for the leadership of the Conservative Party has worked out better than anyone could have hoped. The holders of the two leading offices of state are having a fierce, well argued and important debate about economic policy
Compared to a completely brain dead Labour Party (does anyone even know who the shadow chancellor is?) it is exhilarating. We are finally having a real conversation about how a post-Brexit economy should be run.
Right now, Liz Truss is winning hands down, at least with the members of her party. Liz-enomics is turning into a dramatic break with the orthodoxy Gordon Brown laid down when he took control of the Treasury 25 years ago. Chancellors have come and gone since then but they have all operated within the same basic framework Brown laid down.
The core tenets of Brownism were thus: higher public spending was always good, taxes would always go up and the Bank of England would take care of inflation. Even the Tory governments of the last 12 years operated in that framework, although George Osborne, to his credit, at least managed to bring taxes down a little.
Rishi Sunak would continue with this orthodoxy, except with taxes and spending at levels even Brown might have thought excessive.
By contrast, Truss will break with this recent tradition, embarking on tax cuts to unleash entrepreneurial energy and betting they will generate enough revenue to pay for themselves.
Predictably there have been howls of outrage from the economic establishment, and from the left-leaning think tanks. Over the next few weeks we will hear a lot about how reckless it is, how the pound will be hammered and inflation will run out of control.
Even the City analysts, oddly, are joining in with that. And yet why anyone thinks a chancellor who has delivered the highest rate of inflation for 30 years, a record trade deficit, and steeply falling real wages, is a safe pair of hands is a mystery.
The results of the policy consensus of the last quarter century have been dismal. A change of direction, especially as we now need to reinvent our economy to thrive outside the EU, hardly seems that terrible.
Truss should use the space she has created to go a lot further than she has yet done so.
First, set out a credible medium term plan for bringing down public spending as a percentage of GDP. If that includes a few sacred cows such as the amount we spend on the NHS, even better. In the wake of Covid we can tolerate higher debt for a while, but we need to stop spending so wildly. While we are at it, why not propose a constitutional limit on the total share of the economy that the state should account for, in much the same way that Germany has a constitutional limit on debt? (My figure would be 35pc but everyone will have different views on that).
Next, don't just talk about cutting taxes. Campaign to simplify them as well, with a Royal Commission established to rewrite the tax system from scratch. The British tax code has quadrupled in size over the last decade, and her opponent has made that even worse (can anyone explain how his investment super-deduction works?). If we went right back to basics, and got rid of all the fiddly tax breaks, we could raise a lot more money and save everyone a lot of tedium at the same time.
Finally, Truss should use her experience as trade secretary to campaign for scrapping tariffs and kick-starting deregulation to bring down costs and improve productivity. It is crazy that we still have tariffs on citrus fruits when families are struggling with the weekly supermarket shop. And we need one flagship EU law to repeal – the senseless GDPR rules, which even the Brussels mandarins are having doubts about, would be a great place to start.
Truss will almost certainly win the leadership in a few weeks’ time. It is very hard to see how Sunak can close the gap on his rival now.
Over the summer we will get even higher inflation, a blow-out trade deficit, and more cuts in real wages. It is very hard for the man who has been chancellor until a few weeks ago to run against that backdrop, especially when he refuses to change course in the slightest.
By the time Truss takes over the premiership, and starts putting together her cabinet, she will already have shifted the debate towards lower taxes, a smaller state, and less regulation.
If she goes further over the next few weeks and sets out a far more ambitious programme, there is a far greater chance of making her government a success.
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