Well, it’s been quite a week.
The Conservatives have now had as many Chancellors in the last four months as Labour have in the last 55 years, the Growth Plan lies in tatters and Tory MPs are engaged in a fierce competition to get the most scathing anonymous quote in the papers. The governor of the Bank of England’s warnings about sharp interest rate rises will have already nervous homeowners looking nervously at their remortgaging options.
The new Chancellor, Jeremy Hunt, will meet the PM at Chequers today to thrash out an economic plan quite different to the one his predecessor presented to Parliament just three weeks ago, and the ‘Medium Term Fiscal Plan’ on October 31 will be a Budget in all but name.
Gone will be much of Liz Truss’ signature tax-cutting agenda. The top rate income tax cut has already been excised, the 1p basic rate cut will be postponed and, we learned on Friday, so will the big promise not to raise corporation tax by six percentage points.
The latter is particularly disappointing. Economists of various stripes would query the wisdom of a big hike on business as we head into what threatens to be a brutal recession. And as modelling by the Tax Foundation and our parent organisation, the Centre for Policy Studies, has noted, cancelling the six-point increase could have lifted long-term GDP by 1.2%, investment by 2%, and wages by 1.1%.
The counterpoint, obviously, is that the public finances are in such a state that something had to give. The corporation tax u-turn apparently followed dire warnings that the coming week would see a run on the pound and pension funds potentially collapsing, which would have been – and I hesitate to get overly technical here – very bad.
Tackling that means not just shelving tax cuts, but also reopening the electorally toxic topic of spending cuts. Hunt has been around long enough not to broach that too openly. Instead, he talks about ‘efficiencies’ and warns that ‘spending will not rise by as much as people would like’, neither of which requires too much reading between the lines.
Amid all this strife and worry it’s easy to forget two things.
First, that many of the measures in the Growth Plan – from IR35 reform to investment zones, to reversing the National Insurance rise – were perfectly reasonable and should be retained if the Government still sees getting growth consistently higher as its driving goal. That’s especially vital now that Truss’ tax-cutting agenda has been stripped to the bones. The Government should also make clear which of the 138 different infrastructure projects listed in the plan are going to be accelerated – otherwise it just looks like a very long wish-list.
Second, that Truss’ central contention about the indispensibility of consistently higher growth is still right. Peering into a crystal ball about future spending is always an uncertain exercise, but the outlook for both health spending and the Government’s surging pensions liabilities looks extremely sobering. To quote the former Pensions Minister Steve Webb: ‘The affordability of these massive promises depends on the size of the UK economy in the future.’
For now, though, the furthest Truss and her new Chancellor will be looking ahead is tomorrow, when the all-powerful bond markets will dispense their initial verdict on her abrupt change of course.
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