The Telegraph is in buoyant mood. Kwasi Kwarteng’s mini budget represents ‘a rediscovery, in modernised form, of the ideas and ideals that rejuvenated Britain, America and others in the 1980s’. At last, we have ‘the kind of radical Conservative programme that has been promised so many times but never delivered’. Telegraph commentators have never seen anything like it. Allister Heath sums up the mood when he writes, ‘This was the best Budget I have ever heard a British Chancellor deliver, by a massive margin.
The neo-Brownite consensus of the past 20 years, the egalitarian, redistributionist obsession … the spreadsheet-wielding socialists: all were blown to smithereens by Kwarteng’s stunning Neo Reaganite peroration. Hardcore, unapologetic liberal Toryism is back.’Kwasi Kwarteng’s budget moment history will radically transform Britain’s competitiveness, its attractiveness to investors and top talent, has been transformed. Money and jobs will flow in. Growth should bounce back, the economy will be invigorated, and our finances quickly restored.
Yet the markets, along with most international analysts, do not share this optimism. Nor, evidently, does the government’s own Office for Budget Responsibility, which has been refused permission by the new Chancellor to release its forecast. Sterling plunged to a new 37-year low as investors offloaded government bonds, raising bond yields, and consequently borrowing costs, to the highest since 2011. The Bank of England is expected to raise interest rates by at least one percent at its next meeting.
As for the electorate, the response – including among conservatives – is overwhelmingly one of disgust. Never mind supply-side (‘trickle-down’) economics and the Laffer Curve (cutting taxes at the top raises total tax revenue). When millions are struggling to put bread on the table and heat their homes (an estimated 5 million are already in ‘fuel poverty’), a tax give-away to the rich, and the scrapping of the cap on bankers’ bonuses – whatever its justification in normal times – seems nothing less than a kick in the teeth.
But leaving to one side the fact that this radical and exciting supply-side budget is an electoral suicide note, who is right – the markets or the free marketeers?
Amid all the media comment, and analysis of the macro-economic implications (for borrowing, interest rates, inflation, and Sterling), there has been remarkably little discussion directed to how, or why, this supply-side revolution should raise business investment, productivity, and consequently growth – which has been, for the past decade and beyond, both historically and compared to the G7 average, lamentable. For if Kwarteng’s gamble – which is to raise our trend growth rate from 1.7 to 2.5 per cent – does not pay off, we shall, as a nation, be broke.
Two factors might shed some light on the matter:
The first is that the evidence of previous supply-side revolutions is not encouraging. True, Reaganomics raised the trend American growth rate from 2.8 to 3.6 per cent. But top tax rates when Reagan came in were 70 per cent, which made a dramatic reduction possible, and part of the boost to GDP is now attributed to a sharp rise in women entering the workforce. The Thatcherite revolution, whatever else it achieved, had barely any effect on Britain’s trend rate of growth. As for previous dashes for growth – Maudling’s in 1963-4, Barber’s in the early 70s, and Lawson’s in the late 80s – the booms merely fuelled subsequent busts, with inflationary pressures and balance of payments deficits necessitating deflationary measures that catapulted the economy into recession.
Reaganomics fuelled record borrowing and a trade deficit too – but because the economy started from the position of a balanced budget and trade surplus, and because America has no trouble attracting foreign money, the policy could be sustained. Whether Britain today, which is starting from the position of a record balance of payments deficit and ballooning government borrowing (Mark Carney warned back in 2016 of Britain ‘relying on the kindness of strangers’ to finance it) can sustain Reaganomics, or produce anything like the same effects, is highly questionable.
The other factor, which has been ignored, is the underlying cause of Britain’s chronic lack of productivity. The proximate cause is our low level of business investment – not foreign direct investment, which largely comprises foreign purchases of British companies and other assets, but domestic investment, that is, capital investment by British firms which raises productivity.
Economists cannot identify the precise causes with certainty, but key contributory factors seem to be these: (1) the City of London’s historic preference for quick returns over long-term investments and over more innovative, but risky, start-ups; (2) the ease with which firms that do invest long-term can be taken over and asset-stripped by predatory buyers in search of higher short-run returns to shareholders; (3) our historic failure to invest in the high-quality apprenticeships needed to provide a skilled workforce – that is, in vocational training; (4) uncontrolled immigration, which makes it cheaper for employers to take on foreign workers than to training our own workers; and (5) the absence of any industrial strategy – that is, of active state support for key industries and technologies.
The most successful advanced economies, the ones leading the field in investment, productivity, and growth, are not Britain or America, but the likes of South Korea, Japan, Singapore, Germany, The Netherlands, Denmark, and France, all of which feature a significant degree of state involvement to ensure that the market functions in the interests of the country as a whole – whether through properly funded vocational training, a sovereign wealth fund, industrial clusters, state investment in new technologies and growth sectors, close links between industry and the banks, or the protection of strategic assets from foreign takeover. In one form or another, they have industrial strategies.
The question, then, is whether this new ‘leave it all to the market’ Thatcherism will address any of our underlying economic deficiencies. I think the answer is obvious. The only industrial – or de-industrial – strategy Britain has, and is going to get, is to promote the interests of financiers in the City of London; and its only investment strategy is to make Britain as attractive as possible to foreign investors and private equity sharks, so that they can continue to asset strip established firms to make a quick profit, transfer innovative technologies abroad, and milk our utilities for high returns to shareholders – with the City taking a nice cut on every deal.
Is it blind ideology, or pure greed? I think, most probably, it is a happy coincidence of the two.