In my day job, I deal with a number of situations where people are experiencing financial struggles. One case that sticks in my mind was where monthly mortgage payments had increased so rapidly in recent months, that they now exceed the combined household income by quite a distance. That means they have nothing left – nothing for food, utilities or anything else.
This example will not be a one-off, particularly as the Office for National Statistics (ONS) shows that 62.5% owned their own home in 2021 and 29.7% have a mortgage.
The cause for this spike in mortgage rates is clear. During Liz Truss’s exceedingly short tenure as prime minister in 2022, a disastrous ‘mini budget’ included a number of measures which led to the value of the pound falling and interest rates increasing. It was also harder to get a mortgage as many lenders stopped offerings for new customers.
There was also a venture into trickle-down economics, with the top rate of income tax abolished, as well as removing the cap on bankers’ bonuses. The theory is that making things better for the rich leads to more jobs and increased employment leads to higher spending levels.
Instead of boosting the economy, the mini budget made things worse for many ordinary people and we are still feeling the effects today.
Recent news shows that rates are higher than what was seen in the mini budget, but there is also a clear argument that efforts to fix the damage have failed.
A speech on failure
This week, Truss made a speech to the Institute for Government (IfG) think tank, where she essentially stood by her policies and her firm belief that they can still be used to save the economy.
As you can see from the above word cloud of her speech, there was a heavy focus on tax, growth, spending and regulation.
Let’s look through the speech in more detail.
Who is to blame?
Early on, Truss said this:
“The fact is that since Labour was elected in 1997, we have moved towards being a more corporatist social democracy than we were in the 70s in the 80s and the 90s. State spending now accounts for 46% of GDP, higher than it was in every year in Britain except for 1975 and up from 34.8% in the year 2000. No other European country has seen this level of growth in state spending, apart from Greece and Spain.”
In addition to blaming Labour for the start of the rot, she also blames Joe Biden, the Office for Budget Responsibility (OBR), the Bank of England and Rishi Sunak. So, none of it is her fault.
The reality is that under Labour there was consistently low inflation and 15 consecutive years of economic growth. That period also saw GDP per capita exceed that of the US, Germany and France on a regular basis. Under Labour, we were the fourth largest economy in the world, but under the Conservatives we are now sixth. You could also point to the Conservative’s mismanagement of the Covid-19 pandemic and their choice of a Brexit referendum as major factors in the decline.
With the OBR, she wants the government to ‘take them on’. This was an organisation set up in 2010 by the Conservative-led coalition government. The OECD rated it highly in a 2020 review, but noted it could be affected by increasing government criticism of its work. It’s also worth noting that last year the IfG warned the Truss government that it’s irresponsible to undermine the OBR’s credibility and suggested the blocking of its reports should stop.
Strange then, that she’s criticising their work when she was quite happy to reference it in 2017.
Essentially, Truss didn’t like other perspectives or the idea of anyone disagreeing with her. Truss blocked other ideas and avoided reasonable debate.
Favouring the rich
Truss also said this:
“We needed to reverse the impending hike in corporation tax. We needed to cut the top rate of income tax to show that Britain was open to talent. Reforming IR 35 would cut red tape for small businesses and return to VAT-free shopping would make our cities more attractive.”
Part of the mini-budget included cancelling a corporation tax rise and eliminating the top rate of income tax. The theory was that increasing business profits would enable greater employment and then boost the spending power of ordinary people. This is essentially what is known as trickle-down economics. However, it’s a highly simplistic notion.
It’s based on the assumption that the rich will automatically pass on their gains through increased wages and more opportunities. This theory has been repeatedly debunked, which has been backed up by research. Truss’s plans would also have disproportionately benefited those in the south of the country more, leaving northern parts of the country (such as Yorkshire) with no noticeable benefit.
Finally, there was absolutely no timescale at all for when these increased wages and numbers of jobs would have been seen. It would (more than likely) have never happened and if it did, it would have been a long time in the future.
On regulation
Regulation is mentioned 13 times in her speech. It’s a word that’s often mentioned in politics without going into too many specifics. In the case of the mini-budget there were things like a removal of the banker’s bonus cap and investment zones with fewer planning restrictions. Thousands of big businesses would have the same level of regulation as smaller operations.
So, the rich get richer and they have fewer restrictions on what they’re allowed to do (potentially harming our cities and environment).
In her IfG speech, Truss stuck to her guns:
“Levels of tax and regulation are now too high to generate the amount of economic activity we need to help people’s incomes get bigger and to fund government services and that means our economy is now stagnating. People talk about the productivity puzzle, but it’s really not a puzzle.”
It’s not my fault!
The government gets income from tax, so tax cuts reduce income. It’s also working people who are the locus of productivity. It’s the employees – those who do all they can to pay the bills – who do the work for the companies. Truss’s perspective on productivity is completely wrong. Any budget should be focused on the people and making their lives better.
Trickle-down economics doesn’t work and time away from the role of prime minister hasn’t helped Truss realise this.
Instead of being strong on the economy, the Conservative Party has produced a string of leaders who don’t have solutions to very real and very dangerous problems.
Her leadership destroyed the economy and made our lives significantly worse. We are still seeing the effects to this day and they are certain to continue for some time.
