Shock therapy

Today I want to share my concerns about the turbulent first month of the new British government.

When Kwasi Kwarteng delivered his mini-budget, everyone was stunned. Here was a government determined to drastically reform the British tax system even if it might be initially unpopular politically. But what Kwarteng and Liz Truss failed to predict was how unpopular the policies would be with the markets, leading to a fall in the pound and a calamity in government bonds that forced the Bank of England to become involved.

We are now nearly three weeks after the mini-budget and the government decisions are still politically embattled – the clashes at Conservative conference were unedifying – but the markets have calmed. The pound is now worth more than it was before the mini-budget, as businesses are beginning to understand that the British economy is resilient and, more than that, that it is about to become very hospitable to wealth creators.

The market freak out was because the funding of the tax cuts had not been revealed by the Chancellor, and so Kwarteng’s decision to make a statement explaining the next steps has steadied nerves. In view of the hysteric reaction by the media and parts of the Conservative party the u-turn on the top tax rate was needed in proving that the government listens to the public, even if it must be clear to all that it must incentivise businesses and entrepreneurs to set up in Britain.

There is an excellent analysis produced by Mr Eamonn Butler, Director of the Adam Smith Institute, in his new book on economic inequality. Lowering taxes, he said, can bring back “flight capital,” contributing to economic growth. He states that inequality “may be the result of positive changes that also benefit the poor” – the arrival of wealthy individuals automatically increases inequality but it also raises living standards through investment, spending and the creation of local jobs. Meanwhile, Butler reasons, “progressive taxes inevitably discourage entrepreneurship and investment, and therefore dampen progress and economic growth.”

If this sounds familiar, it is the very doctrine being practiced by our new Prime Minister and her Chancellor. The UK has long been afflicted by a European malaise, prizing equality over prosperity. A resolute but necessary change in direction, to a wealth creation rather than stagnant wealth redistribution agenda, was always going to shock markets and shock the public in its initial stage. But it is a shock that will ultimately lead to success for Britain for its businesses.

The politics, however, are not good at the moment. Truss and Kwarteng possibly moved too quickly, with not enough care for the sudden impact their moves may have on the markets. Now, even if everything is slowly improving, they risk being blamed for hardship that was always going to come, as building a house never comes without physical costs other than resting unprotected on bare ground. Interest rates had to rise, inflation is a short-term bitter medicine to cure the malaise, energy bills were already bound to be high. It was a mistake to not anticipate the anti-growth coalition (a great description) blaming the new Conservatives. For now, it remains to allow the new policies to prove their success in securing growth and thus improvements for all, and we hope that two years is enough time for Kwarteng’s economically reasonable policies to have the desired impact.

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