Sep 27, 2022·edited Sep 27, 2022Liked by Keir Bradwell
[EDIT: Substack told me this comment didn't actually get posted, so I wrote up the same ideas into an actual post. I'll leave this here just in case anyone's interested in the different ways I've framed it.]
I agree with you on this: 'If the Growth Plan’s spending decisions are to work ... they need to be met with a more ambitious supply-side reform agenda than anything we have seen for the last three decades.' And it seems Kwarteng and Truss, on some level, also agree with this. But that's the point - supply-side reform fits into their plan to 'finance' tax cuts and energy spending, rather than as the primary end-in-itself. Hence why, as you mention, the tax cuts and energy spending have received much closer attention to detail.
The problem is that nos. 10 and 11 have a very limited amount of political capital in the present moment, under pressure from the completely undisciplined parliamentary Tory party and from a major Labour polling lead. They are very likely to face rebellion or be forced to water down major policy commitments for political reasons - it's just the reality of the day. And thus priorities must be set: difficult trade-offs abound, and the government must decide which out of their basket of ideal policy changes matter most to them.
Kwarteng's decision to give so much detail to one side of the equation (viz., deficit spending) and be so vague as to the other (viz., deregulation) shows pretty clearly what this government's priorities are. He's emphasising this government's spending plans over its approach to supply. The problem is just that this is the wrong set of priorities, for *precisely* the reason you set out: Kwarteng's spending decisions simply do not work if he can't get supply-side changes through.
This matters because there's no evidence of a Truss plan on political economy here. I know you know this on housing, where the political economy factors are the *only* reason we've built so little. NIMBYs will NIMBY, there will be a Commons rebellion as there was under Johnson, and if reform is to pass it will require nerve from Truss and Kwarteng and a significant expenditure of political capital - yet they're already spending down all their political capital on tax cuts!
Supply-side reform without tax cuts, on the other hand, *would* work: there's no reason that building more housing would suddenly be a bad policy idea if we stuck 1pp back onto income tax. That's the way the priorities have to be. But the government have it completely backwards.
Your post seems to simply be abstracting all of the political difficulties away; but the political difficulties are the reason we have such low growth in the first place. If Truss and Kwarteng have the political chops to pull this off, maybe our future will all be rosy. But there is zero evidence that they have the political ability, and your post offers no reason to think that they can do it. Much more likely is that the political economy of supply-side reforms will eat them alive, and they'll have left Britain with a gaping deficit and a weak pound without any significant movement on growth.
'living standards', but not in life expectancy.....The Conservatives campaigned in 1979 with the slogan "Labour isn't working", with unemployment at around 1.25 million. Then they "delivered" 3 million unemployed.
If a government wanted growth they would reduce the deficit by substituting lower deadweight loss taxes (personal income and VAT) for higher deadweight losses (corporate and NHS) -- and start negotiating a return to EU. To call a combination of anti-growth measures "growth" (and actually believing it) implies disconcerting policy formulation.
I think your argument is missing a piece. T/K view the tax cuts themselves as supply-side reforms. They don't have a bifurcation between tax and regulatory reform. But the markets have reacted so adversely because they don't share Truss and Kwarteng's view on the microeconomics of their tax cuts. The reaction suggests they are mostly inflationary (hence simultaneous fall in sterling/rise in yields).
You are correct that if T/K implement supply-side reform in energy/land use inflation would fall, but as another commenter points out, the political economy is near impossible (as typified by T/K front loading the tax cuts), and the reform would work in absence of the changes to tax anyway.
So the politics and market reaction would suggest the most likely outcome is higher inflation and rates and a change in the income distribution, but little effect on real long-term growth.
The market just wanted to test Truss / Kwarteng's mettle (or rather the 1922 committee's mettle).
They do that every time, they don't really care if this experiment works or not, just shake out the loose money.
I think it will work, UK has to transform itself, and start manufacturing stuff. It has to shrink the public sector and encourage innovation. Has to re-invent the education system, the NHS, transport, shrink London and a whole host of other things including 'climatechange' and Yoocraine.
Tinkering with a penny off income tax ain't going to do it.
One does wonder what influence the former head of the IMF, now at the ECB, has had in this. Give the UK a kicking because they are getting too close to being freed from our shackles? Otherwise, why would they do it?
Thank you for this, helpful to get a dispassionate breakdown of the logic of the plan. It certainly makes the supply side changes more stark, I’m curious as to why bankers bonuses are really such an important driver, versus policies with a different ‘flavour’ that might carry more political capital. Would also be interested to understand why housing reform is the most important of all (apologies if that’s obvious!)
The reversal of the national insurance rise is estimated by HM Treasury to cost £15bn a year; it was expected to cost £9bn (the original rise was estimated to bring in £13bn net, and Rishi Sunak partially reversed it in July by raising thresholds at a cost of £4bn). See Growth Plan 2022, March 2022 Spring Statement and Sept 2021 Budget statement on HMT website
#2: Kwarteng's plan
[EDIT: Substack told me this comment didn't actually get posted, so I wrote up the same ideas into an actual post. I'll leave this here just in case anyone's interested in the different ways I've framed it.]
I agree with you on this: 'If the Growth Plan’s spending decisions are to work ... they need to be met with a more ambitious supply-side reform agenda than anything we have seen for the last three decades.' And it seems Kwarteng and Truss, on some level, also agree with this. But that's the point - supply-side reform fits into their plan to 'finance' tax cuts and energy spending, rather than as the primary end-in-itself. Hence why, as you mention, the tax cuts and energy spending have received much closer attention to detail.
The problem is that nos. 10 and 11 have a very limited amount of political capital in the present moment, under pressure from the completely undisciplined parliamentary Tory party and from a major Labour polling lead. They are very likely to face rebellion or be forced to water down major policy commitments for political reasons - it's just the reality of the day. And thus priorities must be set: difficult trade-offs abound, and the government must decide which out of their basket of ideal policy changes matter most to them.
Kwarteng's decision to give so much detail to one side of the equation (viz., deficit spending) and be so vague as to the other (viz., deregulation) shows pretty clearly what this government's priorities are. He's emphasising this government's spending plans over its approach to supply. The problem is just that this is the wrong set of priorities, for *precisely* the reason you set out: Kwarteng's spending decisions simply do not work if he can't get supply-side changes through.
This matters because there's no evidence of a Truss plan on political economy here. I know you know this on housing, where the political economy factors are the *only* reason we've built so little. NIMBYs will NIMBY, there will be a Commons rebellion as there was under Johnson, and if reform is to pass it will require nerve from Truss and Kwarteng and a significant expenditure of political capital - yet they're already spending down all their political capital on tax cuts!
Supply-side reform without tax cuts, on the other hand, *would* work: there's no reason that building more housing would suddenly be a bad policy idea if we stuck 1pp back onto income tax. That's the way the priorities have to be. But the government have it completely backwards.
Your post seems to simply be abstracting all of the political difficulties away; but the political difficulties are the reason we have such low growth in the first place. If Truss and Kwarteng have the political chops to pull this off, maybe our future will all be rosy. But there is zero evidence that they have the political ability, and your post offers no reason to think that they can do it. Much more likely is that the political economy of supply-side reforms will eat them alive, and they'll have left Britain with a gaping deficit and a weak pound without any significant movement on growth.
Most of these supply side reforms seem either vague or weak beer
Not sure I want "do or die" economics
The UK may have fallen behind America in
'living standards', but not in life expectancy.....The Conservatives campaigned in 1979 with the slogan "Labour isn't working", with unemployment at around 1.25 million. Then they "delivered" 3 million unemployed.
If a government wanted growth they would reduce the deficit by substituting lower deadweight loss taxes (personal income and VAT) for higher deadweight losses (corporate and NHS) -- and start negotiating a return to EU. To call a combination of anti-growth measures "growth" (and actually believing it) implies disconcerting policy formulation.
I think your argument is missing a piece. T/K view the tax cuts themselves as supply-side reforms. They don't have a bifurcation between tax and regulatory reform. But the markets have reacted so adversely because they don't share Truss and Kwarteng's view on the microeconomics of their tax cuts. The reaction suggests they are mostly inflationary (hence simultaneous fall in sterling/rise in yields).
You are correct that if T/K implement supply-side reform in energy/land use inflation would fall, but as another commenter points out, the political economy is near impossible (as typified by T/K front loading the tax cuts), and the reform would work in absence of the changes to tax anyway.
So the politics and market reaction would suggest the most likely outcome is higher inflation and rates and a change in the income distribution, but little effect on real long-term growth.
The market just wanted to test Truss / Kwarteng's mettle (or rather the 1922 committee's mettle).
They do that every time, they don't really care if this experiment works or not, just shake out the loose money.
I think it will work, UK has to transform itself, and start manufacturing stuff. It has to shrink the public sector and encourage innovation. Has to re-invent the education system, the NHS, transport, shrink London and a whole host of other things including 'climatechange' and Yoocraine.
Tinkering with a penny off income tax ain't going to do it.
Do we want a future or not?
One does wonder what influence the former head of the IMF, now at the ECB, has had in this. Give the UK a kicking because they are getting too close to being freed from our shackles? Otherwise, why would they do it?
Thank you for this, helpful to get a dispassionate breakdown of the logic of the plan. It certainly makes the supply side changes more stark, I’m curious as to why bankers bonuses are really such an important driver, versus policies with a different ‘flavour’ that might carry more political capital. Would also be interested to understand why housing reform is the most important of all (apologies if that’s obvious!)
The reversal of the national insurance rise is estimated by HM Treasury to cost £15bn a year; it was expected to cost £9bn (the original rise was estimated to bring in £13bn net, and Rishi Sunak partially reversed it in July by raising thresholds at a cost of £4bn). See Growth Plan 2022, March 2022 Spring Statement and Sept 2021 Budget statement on HMT website